india's illegal wealth abroad is not just a tax issue--eternal india

7/30/2019 India's Illegal Wealth Abroad is Not Just a Tax Issue--Eternal India

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Eternal India, July 2009 67

Insight: Economy

Indias Illegal Wealth Abroad

is Not Just a Tax IssueR. Vaidyanathan*

The average amount stashed away from India annually during2002-06 was $27.3 billion. It means during the five-year

period, the amount parked in different tax havens, includingSwitzerland, was $136.5 billion. The share of Swiss banks inthe dirty money from India is at least one-third, due tohistorical and geographical reasons. These illegal funds lyingin tax havens are not just related to the issue of tax evasion. It

is capital flight from India and part of a corrupt nexusbetween businessmen, bureaucrats and politicians.Substantial sums have been accumulated abroad due to under-invoicing/over-invoicing and also commission from defenceand other major contracts.

The President, in her

address to the joint

session of the 15th

Lok Sabha on June 4,

2009, has clearly

enunciated:My government is

fully seized of the issue

of illegal money of

Indian citizens outside the

country in secret bank

accounts. It will

vigorously pursue all

necessary steps in

coordination with the

countries concerned.

*R. Vaidyanathan is Professor of Finance and Control, Indian Institute of Management,

Bangalore. The views are personal and do not reflect those of his organisation.

Even though the isssue is not part of the agenda

for the first 100 days of the new government, it is

refreshingly different from the election rhetoric of

the ruling party which initially denied the existence

of such illegal wealth stashed abroad. Later, it

questioned the estimates and timing of therevelations etc. Fortunately, after the elections, the

issue has not been brushed under the carpet.

Recent Developments

I earlier wrote in April 2009 issue ofEternal

India regarding the need to get back the illegal

deposits kept by Indians in various tax havens, on

the basis of which a public interest litigation was

filed by Mr. Ram Jethmalani and others in the

R Vaidyanathan.qxd 6/25/2009 12:28 PM Page 67


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Supreme Court. The Government of

Indias Ministry of Finance hasindicated that it is taking steps to

recover such amounts and also

mentioned that the German government

has given a list of names of persons who

have kept money in the LGT bank of

Liechtenstein. The response also avers

that steps have been taken in the case of

Hasan Ali Khans (a Pune based horse

breeder) illegal transactions through

UBS bank of Switzerland.

Interestingly, the response of the

Union government in the Supreme

Court indicates that tax demands of Rs

71,848 crore have been raised against

the said person, his wife and other

associates. If this were the tax demand,

then the income on which this would

have been raised may be more than 1.5

lakh crore, taking into account

compounding, penalty etc. These are

mind-boggling figures pertaining to one

case since our national income for the

current year is of the order of Rs 50 lakh

crore. But something more interesting

has been reported:Swiss authorities have told an Indian

news magazine that Indian authorities

submitted in the case of Pune-based stud

farm owner Hassan Ali Khan, who has a

Swiss bank account, a request in January

2007 for legal assistance to the Federal

Office of Justice. Swiss authorities, upon

domestic inquiry, found that the banking

information provided with the request

for legal assistance contained forged

documents. Last week, the Centre, in an

affidavit to the Supreme Court, haddetailed the action it had taken against

Hassan Ali Khan, his wife Rheema and

Kolkata-based businessman Kashi Nath

Tapuria, who allegedly were holding

about $ 8 billion in an UBS account in

Switzerland. In a communication from

Folco Galli, Information Chief of the

Swiss Department of Justice and Police,

Berne, the magazine Hardnews was

informed that the Indian authorities had

submitted forged documents to seek

assistance in the Hassan Ali Khan case.

In its May issue, the magazine said the

Swiss sought more information. Swiss

authorities want to provide further

assistance in that case if the Indian

authorities could satisfy the Swiss

governments demand to establish dual

criminality what is crime in India is a

crime in Switzerland. The Swiss also

wanted to know whether the offence was

an object of Indian money laundering.

Since April 2007, the Indian government

has not responded.1

The whole issue is becoming more

and more curious.

68 Eternal India, July 2009

Insight: Economy

The Government of Indias

Ministry of Finance hasindicated that it is taking steps to

recover money stashed in tax

havens and also mentioned that

the German government has

given a list of names of persons

who have kept money in the LGT

bank of Liechtenstein.



