Bringing back what is ours

Bringing back what is ours

Arun Kumar

CESP/SSS, JNU.

The Hindu, March 14, 2012.

Statements by top government functionaries are usually expected to lead to clarity. However, the recent statement by the CBI director on illegal money stashed abroad by Indians at the inauguration of the 1st Interpol Global Programme on Anti-Corruption and Asset Recovery 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 maybe transferred within hours from Singapore to Switzerland to Cayman Island in a matter of hours as there are no boundaries in banking transactions. The Swiss have reacted to this last point by asking for the evidence but there has been no official response to this query.

It is unclear that the CBI or some government agency has recently estimated the amount of funds held abroad by Indians. This 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 that 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 amongst many and we neither have an estimate of how much is held in Switzerland nor in any of the other tax havens.

Stories supposedly quoting 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 all other nationalities combined. The official Swiss agencies have denied this. Further, this author could not find any such data in any of the Swiss Bankers’ Reports of 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 other nationalities combined.

$ 500 billion is quite close to the figure of $462 billion given 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 add the flow for 2010 and 2011 to get a figure of $500 billion. If this is the way the CBI has calculated the figure then it is in for trouble.

GFI has admitted that their figure is a gross under estimate of the magnitude of the funds leaving the country since it does not take into account the outflow due to havala, drug trafficking and other such large flows. It only considers the mis-pricing in official trade and uses the IMF data for a limited number of countries. A new global study has now been commissioned in January 2012 by the Norwegian government to estimate the flows of capital to tax havens. It may come up with more accurate figures for the flight of capital from India and other countries and also the impact that these flows have on development and increase in illegality in the world.

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 back to the country. Hence its figure is not the same as the amount of black money held abroad by Indians. It is well know that in the last 15 years there has been round tripping by Indian businessmen who have brought back some of the hoards of black funds they had spirited abroad. The flows of capital to India through Mauritius belong to this category and especially those 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 may have earned over the last 60 years. It has used the US treasury bill rate to make this calculation. This method has several problems associated with it. First, this 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 then they would not be earning a return abroad and this would over estimate the funds held abroad. 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, consumption during vacations and so on.

In brief, the figure estimated by GFI is an opportunity cost of the funds taken out of the country but not the actual figure of funds presently held abroad by Indians. The figure may give a very conservative idea of what the outflow of capital has cost the country in terms of development foregone. But this is not the same as the funds held abroad that can be some how retrieved by the government.

The CBI director has not given any hint as to how the funds held abroad maybe retrieved. What methodology maybe used for this purpose? Bank secrecy and the laws of tax havens come in the way of getting hard information about black money held abroad by not only Indians but of any nationality. Recently, the US prosecuted the largest Swiss bank, UBS, for helping US citizens escape taxation. It fined the bank $750 million and also obtained 4,500 names of US citizens with accounts in UBS.

The German government in 2007 bought a disc for 4 million Euros from a disgruntled LGT banker containing data on foreigners having accounts in that bank. This data is being used in US, 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 it later under the pressure of Courts and the public. The French bought a disc of secret data from a former HSBC banker. This data has been offered to Indian government as well and apparently prosecution has been initiated on the basis of this data. Julian Assange has also claimed that he has been given data by a former Swiss banker, Mr. Rudolf Elmer, on bank accounts held abroad by Indians. But, he has stated that presently he is not in a position to reveal this data since the Swiss government has threatened Mr. Elmer with prosecution.

The lesson is that government agencies have to be pro active in ferreting out names of those who may hold bank accounts abroad. Further, many foreign banks are a party to flow of funds to tax havens but this data will not be revealed by the governments of tax havens. Only stolen data can be used to prosecute individuals. In the name of investments, 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 flow of black funds from the country.

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, the 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 maybe argued that since both these activities involve illegality and secrecy, the government will not get to know and, therefore, cannot act. For this 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, the functionaries of government – the politicians, the bureaucrats and the police -- know what is going on since they indulge in these activities. The havala operators and their place of operations are known to many who use their services. Does 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 havala in the country? A real conundrum.

arunkumar1000@hotmail.com