Thursday, April 11, 2013


Courtesy: Shrinivas Kalyanaraman

Niti Central 10/04/2013

Is Congress serious about illegal money in tax havens? - Part 1

Prof. R.Vaidyanathan

Leaked documents reveal how the rich, crooks and politicians use offshore banking havens to protect their money, a journalism group in Washington said on Thursday.

The International Consortium of Investigative Journalists collaborated with The Guardian and the BBC in Britain, Le Monde in France, Suddeutsche Zeitung and Norddeutscher Rundfunk in Germany, The Washington Post, the Canadian Broadcasting Corp and 31 other news organisations to analyse the data from 2.5 million documents related to more than 120,000 offshore companies and trusts.

“The leaked files provide facts and figures – cash transfers, incorporation dates, links between companies and individuals – that illustrate how offshore financial secrecy has spread aggressively around the globe, allowing the wealthy and the well-connected to dodge taxes and fueling corruption and economic woes in rich and poor nations alike,” the ICIJ said in its report, “Secrecy for Sale: Inside the Global Money Maze.”

The major findings so far are,

» Government officials and their families and associates in Azerbaijan, Russia, Canada, Pakistan, the Philippines, Thailand, Mongolia and other countries have embraced the use of covert companies and bank accounts.

» The mega-rich use complex offshore structures to own mansions, yachts, art masterpieces and other assets, gaining tax advantages and anonymity not available to average people.

» Many of the world’s top’s banks – including UBS, Clariden and Deutsche Bank – have aggressively worked to provide their customers with secrecy-cloaked companies in the British Virgin Islands and other offshore hideaways.

» A well-paid industry of accountants, middlemen and other operatives has helped offshore patrons shroud their identities and business interests, providing shelter in many cases to money laundering or other misconduct.

» Ponzi schemers and other large-scale fraudsters routinely use offshore havens to pull off their shell games and move their ill-gotten gains. (Source: ICIJ)

There are “612 Indians in this list include two Members of Parliament — Lok Sabha Congress MP Vivekanand Gaddam and RS member Vijay Mallya — and several industrialists such as Ravikant Ruia, Samir Modi, Chetan Burman, Abhey Kumar Oswal, Rahul Mammen Mappillai, Teja Raju, Saurabh Mittal and Vinod Doshi.” (Source: Indian Express)

The list also includes businessmen who have had a brush with authorities such as the Income-Tax department and the CBI. Several of the offshore investments were made in possible violation of RBI and FEMA rules.

For instance that substantial amount of our money is stashed illegally in tax havens. For a long period of time there have been discussions on the black money stashed by Indians in Swiss banks. It is not only Swiss banks but various other off-shore banking centres like Lichtenstein, Luxemburg, and Channel Island etc. At the outset let us be clear that Swiss bank is only a generic name given to many such locations which are called tax havens. There are presumably more than 70 tax havens in the world. At least forty countries used to market themselves aggressively as tax havens — even on the internet.

The common characteristics of these tax havens are no or low taxes, not much of Know Your Customer (KYC) norms, no transparency and confidentiality about the account and in some cases these small countries give asylum in case the originating country goes after a customer. Tax havens do not consider tax evasion a crime.

Anywhere between $500 billion to $1.5 trillion of our money is stashed abroad. Most of this has gone abroad due to trade mispricing that is under invoicing and over invoicing of trade items and commissions on major contracts like Bofors stashed abroad.

President Pratibha Patil, in her address to the joint session of the 15th Lok Sabha on June 4, 2009, had 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.

Even though the issue 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 the revelations etc. Fortunately, after the elections, the issue has not been brushed under the carpet.

Then there was a case by Ram Jethmalani and others about our illegal money abroad and the then Supreme Court wanted a Special Investigative Team under retired Supreme Court Justice Jeevan Reddy be constituted to probe the entire issue. Basically the court enlarged the existing coordinating mechanism between RAW/IB/ED/FIU etc. to be supervised by the SIT. The Government of India has not shown any interest in probing the issue.