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As for the list provided by the German

authorities, the government maintainthat it cannot reveal the names since it

has been obtained under the double

taxation treaty. But the government says

that it is proceeding against the account

holders under tax laws. A report in

Economic Times (June 4, 2009)

suggests that out of 50 names in the

LGT list, 25 belong to Mumbai. It also

says that none of the 25 account holders

are big industrialists or well-known

individuals. As if big industrialists and

politicians are going to hold it under

their names! It will be held under

benami names.

At last, the government says there are

names from Liechtenstein.

..Why did the GoI ask for information

under the Double Taxation Treaty

with Germany when the issue

Liechtenstein Bank stolen data by

Germany does not have any link tothat?

..Did the government think that

Germany would not respond if it was

asked under the Double Taxation

Treaty?

..Where is the issue of confidentiality

vis-a-vis criminals? Germany has

released their own list and how can

they ask India not to release it?

The MoF says it has names but will

not reveal them. The affidavit suggests

that the petitioners should seek the RTI

route may be to be rejected under the

RTI. We have a story in Tamil the

beggar is refused food by the daughter-

in-law and thrown out of the house. The

mother-in-law sees him on the road and

on hearing what happened gets furious

and brings him back home and then tells

him no food for you and I am the one

eligible to say that and not her.

Similarly, the government argues for

the RTI route and then gets the

application thrown out. These are not

domestic tax evaders etc. for showing

confidentiality. These are international

crooks that have deprived our land of

huge financial resources through capital

flight. It is an unpatriotic act which can

be equated to financial terrorism.

As reported inEconomic Times dated

June 4, 2009, of the 50 Indians who

have stashed funds in LGT bank in


Insight: Economy

As for the list provided by

the German authorities, the

government maintain it cannot

reveal the names since it has

been obtained under the double

taxation treaty. The government

says it is proceeding against the

account holders under tax laws.

A report in Economic Times

suggests that out of 50 names in

the LGT list, 25 belong to

Mumbai.



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Liechtenstein, 25 belong to Mumbai.

Tax authorities have re-openedassessment of these 25 tax evaders

under Section 148 of the IT Act. This

implies that the government is treating it

as tax evasion and not capital flight and

corruption with associated implications.

Not only that. The Organisation

of Economic Cooperation and

Development considers four dominant

features of a tax haven. These are:

1. No or nominal effective tax rates

2. Lack of transparency

3..Lack of effective exchange of

information

4..Absence of a requirement of

substantial activities.

Tax havens are jurisdictions which

make themselves available for

avoidance of tax which would otherwise

be paid in the parent countries with

moderate or high level of taxes.

If an American company earns capital

gains in India, it is liable to be charged

tax as per the laws prevailing in these

countries; if this company set up

subsidiaries in tax havens like

Mauritius, they are neither taxed in

India nor in such tax havens on their

capital gains. Sailing under false

colours becomes most inviting for the

tax dodgers as they wrongfully gain

advantages of a bilateral treaty of which

they are neither the concerned parties

nor the intended beneficiaries.

Tax havens are against transparency.

It is commonly shared concern that a lot

of money is being generated by most

unscrupulous methods bribery,

kickbacks, drug-trafficking, insider

trading, embezzlement, computer fraud,

under invoicing and other tainted

activities spawning scams with lethal

consequences for the welfare of

common man. Through companies

floated in tax havens, ill-gotten money

can be effectively laundered and

brought into normal economic channels.

Many tax havens spread a red carpet to

welcome them. They ensure legal

systems under which such pursuits are

carried on without any risk of scrutiny.

If a terrorist organisation decides to

transfer resources to India from Monaco

or Luxemburg, or some of the islands in

the Caribbean Sea, or the English

Channel or some dot-like country in

Micronesia or Polynesia, it can adopt a


Insight: Economy

Tax havens are against

transparency. It is commonly

shared concern that a lot

of money is generated by

most unscrupulous methods

bribery, kickbacks, drug-

trafficking, insider trading,

embezzlement, computer fraud,

under invoicing and other

tainted activities.



