Black money, white lies, and the colourless truth – Virendra Parekh

Virendra Parekh“The Government of India should enact a law to declare itself as the sole owner and beneficiary of all Indian monies, assets and bank accounts held abroad by Indian nationals or by the dependants of Indian nationals without due declaration to the Indian authorities. … On the strength of this law, the Government of India can ask the world governments and the foreign banks … to recognise the Indian government as the beneficiary of the undeclared wealth and freeze the accounts till the currents owners prove that they had acquired it by fair and lawful means.” – Virendra Parekh

Narendra Modi & Tony AbbottHas the Modi government bitten off more than it can chew on the black money? Black money is a vast issue, but the current public debate is centred on the illicit wealth stashed away in foreign banks; more accurately on BJP’s promise to bring it back.

No doubt this was among the most titillating promises made by Narendra Modi while campaigning for the election that swept him to power in Delhi. Since coming to power, he has reiterated it not only at home but even at international gatherings. “Repatriation of black money kept abroad is a key priority for India” he told the gathering of global worthies at Brisbane.

It is nice to hear such things, especially from Narendra Modi. He has a reputation for backing words with action. On black money, his government has not been inactive; but what it has done falls far short of high expectations aroused by its own earlier rhetoric.

Its activeness could be attributed partly to the increasing pressure from the Supreme Court, which is hearing a public interest petition filed by the noted lawyer Ram Jathmalani in 2009. In July 2011, the Supreme Court directed the government to appoint a Special Investigation Team (SIT) to probe the issue.

By then the UPA government had received information from Germany about account holders in Liechtenstein Bank. Then again, Herve Falciani, a former employee of HSBC, Geneva, stole some data about the account holders and gave it to the French government. The French government, in turn, decided to share the details with our own government.

The court insisted that the information be disclosed to the SIT. The UPA government refused to comply, citing some provisions of the Double Taxation Avoidance Agreement (DTAA) under which it said it had received the information. No SIT was formed. Instead the government filed a review petition asking the court to take back the judgment. After that the matter went into hibernation until the new government took over.

The very first act of Modi Government was to appoint the SIT, which the UPA was stalling. Under court orders, all investigations of black money stood transferred to the SIT. The Modi government also handed over to the SIT a list of all the individuals with foreign bank accounts as early as June.

Some information has transpired into the public domain since then, but it is sketchy and inspires little confidence about billions of dollars returning home for the benefit of India’s poor.

Arun JaitleyPutting together the bits and pieces of information released by the finance minister Arun Jaitley, SIT and Attorney General Mukul Rohatgi, we learn that there was no amount shown in 289 HSBC Geneva entries out of a total of 627, while 122 of them were repeated twice in the same list. “The SIT found that the biggest impediment in taking action was that there were no details about Mukul Rohatgithe operations of these accounts. It was not reflected in the list as to when these accounts were opened and what their transaction history was.” The SIT report said the I-T department had undertaken 150 search or survey operations against those named in the list but prosecution proceedings were yet not finalised against them.

Details of account holders pertain to 2006 and were supplied by the French government to the Centre in 2011. Most transactions took place during 1999 and 2000. The identity of 427 account holders has been established and 250 of them have admitted to having these accounts. The government would initiate prosecution against the offenders but there is no time frame by when it would be done.

There is no doubt that the Modi government has shown greater urgency in this matter than any of its predecessors. Yet, its credibility has been damaged because, either by design or default, it is trapped in the same web of deceit crafted by the UPA government. On some important aspects, it repeats the same arguments that the previous government made.

Mr. Jailey, for example, dismissed the Opposition’s demand to disclose the names of the account holders as “suicidal course” and asserted the government would follow a “foolproof procedure” against the culprits. This is the same stand that the UPA government took.