The case of Hasan Ali is well known and he is supposed to have had several million dollars in Swiss bank accounts. The Government slapped an Income-Tax notice on him based on its findings. Interestingly the response of the Union Government in the Supreme Court indicates that tax demands of Rs 71,848 crores 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. This is a mind-boggling figure pertaining to just one case! Our national income for the current year is of the order of Rs 50 lakh crore. But something even 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, had detailed 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 government’s 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.” (Source: The Hindu).

[This is the first of a two-part article).

(This is the first of a two-part article. The writer is Professor of Finance and Control, Indian Institute of Management, Bangalore. The views are personal and do not reflect that of his organization.)

Silence on Swiss banks must end – Part 2
Niti Central April 10, 2013
Prof. R.Vaidyanathan
This is the second of a two part article. Read the first part here

The whole issue is becoming curiouser and curiouser. But later the Government, in a brazen manner says the recovery of tax arrears of about Rs 91,000 crore from stud farm owner Hassan Ali Khan is not possible. “In Hassan Ali Group, the recovery is not possible though all known immovable and moveable assets belonging to the group have been attached,” the Finance Ministry said in its submission before the Standing Committee on Finance.

Not only that, the list of illegal money holders from Lichtenstein Bank (provided by German Government) is available with the Government of India along with the major list of depositors from HSBC Geneva. As far as the list provided by the German authorities is concerned, the Government maintains that it cannot reveal the names since they have been obtained under the double taxation treaty from Germany. The Government also says that it is proceeding against the account-holders under tax laws. A report in The Economic Times suggests that out of the 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 Government of India ask information under Double Taxation Treaty with Germany when the issue – Liechtenstein Bank stolen Data by Germany — does not have any link to that.

» Did the Government think that Germany will not respond if it is asked under the Double Taxation treaty?
» Where is the issue of Confidentiality vis-vis criminals? Germany has released their own list. How can they ask India to not release it?

Finance Ministry says it has names but will not reveal and the affidavit suggests that the petitioners should go the RTI way — perhaps only to be denied information.

There are categories of culprits. Some are traditional business leaders who have been accumulating from the fifties, some are new rich entrepreneurs, politicians and bureaucrats who influence decision-making for large global purchases. The third category is money launderers who do it for nefarious purposes including financing terrorism.

The business groups would be more than willing to bring it back. Already they are suspected to be doing it using the participatory note process in the stock market. The returns in India are very attractive and India is one of the few countries which growing at more than six per cent even in the midst of global meltdown. Plus the severe actions contemplated against the tax havens by the OECD countries will also be a cause of concern for Indian holders of illegal funds.
Hence, Government should think of providing a window of opportunity for the business / bureaucrat / politician groups 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, Government can decide to completely nationalise any funds kept abroad – that is those funds will be frozen into a Government account as and when the facts about them come to the Government’s knowledge.

As far as the 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 UNSC and get common legislation enacted to get in to the funds of tax havens. Bilateral treaties have limitations since many of these jurisdictions are non-transparent and to start with created with a purpose of holding illegal wealth.

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 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 the 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 privileges like access to bank funds etc. and the criminal nature of their actions will never be known.

Our clean political leaders have to gather the courage to act now. There is a report in India Today dated February 18, 2008 regarding the foreign travels of the Ministers of the Central Cabinet states that large numbers of them have visited Switzerland including side personal trips not definitely for skiing in Alps. Hence we can say that there are three issues – the total amount of 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 issue we are debating about the need to provide exact pin code address and pan number of the 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 be through or from these tax havens. That might explain the eloquent silence. But as the proverb goes in Tamil, can a pumpkin be completely hidden in a katori of curd rice? The Swiss vaults will be opened up with or without India’s role. If it happens as a ‘Collateral benefit’ to India, then it will make us a banana republic worse than Sani Abacha’s Nigeria. The money kept abroad can be fruitfully employed in developing our infrastructure and to that extent it is a beneficial inflow for India if it is brought back.

The choice is ours. Either we play our necessary role in the global forums and by domestic actions are a facilitator to get our money, or we become a laughing stock when the India list is published in some American or European news portal.

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