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simple strategy. Its investment manager

can structure some device fortransferring resources into the target

country. By way of illustration,

a subsidiary company or a

conduit company might be floated in

Mauritius for transacting on the Indian

stock exchange.

It is worth noting that capital gains are

neither taxable in India nor in

Mauritius. India has become over the

years an obvious and immediate target.

Such companies obtain certificate of

residence from foreign tax authorities so

as to pass for real residents.

Let us quote from the web page of

Shiv Kant Jha, former Chief

Commissioner of Income Tax:

There was some measure of check when

income tax authorities used to

investigate cases of non-residents in

order to see the profile of the real

operators and the beneficial owners toexclude the persons of the third States

from taking advantage of the bilateral

treaties. The courts of law have held such

actions of the income tax authorities in

total conformity with law. In exercise of

this jurisdiction, the Income Tax

Department could know the whereabouts

of the real operators and the real

beneficiaries. On knowing that some

crime had been committed or some

crime had been planned, the authorities

of the Income Tax Department were dutybound to inform other agencies of the

government to take appropriate actions.

This would be in exercise of general duty

of the type contemplated in the

Government Instructions issued in terms

of Section 138 of the Income Tax Act,

1961. Various frauds and crimes,

especially in the post-September 11

phase, should drum into the ears even of

the banking regulators the world over, to

identify account holders and the

beneficiaries of funds flow from and to

bank accounts.

But a controversial Circular was

issued with devastating impact,

says Mr. Jha:

The effect of Circular no. 789 issued by

the Central Board of Direct Taxes is to

subvert the check, which had its

wholesome effect before the Circular

under reference had been issued. The

effect of the Circular is to make the

Certificate of Residence granted by a tax

haven government conclusive for two

things: (i) as to the authenticity of the


Insight: Economy

I have been closely following the

debate, or the lack of it, on theimportant issue of our illegal

money stashed away in

Switzerland and other tax

havens. Most of the mainstream

media has kept quiet.

No editorials or analysis.

TV channels, particularly the

business ones, are silent. The

CII and FICCI, the lobbies for

big business interests, are

observing eloquent silence.



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fact of residency, and (ii) as to the

beneficial ownership of income. On

account of the mandatory directions, the

income tax authorities would not be able

to know the real operators and the real

income earners. Terrorism can flourish

under such circumstances. I am sure that

those who issued this Circular would not

have thought that they were unwittingly

facilitating terrorism and anti-nationalactivities. Countries, which believe in

the rule of law and want to ensure that

public resources are not plundered

through fraudulent devices, readily reject

any Certificate of Residence granted by a

foreign authority when the rogues take

unfair advantage. The United States

Courts of Appeal crisply said in an

important case, Be this as it may, we are

not bound by the determination of the

Swiss tax authorities.

To say the obvious, the statutoryjurisdiction to investigate can neither be

clogged nor curtailed under the

executive instructions. It is a

fundamental principle of tax law that

only the real earner of income is taxed.

Legality of the government circular is for

the court to decide, but its evident

sinister potentialities which the terrorists

would grab must not be lost sight of.2

The Way We Deal With Such Serious

Crimes

This brings us to an important point

pertaining to the way the government of

India is handling a serious issue

like tax havens.I have been closely following the

debate, or the lack of it, on the

important issue of our illegal money

stashed away in Switzerland and other

tax havens. Most of the mainstream

media has kept quiet. No editorials or

analysis. TV channels, particularly the

business ones, are silent. The

CII and FICCI, the lobbies for

big business interests, are observingeloquent silence.

In the last few months, global

newspapers, particularly the business

ones like Financial Times, Wall Street

Journal, The Economist etc. are full of

articles and analysis about tax havens

and the determination of the USA and

other OECD countries to prise open the

veil of secrecy about these tax havens,

particularly Switzerland, since it is

presumed to be one of the oldest and the

largest. I have been following the

developments for the last 15 years at


Insight: Economy

In the last few months, global

newspapers, particularly the

business ones like Financial

Times, Wall Street Journal, The

Economist etc. are full of articles

and analysis about tax havens

and the determination of

the USA and other OECD

countries to prise open the veil of

secrecy about these tax havens,

particularly Switzerland.