He has persisted with the argument of the Double Taxation Avoidance Agreement (DTAA) and its obligation of confidentiality. It is said that the DTAA prohibits the disclosure of information received under its provisions till the prosecution proceedings were started. The names could not be disclosed even to the court which was overseeing the investigation into the cases. This was precisely the argument of the UPA, which the Supreme Court in its judgment of July 2009 had overruled. Yet, the Modi government told the court that its directive to disclose names overriding the DTAA was impeding the government’s efforts to secure an Inter Governmental Agreement (IGA) with the US for exchange of banking information. The IGA has the same provisions regarding disclosure as the DTAA with the US and most other nations.

There is a double deceit here: the focus on tax and the obligation of confidentiality under the foreign treaties.

The UPA government was never serious about investigating black money, either at home or abroad. It knew where the trail of illicit wealth would lead to. While it paid lip service to the cause, not a single bit of information has been secured by its efforts. Even when information was pushed under its nose by other countries, as it were, its natural tendency was to turn the face away. Since that could not be done overtly, it resorted to ruses and subterfuges.

Rajiv Gandhi and the Bofors gun.One such ruse was to seek information about tax evasion. It is an old one. Rajiv Gandhi government would ask the Swiss government for information about recipients of commission in the Bofors deal on the ground that they had evaded tax in India. Switzerland would reply that tax evasion in India is not an offence in Switzerland; so, it could not force its banks to disclose the details. The Indian government would fool the people here by pleading helplessness in the face of “rigidity” of Swiss banking law. It was a white lie. The Indian government knew all along that if information were sought under some other head (e.g. bribe), Swiss authorities would be more cooperative.

More recently, a horse trainer in Pune named Hasan Ali was found to hold $8 billion in foreign banks. As the details kept surfacing, the Finance Minister Pranab Mukherjee would issue one statement after another about the tax that Ali was liable to pay. The amount of tax liability would keep rising with every statement. The finance minister would never pause to inquire whether the money really belonged to Ali, if so, how he made it; if it did not belong to Ali, whose money it was and how and why it was entrusted to him.

According to Mr. JethmalaniP. Chidambaram, the correspondence between the Government of India and the German authorities, which was supplied to him under court orders, clearly establishes that the DTAA was invoked first by Finance Minister P. Chidambaram, who sought information only about Indian taxpayers and not about the criminals who did not pay any tax at all; India deliberately did not avail of the offer made by the German government to share information with any country without cost or condition, even though Chidambaram was aware of this open offer.

Invoking DTAA in this context is another white lie. It can be nailed on several counts. First and foremost, it is not clear why DTAA is being used at all in the present context. The DTAA by definition applies to legitimate business activity. Its purpose is to ensure that businesses and businessmen with operations in more than one country are not made to pay tax on the same income in both the countries. But the money we are discussing is anything but legitimate. It is nothing short of loot or embezzlement. Its origin and legitimacy of its ownership are far more important than tax liability attached to it. It would be far more pertinent to invoke United Nations Convention against Corruption (UNCAC).

Secondly, it is important to understand that the 627 HSBC account holders’ names were not provided to us under the provisions of any Double Taxation Avoidance Treaty. So, they do not attract the confidentiality requirement. The DTAA only applies when information is called under Section 90 of the Income Tax Act of India dealing with persons who on the same income are liable to pay tax in two or more countries.

Finally, the hard fact is that the DTAA with France does not prohibit disclosure of information on the account holders in HSBC, Geneva, received from France in public court proceedings. The agreement stipulates that if originally the information was secret in the hands of France (the sender) it shall be kept secret by India (the receiver). Now, the names were not a secret for France; otherwise, why would it share them with India? And Indian law permits their disclosure to the court. They would presumably be secret in Switzerland, but that country has not furnished any information so far.

Quite a few supporters of the current dispensation are unhappy with the fact that the NDA government has chosen to tread the same path as the UPA government, although there was, and still is, a better alternative available to it.

That alternative was articulated years ago by none other than Mr. Ajit Doval, who is now the National Security Adviser. In an article “India’s Plundered Money Abroad — Can We Get It Back?” published in February 2011, he outlined a two-step action plan.

