Government agencies have to be proactive in ferreting out the names of those who may hold bank accounts abroad.
Statements by top government functionaries are usually expected to lead
to clarity. However, the statement by the Central Bureau of
Investigation Director on illegal money stashed abroad by Indians at the
inauguration of the first Interpol Global Programme on Anti-Corruption
and Asset Recovery last month has added confusion to a politically
sensitive subject.
The Director made three points. First, Indians hold an estimated $500
billion of illegal money abroad. Second, Indians are the largest
depositors in banks abroad. Lastly, shell companies are set up, and
layered transfers made from one account to another. Funds may be
transferred within hours from Singapore to Switzerland to Cayman Islands
in a matter of hours as there are no boundaries in banking
transactions. The Swiss have reacted to the last point by asking for
evidence but there has been no official response to this query.
Tax havens
It is unclear whether the CBI or any other government agency has
recently estimated the amount of funds held abroad by Indians. It is a
difficult task for anyone to carry out since data are hard to come by.
New theoretical advances are required to estimate this sum. The
difficulty is there are 77 tax havens in the world, according to the Tax
Justice Network. Switzerland is the best known and possibly the biggest
but it is only one among many. We do not have an estimate of how much
is held in Switzerland or in any of the other tax havens.
Stories supposedly quoting the Swiss Bankers' Association Report 2006
suggest that $1.4 trillion of Indian money is in Swiss banks and that
Indians hold more funds in these banks than people of all other
nationalities combined. The official Swiss agencies have denied this.
Further, this writer could not find any such data in any of the Swiss
Bankers' Reports from 2005 to 2008. Finally, given that the nationals of
other countries have also been stashing funds abroad for a long time,
it is unlikely that Indians would have more black funds in Swiss banks
than all others.
The estimate of $500 billion is quite close to the figure of $462
billion disclosed by Global Financial Integrity (GFI) in November 2010
for the amount of capital that has illegally gone out of India since
independence. One only need to add the flow for 2010 and 2011 to get a
figure of $500 billion. If this is how the CBI has calculated the
figure, it is in for trouble.
GFI has admitted that its figure is a gross underestimate of the
magnitude of funds leaving the country since it does not take into
account the outflow due to hawala, drug trafficking and other
such activities. It only considers the mis-pricing in official trade and
uses the IMF data for a limited number of countries. A new global study
was commissioned in January 2012 by the Norwegian government to
estimate the capital flows to tax havens. It may come up with more
accurate figures on the flight of capital from India and other
countries, the impact of these flows on development, and the increase in
illegal activities across the world.
GFI methodology
However, this is not the only difficulty if the CBI is using the figure
given by GFI. The GFI methodology does not take into account the black
money that may have returned to the country. Hence, its figure is not
the same as the amount of black money held abroad by Indians. It is well
known that in the last 15 years, there has been round tripping by
Indian businessmen who have brought back some of the black funds they
had spirited abroad. The flow of capital to India through Mauritius
belongs to this category, especially the money coming through the
Participatory Note (PN) route.
This is not all. GFI has added to the outflow of capital from India a
certain amount of interest that the money held abroad might have earned
over the last 60 years. It has used the U.S. Treasury bill rate to make
this calculation. This method has several problems associated with it.
First, the rate of return is very low compared to what is usually earned
in businesses. Thus there would be a tendency to underestimate the
amount of funds held abroad. However, if some funds have come back to
the country, they would not be earning a return abroad and this would
overestimate the funds held there. Finally, when illegal funds are taken
abroad by Indians, they use them for various purposes and do not just
invest them. They may be used to finance children's education, for
medical purposes, on vacations and so on.
In brief, the GFI estimate is an opportunity cost of the funds taken out
of the country, not the actual figure of funds presently held abroad by
Indians. The figure may give a very conservative idea of what the
capital outflow has cost the country in terms of development foregone.
But this is not the same as the funds held abroad that can somehow be
retrieved by the government.
The CBI Director has not given any hint on how the funds held abroad may
be retrieved — what methodology may be used for the purpose. Bank
secrecy and the laws of tax havens come in the way of getting hard
information on the black money held abroad by not only Indians but
people of any nationality.
Recently, the United States prosecuted the
largest Swiss bank, UBS, for helping its citizens escape taxation.
It
fined the bank $750 million and also obtained 4,500 names of U.S.
citizens with accounts in UBS.
The German government in 2007 bought a disc for €4 million from a
disgruntled LGT banker, containing data on foreigners having accounts in
that bank. The data are being used by the U.S., Britain, France and
Germany to prosecute their citizens with accounts in LGT bank. The
Indian government refused to take the data when offered but took them
later under the pressure of the judiciary and the public. The French
bought a disc of secret data from a former HSBC banker. The data have
been offered to the Indian government as well and, apparently,
prosecution has been initiated on their basis. Julian Assange has also
claimed that he has been given data by a former Swiss banker, Rudolf
Elmer, on bank accounts held abroad by Indians. But he has stated that
presently he is not in a position to reveal the data since the Swiss
government has threatened Mr. Elmer with prosecution.
The lesson is that government agencies have to be proactive in ferreting
out the names of those who may hold bank accounts abroad. Further, many
foreign banks are a party to the flow of funds to tax havens but data
on them will not be revealed by the governments of tax havens. Only
stolen data can be used to prosecute individuals. In the name of
investment, foreign banks help their high net worth depositors to move
funds to various jurisdictions. When the failing Fortis bank of
Netherlands was taken over by the government in 2008, it was found to
have 700 subsidiaries in tax havens. This is not unusual and most MNC
banks in India also offer their services to their clients. Thus,
tackling banking secrecy is crucial for stopping the outflow of black
funds.
Two aspects
There are two aspects of the black wealth held abroad. First, the
continued siphoning out of the funds from the country needs to be
stopped. Secondly, what has been taken out in the past needs to be
traced and brought back. For the former to happen, black income
generation in the country needs to be curbed. For the latter, Indians in
India who have taken their wealth out need to be brought to book. It
may be argued that as those who stash their wealth abroad do so secretly
and illegally, the government will not get to know the facts and,
therefore, cannot act. For the same reason, the Double Taxation
Avoidance Agreement (DTAA) will also not help.
While the government does not officially know how black incomes are
generated and spirited out of the country, in their personal capacity,
government functionaries — politicians, bureaucrats and police — know
what is going on. Hawala operators and their place of operations
are known to many who use their services. Does the CBI not have this
information? If it does not, it is not doing its job. If it does, why
has it not acted to stop hawala in the country? A real conundrum.
(The writer is Chairperson of the Centre for Economic Studies and
Planning, School of Social Sciences, Jawaharlal Nehru University, New
Delhi.)
arunkumar1000@hotmail.com
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