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least. I have been arguing against tax

havens and suggesting that we make

plans to get our money back. I have also

included this as a module in my finance

course for many years. Now, we find

that the CPI (M), in its manifesto, has

included the issue of our illegal funds

lying in foreign tax havens and so also

the CPI, Janata Dal (United) and the

Samajwadi Party. The BJP has also

included it in its manifesto and Mr. L.K.

Advani also held a press conference on

the issue. Hence, it was expected that a

major informed discussion would take

place in our country on this vital matter.

But it has taken peculiar turns in our

politically twisted atmosphere.

First, the political reactions. The

Congress spokesperson castigated

Advani for raking up the issue now

instead of when he was in power.

Perhaps the spokesperson is not aware

of the fact that the global atmosphere

regarding tax havens has dramaticallychanged in the last few months. This

was particularly true after the LGT bank

of Liechtenstein was forced by

Germany to get a long list of tax

evaders, including that of the head of

German Post. Also, the severe action

initiated by the US government against

the largest Swiss bank, namely UBS,

and its readiness to part with details of

tax evaders and paying a fine. The

OECD has published a list of these tax

havens and categorised them according

to level of non-cooperation. The Obama

administration is working on a

legislation to deal a severe blow to these

tax havens.

Our political reactions were bordering

on absurd. Congress spokesperson

Abhishek Manu Singhvi says that India

could not discuss this issue at the G-20

meet held on April 2, 2009 since it

would be out of line when the major

item on the agenda was dealing with tax

havens. That is how politics works in

our country!

Then there were some articles in

newspapers. One was by Ashok H.

Desai, calling the money as mythical

trillions (The Telegraph dated April 7,

2009). Given his political orientation

and bias towards big businesses, this

was not unexpected. But what was

shocking was his attempts at


Insight: Economy

Our political reactions were

bordering on absurd. Congress

spokesperson Abhishek Manu

Singhvi says that India could not

discuss this issue at the G-20

meet held on April 2, 2009 since

it would be out of line when

the major item on the agenda

was dealing with tax havens.

That is how politics works in our

country!



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obfuscating issues by bringing in the

role of NRIs and their money. The

discussions on Indian illegal money in

Switzerland do not involve NRIs and

their deposits. He makes absurd

suggestions like 20 million NRIs

making USD 25,000 per annum and a

portion of it in Switzerland etc. If the

NRI is in the USA or Norway, he will

then have his bank accounts in those

countries. Why on earth in Switzerland?

Anyhow, we are debating not about

the NRIs but about the Resident Non-

Indians (RNIs) who have accumulated

wealth in Swiss banks. Desai seems to

be oblivious to the under- or over-

invoicing of exports/imports;

commission in large projects/defence

deals etc. despite being an astute and

expert observer of the Indian scene for

long. The following two items may

illuminate him:

Addressing a press conference tocommemorate 60 years of Indo-Swiss

Friendship Treaty, (the Swiss

Ambassador to India) Dreyer said,

Switzerland was accused of giving

shelter to black money and there has

been a lot of inflow of such wealth from

India and other countries of the world.

The Ambassador said, I would not say it

would be stopped 100 per cent (under a

new law). But through this measure, it

would be controlled up to a certain limit.3

And more recently, after the actionsinitiated by the Western powers against

Swiss banks etc., Business Standard

reported on April 9, 2009:

Swiss private bankers are likely to

reduce their exposure to wealthy Indian

clients as they cut down their discreet

banking services in countries like

Germany, France and the United States,

analysts say. As the worldwide

crackdown on tax evasion gathered

momentum following the recent G-20meeting in London, several Swiss banks,

including UBS, which is the worlds

largest manager of private wealth assets,

have issued travel directives to their

client-facing staff not to visit foreign

countries for carrying out what are called

offshore wealth-management banking

services. UBS, for instance, has asked its

wealth management staff not to travel

abroad to meet clients. This will also

apply to India, said Serge Steiner, a

UBS executive.However, UBS India will continue to

service wealth management for Indian

clients, he added. In effect, it would be


Insight: Economy

We are debating not about the

NRIs but about the Resident

Non-Indians (RNIs) who have

accumulated wealth in Swiss

banks. Desai seems to be

oblivious to the under-

or over-invoicing of exports/

imports; commission in large

projects/defence deals etc.

despite being an astute and

expert observer of the Indianscene for long.