Ajit DovalThe Government of India should enact a law to declare itself as the sole owner and beneficiary of all Indian monies, assets and bank accounts held abroad by Indian nationals or the dependants of Indian nationals without due declaration to the Indian authorities. Exception may be made for those who can prove that the assets held by them were acquired through proper means and the non-declaration was merely a technical default. On the strength of this law, the Government of India can ask the world governments and the foreign banks, like the Swiss banks, to recognise Indian government as the beneficiary of the undeclared wealth and freeze the accounts till the currents owners prove that they had acquired it by fair and lawful means.

It could inform them that a large part of this wealth may have its origin in criminal activities like drug traffic, terrorist funding, ransom, fraud, extortion, misappropriation of government funds, cheating, organised crime, etc.

Secondly, the government should suo moto register an omnibus criminal complaint against unidentified persons who have been indulging in criminal activities and illegally transferring the money to tax havens abroad. The case may be given to a special team of the CBI and investigated under supervision of the Supreme Court. Registration of the criminal case will enable the investigation agencies to summon people for questioning, interrogate suspected persons, seize incriminating documents, conduct raids, make arrests, examine documents etc. It would also enable the government to seek assistance of foreign police and also approach foreign banks and their governments for information about the money trails as they pertain to criminal cases.

The law and the criminal complaint suggested by Mr. Doval should have been the first steps to be taken by the finance ministry. Even now, such a course of action is open to it.

However, it is highly doubtful if such an exercise would yield any worthwhile results. Black money stashed abroad has been subject of a noisy public debate for about eight years. That period is long enough, more than enough, for the crooks to become alert and transfer the money to safer places. Switzerland is known even to the layman. But there are about two dozen countries that provide shelter and secrecy to unaccounted wealth. There is a strong possibility that the big fish have already cleaned up and closed their accounts long back. Why should any country volunteer information about accounts that ceased to exist years ago?

Such account holders would include top political leaders cutting across party lines, business houses that fund major political parties and mafia leaders. They might already have struck deals with the government that would save them from too onerous consequences. The 250 people who have admitted to holding accounts abroad, would they wait until they are publicly named, prosecuted and punished?

Sonia Gandhi & Rahul GandhiIt may be possible to embarrass some parties, leaders and public figures by disclosing the names. But it is unrealistic to expect that such an exercise would lead to an avalanche of dollars and end of India’s poverty.

In the common man’s imagination, there are pots of dollars and valuables hidden away in dark chambers in distant lands which India’s brave officers would fetch home. The reality is quite different. To begin with, the illicit wealth need not be held as cash lying in an “account”. It can take the form of a high-end property in the Alps or Manhattan, a cruise ship floating on the Mediterranean or shares of a blue-chip company held through an offshore fund manager.

The unaccounted money, like the legitimate money, is not held captive at one place; it gets transferred from place to place in search of better returns. When Indian stock markets are booming, when Indian bonds offer much higher yield than, say, US treasury, and when the economy is set to turn the corner, the best course of action will be to invest it in India, through offshore entities if necessary. Just look up the inflow of FII investments in stocks and bonds, the rigidly high real estate prices even when there is no demand, spurt in exports of select items defying global trends.

Probably the government has realized this. Six months into office, Mr. Modi has discovered that this is too serious an issue to be sorted out in 100 days. The climb down has begun. First, Mr. Modi said in a radio interview that the quantum of black money kept in foreign bank accounts is not known to anybody. Then there were media reports suggesting that the PMO has prepared a note stating that there is no legal mechanism to bring back the black money stashed in foreign countries to India. The Revenue Secretary has recently stated that the problem of domestic black money is far more critical than overseas black money. The finance minister Arun Jaitley has said, following the SIT recommendation, that India would seek a change in the treaties with certain countries, which would allow repatriation of black money. All this suggests that the debate may become less sensational but more sensible in the months to come. – Corporate India, 15 December 2014

» Virendra Parekh is the Executive Editor of Corporate India and lives in Mumbai.

