Combating the Black Loot Stashed Abroad

The recent leak of financial data in 13.4 million documents— the largest ever— of Bermuda’s Appleby and Singapore’s Asiaciti has only reiterated the extent to the rich and mighty world over use shell companies and secret bank accounts for concealing illegal, ill-gotten, tax-evaded and laundered money in tax havens.

The treasure trove of financial evidence, corporate assets and transactional data, named “Paradise Papers”, spans 180 countries. Scores of Indian nationals, 714 to be precise, are featured in these documents. Companies of several prominent politicians, journalists, lobbyists, businessmen and film artistes are featured in the list. Those embroiled in the various leaks, to name a few, include Harsha Moily, Kalanithi Maran, Jayant Sinha, Karti Chidambaram, Sachin Pilot, YS Jagan Mohan Reddy, Vijay Mallya, Nand Lal Khemka (of Sun Group), Hinduja Brothers, Subhash Chandra (of Essel Group), Raghav Bahl (of Network18), Harish Salve, Shobhana Bhartia (of Hindustan Times Group), Sanjay Dutt, Amitabh Bachchan and Niira Radia.

The Emergent Pattern

The “Paradise Papers” expose comes on the heels of other collaborative investigations into offshore banking transactions in recent times. The first instalment of ‘offshore leaks’ made public in April 2013 related to companies incorporated in the British Virgin Islands. Next, the “Swiss Leaks”, which gave out data from the HSBC branch in Geneva, followed in February 2015. The “Panama Papers” leak came thereafter in April 2016.

Each of these leaks underscores the enormity of the deep-rooted, systemic malaise. The Tax Justice Network estimated the total volume of liquid, cross-border assets held in secret offshore accounts to be in excess of US$ 20 trillion in 2012. The quantum of illicit funds stashed abroad by Indians has been put between US$ 500 billion, as reported in the Supreme Court of India in July 2011, and US$ 1.4 trillion, as derived using unscientific, back-of-the-envelope methods by Global Financial Integrity (GFI) in 2008. 

Regardless of the magnitude of the illicit funds abroad, it is clear that Indian black money stashed illegally abroad has become a multi-headed, Hydra-like monster. A large, global network of lawyers, bankers, accountants and other operatives is at work overtime. They offer advisory services to help clients conceal their illegitimate wealth in secret tax haven destinations with devious ingenuity.

Action, Not Lip Service

The Finance Minister Arun Jaitley has promised to constitute a multi-agency team to probe the matter and act swiftly. Yet, the assurance of effectively unearthing foreign holdings of Indian citizens and entities rings hollow.

Why?

For one, initiatives of many such probe teams, committees and commissions instituted in the past have yielded zero results.

Two, Double Taxation Avoidance Agreements (DTAA) facilitate treaty shopping, which enable overseas corporate bodies (OCBs) incorporated in countries with lower taxation to enjoy tax benefits legally. Besides, DTAA is aimed at avoiding double taxation of declared ‘white’ incomes and not hidden ‘black’ incomes or assets.

Three, changing ownership of offshore companies, through trusts, investment funds and other vehicles, to unlawfully alter ownership of shares of Indian companies without paying capital gains tax is a common modus operandi adopted. It is extremely difficult to even track and detect, let alone the levy and collection of taxes.

Four, corporations are well within their rights to plan and manage financial affairs in a manner that reduces tax liability legitimately. This enables companies to engage a battery of professionals, who identify and exploit loopholes for avoiding, if not evading taxes through innovative book-keeping and financial planning practices under rather opaque and impermeable corporate veils.

Five, the burden of proof of tax evasion or financial impropriety rests with regulatory authorities, who are discouraged from second-guessing motives or fishing for evidence of suspected wrongdoing if prima facie transactions appear legitimate. Only if fraud seems to have been committed beyond reasonable doubt do courts permit the piercing of the corporate structure and the obscurity that it affords.

Six, Indian Government has often contended in Courts that it has to refrain from divulging names of Indian national holding monies in foreign bank accounts in order to not infringe upon the privacy rights. These tenuous arguments have stalled the revelation of names of “dirty” entities and their murky monetary affairs.

Finally, in the Indian context, the multitudinous enactments have so many lacunae, not to mention endemic delays in the Indian judicial apparatuses, that effective enforcement is a big challenge.

Checkmating Black Wealth Hoarders

Thus, in this cat-and-mouse, catch-me-if-you-can game, it appears that the hoarders of black money abroad are winning. 

Thus, many offshore companies, as the Paradise Papers reveal, are “sham”, “shell” entities. They are created typically to facilitate such nefarious purposes as tax evasion, stock market manipulation, money laundering (entailing structuring, micro-structuring and cuckoo-smurfing), hawala operations, over-invoicing of imports and under-invoicing of exports, round-tripping (i.e., taking untaxed money out of the country through inflated invoices and then bringing it back as investment), parking of dirty, tainted money obtained through criminal activities (such as, drug trafficking, illegal betting/gambling, prostitution, etc.), graft, bribery, concealment of income, inflation of deductions or expenses and so on.

Clearly, the ingenuity of the corrupt and the criminals has reached a crescendo. The existing laws of the country— such as the Benami Transactions (Prohibition) Act, 1988, the Foreign Exchange Management Act, 1999; the Prevention of Corruption Act, 1988; the Prevention of Money Laundering Act, 2002; the Securities Contracts (Regulation) Act, 1956; and so on— are ill-equipped to handle this kind of sophistication in moving funds across borders and managing finances stashed abroad.

Everlasting Solution

So then, is there a solution?

Well, desperate times call for desperate measures. Indeed, if the political dispensation is serious about fighting the scourges of: (a) tax evasion; (b) stashing of proceeds from crime & corruption; and (c) flight of capital to foreign destinations, it has to enact legislation for automatically nationalizing any and all illegal foreign properties of Indian nationals, be they liquid or illiquid, movable or immovable. The provisions should be stringent enough to presume guilt of owners of illegal foreign assets and holders of illicit monies abroad. Indeed, summary trial proceedings should be instituted in fast track courts with the onus of proving innocence squarely placed on the accused.

As a precursor to any such legislation though, government can introduce a “Voluntary Disclosure and Amnesty Programme”.

Can any sane, sensible voice deem the passing of any such law as extreme?

I mean, did past governments not have the moral spine, steely resolve and noble uprightness to do national good through measures such as bank nationalisation; zamindari abolition; annulment of privy purses; and, land reforms?

Unless a paradigm shift is brought in, all governmental assertions of sincerity in the fight against black wealth is mere lip service. A weak will in this endeavour to bring back home the loot stashed abroad is not only tacit approval, nay, abetment of crime, but also a mockery of law enforcement and abuse of legislative power.