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a complete onshore (domestic) activity

unlike the UBS wealth management staff

descending from Singapore to service

rich Indian clients. At present, Swiss

banks manage around $2 trillion offshore

assets of clients from various countries.

UBS, which is now mired in a major

legal dispute with the US tax authorities,

has passed information of over 300

accounts of wealthy American clients to

the US Internal Revenue Service. But the

IRS is not satisfied with the UBS and it

wants the Swiss bank to provide

information on some 52,000 Americanclients. Besides, two UBS bankers were

arrested in the US on the plea that they

were involved in tax fraud, analysts said.

Consequently, the UBS and other Swiss

private banks are preparing ground to

reduce their exposure to offshore

banking services in a move to avoid

further difficulties for the bank. Other

Swiss private bankers too have been

discreetly cautioned not to undertake

visits in the wake of growing pressure

from the G-20 leaders, especially

Germany and France, who seem

determined to pry open the secret tax

havens. But a representative of the Swiss

bankers association said there was no

general directive to private bankers in

Switzerland, suggesting that it is up to

each individual bank to decide their

foreign travel.

More surprising was the reaction ofBibek Debroy in the Indian Express

dated April 3, 2009. The erudite and

scholarly Debroy, of course, talks about

pricing the loot and suggests the

difficulties involved in the same. He

uses the Global Financial Integrity

report and unfortunately looks only at

the summary version. On website

http://www.gfip.org/storage/gfip/execut

ive%20-%20final%20version%201-5-09.pdf a detailed report is available

(Illicit Financial Flows from

Developing Countries: 2002-2006

authors DEV Kar and Devon-

Cartwright Smith A project of Ford

Foundation). Page 30 of the report gives

a clearer picture for India.

Financial flows in the context of this

report includes proceeds from both

illicit activities such as corruption

(bribery and embezzlement of national

wealth), criminal activity and proceeds

of licit business that become illicit


Insight: Economy

The average amount stashed

away from India annually

during 2002-06 was $27.3 billion.It means during the five-year

period, the amount taken away

was $136.5 billion (Ford

Foundation Report). It is not

that all of this amount had gone

to Switzerland. It has gone to

different tax shelters. The share

of Swiss banks in dirty money

from India is at least one-third,

due to historical and

geographical reasons.



10/16

when transported across borders in

contravention of applicable lawsand regulatory frameworks (most

commonly to evade payment of taxes).

This report shows that the average

amount stashed away from India

annually during 2002-06 was $27.3

billion. It means that during the five-

year period, the amount stashed away

was $136.5 billion (page 30 of the Ford

Foundation Report). It is not that all of

this amount had gone to Switzerland. It

has gone to different tax shelters. The

share of Swiss banks in dirty money

from India is at least one-third, due to

historical and geographical reasons.

Some $ 45 billion out of the total 136.5

billion dollars stashed away from India

would have been hoarded in these five

years in Swiss banks.5

The important point is that the money

under focus is only for five years. More

money was stashed away during the

Nehruvian socialist regime. So the loot

for 55 years would be several times the

above-mentioned money. In fact,

in those days, the Indian rupee

commanded a better value per dollar.

So fewer rupees could get more

dollars. So the estimation that

the Indian money stashed away may

be of the order of $500 billion

to $1.5 trillion.5

The International Narcotics Control

Strategy Report Money Laundering

and Financial Crimes (March 2009)

by the US State Department suggeststhat 30-40 per cent of the inflows may

be through hawala channels which are

not accounted. During 2007-2008,

according to the report, formal inflows

into India were USD 42.6 billion. So 40

per cent of this amount, USD 1.8

billion, could be considered illegal

flows not captured by law. This sum

could be paid for in rupees domestically

but stored in tax havens abroad. This

implies that at least USD 2 billion was

salted away through hawala route

only. One can imagine the total

amount involved if we were to

include under- and over-invoicing

of exports and imports, kickbacks

from major defence/civilian contracts,

non reparation of earnings abroad

and funds earned by artists/

entertainment industry/sports persons

but stashed abroad.


Insight: Economy

Some $ 45 billion out of the total

136.5 billion stashed away from

India would have been hoarded

in these five years in Swiss

banks. More money was stashed

away during the Nehruvian

socialist regime. So the loot for

55 years would be several timesthe above-mentioned amount.