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3 Responses

  1. Indian Black Money

    India 3rd on black money list; $440 bn flows out in 10 years – The Hindu Business Line – PTI – 16 December 2014

    WASHINGTON, DEC 16: As India continues its pursuit of suspected black money stashed abroad, an international think-tank has ranked the country third globally with an estimated $94.76 billion (nearly Rs. 6 lakh crore) illicit wealth outflows in 2012.

    As a result, the cumulative illicit money moving out of the country over a ten-year period from 2003 to 2012 has risen to USD 439.59 billion (Rs 28 lakh crore), as per the latest estimates released by the Global Financial Integrity (GFI).

    Russia, China top list

    Russia is on the top with USD 122.86 billion, followed by China at the second position (USD 249.57 billion) in terms of the quantum of black money moving out of a country for 2012 — the latest year for which these estimates have been made.

    The Washington-based research and advocacy group further said that the illicit fund outflows from India accounts for nearly 10 per cent of a record USD 991.2 billion worth illegal capital that moved out of all developing and emerging nations in 2012 to facilitate “crime, corruption, and tax evasion”.

    As per GFI’s 2014 Annual Global Update on Illicit Financial Flows report, that the cumulative illicit outflows from developing economies for ten years between 2003 and 2012 stands at USD 6.6 trillion.

    This includes USD 439.59 billion worth illicit money that has moved out of India in these ten years, putting the country at fourth position in overall ranking for a decade, after China (USD 1.25 trillion), Russia (973.86 billion) and Mexico (USD514.26 billion).

    In these ten years, an average of USD 43.96 billion of black money is being sent out of India every year, GFI said.

    India woes

    The estimate of the huge illegal money flow follows a Supreme Court—constituted Special Investigation Team (SIT) tracing Rs. 4,479 crore in the accounts of Indians figuring in a list of account holders of HSBC’s Geneva branch.

    Besides, the SIT has also disclosed tracing unaccounted wealth worth Rs. 14,958 crore within India, which are now being investigated by the Enforcement Directorate and the Income-Tax Department.

    The issue of black money has been matter of a serious political debate in India, including during the last general elections. While the new government has said it is committed to tackle this menace, there are no official figures for the overall size of illicit wealth stashed by Indians within the country or abroad.

    As per GFI estimates, the amount of illicit funds that moved out of India in 2012 was much lower than the same for neighbouring China, as also Russia.

    These three countries are followed by Mexico at the fourth place (USD 59.66 billion) and Malaysia at fifth (USD 48.93 billion).

    Authored by GFI chief economist Dev Kar and GFI Junior Economist Joseph Spanjers, the study further said that illicit financial flows of a record high USD 991.2 billion in 2012 marks a dramatic increase from 2003, when size of such funds stood at USD 297.4 billion.

    Over the decade (2003—2012), the study found that illicit financial flows are growing at an inflation—adjusted average rate of 9.4 per cent per year.

    However, in many parts of the world, particularly in the Middle East and North Africa (MENA) and in Sub—Saharan Africa, illicit flows are growing at an average annual inflation— adjusted rate of 24.2 and 13.2 per cent, respectively.

    Most damaging economic problem

    “As this report demonstrates, illicit financial flows are the most damaging economic problem plaguing the world’s developing and emerging economies,” GFI president Raymond Baker said.

    “These outflows—already greater than the combined sum of all FDI and ODA flowing into these countries — are sapping roughly a trillion dollars per year from the world’s poor and middle—income economies,” he said.

    However, the troubling fact is that these outflows are growing at an alarming rate of 9.4 per cent per year, which is twice as fast as global GDP, Baker noted.

    According to him, it is simply impossible to achieve sustainable global development unless world leaders agree to address this issue head on.

    “That’s why it is essential for the United Nations to include a specific target next year to halve all trade—related illicit flows by 2030 as part of post—2015 Sustainable Development Agenda,” he said.


  2. Excellent narrative.


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