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West Acts to End Tax Havens

It will be interesting to note that theOECD estimated that the money parked

in tax havens is in the range of 1.7 to

11.5 trillion dollars on a conservative

scale. The US suggests it is losing at

least 100 billion dollars per year due to

these tax havens. Why Switzerland is

specifically mentioned among tax

havens is the fact that it is considered

the largest, the oldest and also most

uncooperative.

For instance, a report dated April 10,

2009, by AFP mentions that the head

of the Organization for Economic

Cooperation and Development, Angel

Gurria, referred in a letter to Swiss

President Hans-Rudolf Merz to the

inaccuracy of charges of unfair

treatment made by Swiss officials.

Switzerland has expressed its

disapproval of being targeted as a tax

haven by refusing to authorise a budget

contribution to the OECD. There are no

black lists and the OECD did not

include or threaten to include

Switzerland on any black list, Gurria

wrote, according to a statement made

available by the OECD. We only

shared the criteria that have been

approved by our committees and the

jurisdictions that were adopting or not

the OECD standard, he said. As you

know very well, Switzerland does not

yet have a single agreement on the

exchange of tax information that

conforms to the OECD standard. Thatis the reason why all eyes are on

Switzerland.

Another interesting development is

the results of the crackdown in

Germany. An April 8 report by Reuters

says that a crackdown on tax havens

that prompted Switzerland to loosen its

banking secrecy is encouraging more

and more Germans to come clean about

foreign accounts they use to evade

taxes. Berlin has waged a very public

campaign to stamp out tax evasion since

Klaus Zumwinkel, the then chief

executive of Deutsche Post and one

of Germanys top businessmen, was

arrested in a major tax probe last

February.

Zumwinkel kicked off a bit of an

avalanche, said Andreas Boehm, a

lawyer based in central Berlin.

Afterwards, the number of people

coming clean with us ... rose by about

400 to 500 per cent. And that level has


Insight: Economy

It will be interesting to note that

the OECD estimated that the

money parked in tax havens is in

the range of 1.7 to 11.5 trillion

dollars on a conservative scale.

The US suggests it is losing at

least 100 billion dollars per year

due to these tax havens.



12/16

been maintained. This is a positive

outcome of the LGT affair where India

has been reluctant to grab the names of

Indians in the list with the Germans.

In the case of France, for the first time

it is allowing people to make voluntary

disclosures so that those who have

stashed untaxed money in secret foreign

accounts can quietly come clean. The

special unit handling this issue is getting

at least 25 phone calls per day and

though the move is small it is a

significant step in the campaign to end

banking secrecy and tax havens.6 The

US has already initiated measures to

bring the UBS under its scanner and has

also piloted a bill to tackle US

companies using tax havens to avoid US

taxes. A White House Press release on

May 4 mentions the following

interesting information and plan of

action:

In 2004, the most recent year forwhich data is available, US

multinational corporations paid about

$16 billion of US tax on approximately

$700 billion of foreign active earnings

an effective U.S. tax rate of about 2.3

per cent.

A January 2009 GAO report found

that of the 100 largest U.S. corporations,

83 have subsidiaries in tax havens.

In the Cayman Islands, one address

alone houses 18,857 corporations, very

few of which have a physical presence

in the islands.

Leveling the Playing Field: Curbing

Tax Havens and Removing Tax

Incentives for Shifting Jobs Overseas

1) Replacing Tax Advantages for

Creating Jobs Overseas With

Incentives to Create Them at Home

..Reforming Deferral Rules to Curb A

Tax Advantage for Investing and

Reinvesting Overseas

..Closing Foreign Tax Credit

Loopholes

..Using Savings To Make Permanent

The Tax Credit for Investing

in Research and Experimentation

at Home

2).Getting Tough on Overseas Tax

Havens

..Eliminating Loopholes for Dis-


Insight: Economy

France, for the first time, is

allowing people to make

voluntary disclosures so that

those who have stashed untaxed

money in secret foreign accounts

can quietly come clean. The

special unit handling this issue is

getting at least 25 phone calls per

day and though the move is small

it is a significant step in the

campaign to end banking secrecyand tax havens.



13/16

appearing Offshore Subsidiaries

..Cracking Down on the Abuse of TaxHavens by Individuals

..Devoting New Resources for IRS

Enforcement to Help Close the

International Tax Gap (leveling-the-

playing-field-curbing-tax-havens-

and-removing-tax-incentives-for-

shifting-jobs-overseas).7

The G-20, after its meeting on April 2,

2009, indicated in its declaration that

the proposed Financial stability Board

(FSB) with a strengthened mandate as a

successor to the Financial Stability

Forum (which will include all G-20

members, FSF members, Spain and

European Commission) will take action

against un-cooperative jurisdictions,

including tax havens. It declares that the

era of banking secrecy is over.8

Jeffry Owens who is the Director of

Tax Planning and Administration at the

OECD Centre for Tax Policy, which is

responsible for framing tax principlesand ensuring that the tax havens fall in

line on disclosure norms and share

information, feels that the days of tax

havens are over.9

It has been successfully demonstrated

by countries which had attempted to

recover the assets stashed abroad by

their corrupt leaders and businessmen

that it can be accomplished, like

as under:

..Philippines slogged for 18 years but

finally successfully got repatriated

the bribe money of its former

President Ferdinand Marcos

($ 624 million) held in Swiss

Bank accounts.

..Between 2001-2004, Peru recovered

$180 millions stashed away in tax

havens by Vladimiro Montesinos.

.Between 2005-2006, Nigeria

recovered USD 505 million of the

Sani Abacha money frozen and

forfeited by Swiss authorities.

India Should Also Act

The illegal funds stashed away in tax

havens are not just issues of tax evasion.

It is capital flight from India and part of

a corrupt nexus between businessmen,

bureaucrats and politicians. Substantial

sums have been accumulated abroad

due to under-invoicing/over-invoicing

and also commission from defence and


Insight: Economy

The G-20, after its meeting on

April 2, 2009, indicated in its

declaration that the proposed

Financial stability Board with a

strengthened mandate as a

successor to the Financial

Stability Forum will take

action against uncooperative

jurisdictions, including tax

havens. It declares that the era

of banking secrecy is over.



14/16

other major contracts.

Corruption in our country has ahistorical perspective of its own. As

pointed out by the Supreme Court (State

of MP vs. Ram Singh 2000 (5) SCC 88):

Corruption is termed as a plague which

is not only contagious but if not

controlled, spreads like a fire in a jungle.

Its virus is compared with HIV leading

to AIDS, being incurable. It has also

been termed as royal thievery. The socio-

political system exposed to such a

dreaded communicable disease is likely

to crumble under its own weight.

Corruption is opposed to democracy and

social order, being not only anti-people,

but aimed and targeted against them. It

affects the economy and destroys the

cultural heritage. Unless nipped in the

bud at the earliest, it is likely to cause

turbulence shaking the socio-

economic-political system in an

otherwise healthy, wealthy, and effective

and vibrating society.10

There is a need to look at the largerissues of not only corruption but also

the impact on our foreign exchange,

inflation and interest rates due to these

illegal funds stashed abroad. Had these

funds been available to India, its foreign

exchange situation would have been

totally different and the exchange rates

would also be very favourable to India.

Our borrowings from IMF/World bank

and other global institutions would havebeen lower. The domestic interest rates

would have been lower due to

substantial availability of funds and

inflation numbers would have been

different. We are not talking about one

or two years but decades of lost

opportunities and continued loot from

the country.

Hence the Indian government should

look at it as criminal act against the

interest of the State since some portion

of this also is suspected to be funding

terror related activities. The following

steps should be considered.

There are various categories of

culprits. Some are traditional business

leaders who have been accumulating

money since the 50s; some are new rich

entrepreneurs and politicians and

bureaucrats who influence decision

making for large global purchases. The

third category is the money launderers

for nefarious purposes including

financing of terrorism. The business


Insight: Economy

There is a need to look at the

larger issues of not only

corruption but also the impact

on our foreign exchange,

inflation and interest rates due

to these illegal funds stashed

abroad. Had these funds been

available to India, its foreign

exchange situation would have

been totally different and the

exchange rates would also bevery favourable to India.



15/16

groups would be more than willing to

bring it back already they aresuspected of doing this through the

Participatory Note process in the stock

market. The returns in India are very

attractive and India is one of the few

countries which are growing at more

than 6 per cent even in the midst of a

global meltdown. Plus, the severe

actions contemplated against the tax

havens by the OECD countries etc. will

also be a cause of concern for the Indian

holders of illegal funds. Hence the

government should think of providing a

window of opportunity for the

businessmen/bureaucrats/politicians to

bring the money back with suitable

grace period and penalty on the

quantum of funds and also specifying

the instruments (like infrastructure

bonds) where the funds should be

invested. Beyond the moratorium

period of, say six months, the

government can decide to completely

nationalise any funds kept abroad, i.e.,

those funds will be frozen into

government account as and when the

facts of their existence comes to theknowledge of the authorities.

As far as illegal funds kept for

nefarious purposes are concerned, it is

imperative that the government raises

the issue in multilateral forums like G-

20 and even the UNSC and get a

common legislation enacted to get these

funds from tax havens. Bilateral treaties

have their limitations since many of

these jurisdictions are non-transparent

and, to start with, created with a purpose

of holding illegal wealth. The

Government of India can also create a

Truth and Reconciliation Commission

which would facilitate distinguishing

between the funds and the holders. It

will also help in voluntary confessions

with penalty for those who have

accumulated funds abroad to evade

taxes. It can distinguish between

different shades of criminals and

recommend to the government for

acting accordingly.

Also, the persons who have

accumulated funds abroad should be

barred from holding any public office

and getting loans from banks etc. as a

form of punishment. If all fund holders

are treated only as tax evaders, as is

currently done in the case of LGT bank

list, then they will continue to have

every privilege like access to bank

funds etc. and hence the criminal nature


Insight: Economy

The Indian government should

look at the issue as a criminal act

against the interest of the State

since some portion of the stashed

away money is suspected to be

also funding terror related

activities.



16/16

of their actions will never be known.

Our clean political leaders have tomuster courage to act and act now.

There was a report in India Today

(February 18, 2008) regarding foreign

travels of Central ministers. It stated

that a large numbers of them visited

Switzerland, including on personal

trips, certainly not for skiing in the Alps.

Thus there are three issues. The total

illegal money stashed abroad, the

amount of illegal money kept by Indians

in various tax havens and the amount

kept in Switzerland. On the first issue,

developed economies are taking

appropriate actions. On the second and

third issues, we are debating about the

need to provide exact pin code address

and PAN numbers of culprits before

even we debate! Going back to the

earlier issue of the deafening silence of

our business media, both print and

electronic, we can surmise that hedge

funds etc. have invested in many of

these TV companies and it could bethrough or from these tax havens. That

might explain the eloquent silence. But

as a Tamil proverb says: can a pumpkin

be completely hidden in a bowl of curd

rice? The Swiss vaults will be opened

up with or without Indias role. If it

happens as a collateral benefit to India,

then it will make us a banana republic

that is worse than Sani Abachas

Nigeria. The money kept abroad can be

fruitfully employed in developing our

infrastructure. To that extent, it is a

beneficial inflow for India if the money

is brought back.

The choice is ours. Either we play our

required role in the global forums and

get back our money through domestic

actions or act as facilitators or become a

laughing stock when the Whos Who of

India list is published in some American

or European news portals.


Insight: Economy

References

1.http://www.thehindu.com/2009/05/08/sto

ries/2009050861061300.htm.

2.http://www.shivakantjha.org/openfile.

p h p ? f i l e n a m e = a r t i c l e s / f u n d i n g _

terrorism.htm.

3. NDTV Profit, March 15, 2008.

4. See Eternal India- Vol. 1, No. 7, April

2009.

5. See Eternal India - Vol. 1, No. 7, April

2009.

6. Reuters India - May 15, 2009.

7.http://www.whitehouse.gov/the_press

_office/.

8.http://www.g20.org/Documents/g20

_communique_020409.pdf.

9. Business Standard, June 13, 2009 -

http://www.business-standard.com/india/

news/the-daystax-havensover/360122/.

10. 179th report of the Law Commission of

India on 'The public interest disclosure andprotection of informers' - December 2001,

by Justice B.P. Jeevan Reddy.
