"The two most important steps that we can take are: firstly, the financial institutions must know the natural persons who own accounts in the banks. Secondly, what will help in cleaning illicit finance is to tackle the trade 'mispricing' aspect to file the result on the country-by-country basis."

Raymond W Baker is a despised figure in the tax haven countries. He is the founder and director of Washington-based think tank Global Financial Integrity (GFI), which has brought out many reports on the illicit money that flows from countries and is parked in 60-odd tax haven countries. His reports have created buzz around the world.



Author of ‘Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free-Market System’, he has four decades of experience in business and is an authority on subjects related to corruption, money laundering and tax evasion. In conversation with Trithesh Nandan in New Delhi, Baker blames the western nations for creating a shadow financial system that facilitates the flow of illicit money from developing countries. On the opposition parties in India raising the issue of bringing the country’s black money back, Baker says it is not that easy. Edited excerpts:

India, placed among the top five economies in the world, has also a dark underside in its huge deposits of black money shored abroad. What do you have to say on this?

We look only at that part of the dark economy where money goes outside the country. We do not study the underground economy that is purely internal. Professor Arun Kumar of JNU, who has written book on India’s black economy, estimates black economy to be 50 percent of the GDP. You address that kind of problem differently than you do with the illicit money parked outside the country that we focus on. In the GFI estimation, from independence till 2008, $462 billion illicit money disappeared outside the country into foreign bank accounts. We think it is a conservative estimate because in reality it is more than that. Having said that, some of the money has come back into the Indian economy through a process called as 'round tripping'.

What is round tripping?

The money which goes out of India illegally usually goes to tax havens and it is incorporated in some sort of foreign corporation and then it comes back to India as an investment from foreign countries. It is basically Indian money. Nevertheless, we are talking about hundreds of billions of dollars that is affecting India. We think that is an extraordinarily damaging condition not only for India but other emerging market economies as well.

Do you have any estimate of what percentage of illicit money comes back to India?

I do not know what percentage is coming back. It is very difficult to determine. I think it is fair to say that most of the money that comes back into India from Mauritius is probably the illicit money that went out of India. That is purely judgement on our part without any support from data. We do not have good data on how much of Mauritius assets is of Indian origin. We have, however, data on how much money is invested from Mauritius.

You mean to say that the illicit money that goes out of India becomes white money in due process before it is invested back in the country?

In fact, yes. It comes back legally, into the economy. This is the purpose of global financial shadow system, to take illicitly generated money, recycle it, and make it look clean and let it go somewhere else again in the legal form. That’s the purpose of the system and functions very, very efficiently.

If the same money comes back to India, how does it harm the country?

The country would have been better off if the money had never left it and was invested internally. When Indian citizens take money abroad, they are creating the mechanism by which the money can go out again in the form of dividends on share capital, interest in principal on loans and indeed can go back again as trade mispricing.

Who would you hold responsible for all the mess?

Over the last 60 years or so, the western countries have created the shadow financial system, specifically for the purpose of moving money across borders in disguised manner. So India and other developing countries take advantage of the system to move money abroad. The western countries are largely to blame for the shadow financial system. Obviously, we have structured something that can be easily used by the people who live in emerging markets and developing countries. We created the system that facilitates the flow of that money.

How much are banks responsible for the illicit flow of money?

Banks are deep into the problem. Virtually, every major bank in the world has branches in tax havens and hand over the business of corporate and individual clients, who want to move money through either disguised entities in tax havens or otherwise in tax evading or avoiding entities. However, there are a number of elements in the global shadow financial system. There are banks, tax havens, MNCs, criminal elements and so forth, all contributing in creating the dubious finance system. Banks are involved virtually in every aspect in the movement of illicit money.

Since India started liberalising its economy in 1991, such activities have only fuelled the growth of illicit money.

The liberalisation of the economy has accelerated the flow of illicit money. It made it easier for trade to be mispriced, move money abroad. It made it easier for capital transfers of the dubious origin to be sent abroad. The liberalisation has been beneficial to the global economy, in general, but a downside to it has been acceleration of the illicit financial flow. We liberalised the system without putting in place any sort of adequate regulation, monitoring and oversight that would have made liberalisation work the way it was intended to.

So, according to you, liberalisation has been bad for countries like India?

I think liberalisation is here to stay. I spent 35 years in international business before I moved into the think-tank world. I believe in free trade, free economy and free movement of capital provided it is legal. It is the illegal component of flow that has exploded over the last 30 or 40 years.

Some political parties in India have created the impression that all the illicit money gone abroad from India can be brought back. Is it possible?

In my opinion, no. There are inadequate mechanisms available internationally to repatriate illegal money to India. The world is getting a little more used to the idea of repatriating the ‘corrupt money’. We are little more inclined to do that and indeed the Arab Spring movement helped. But tax-evading money? No. We have not made up mind on tax-evading money that went out. We have moved forward on working to curtail the flow of criminal money but there is no effort towards returning criminal money. For example, drug trading has taken a lot of money out of Colombia. While we fight drug trafficking and money laundering, there is no effort to return any money that is recovered back to Colombia. We are not doing a particularly good job on any aspect of illicit money abroad except repatriating some of the corrupt money.



There have been increasing efforts towards signing bilateral and multilateral agreements to curb such practices.

It is helpful. One example is the creation of an automatic exchange of information where the US is taking a lead with a heavy hand. The US is telling foreign banks that they must disclose American accounts in their banks. So, foreign banks all over the world are now cooperating. Other nations are beginning to think in the same way. Things are improving. Without question, we are making progress on this agenda – not as fast as we would like to, but there is progress on a lot of aspects in curtailing illicit financial flows.

How can we check the flow of the illicit money going abroad now?

The two most important steps that we can take are: firstly, the financial institutions must know the natural persons who own accounts in the banks. Banks all over the world do not know the real people who own the accounts. It is excusable. It is easy to know who owns accounts, but we have not done that because the shadow financing system caters to this sort of hidden disguised money. So get rid of the disguised accounts and that can be done very simply by instructing financial institutions: you cannot have an account when you do not know the natural person who holds the account. Secondly, what will help in cleaning illicit finance is to tackle the trade ‘mispricing’ aspect to file the result on the country-by-country basis. File your tax information on sales, profits, taxes paid, investment, employment and so forth. Those two things will curtail the bulk of the problem. Let’s be very clear, nothing will end or stop it altogether.

What is trade mispricing? How is it done?

Suppose you and I are in different countries. I decide that I want to get money out of my country to your country. We do business together. Let's say you export to me and I buy from you. I will then say we have done business together for many years but on the next transaction I want you to overprice what you sell me by 25 percent. I will pay overpriced amount and you will take the extra amount and put it in my private bank account. And, this goes on for many years. So, with your cooperation, I have shifted a lot of money out of my country. Multinational corporations work in such a fashion between parent and subsidiary companies. They agreed to misprice transactions out of the subsidiary back to the parent company. Trade mispricing is the easiest way to shift money because few people need to know about such transactions. Even my company’s accountant need not know about this. It is the preferred way to park money outside.

Do we need people's movements, like the anti-corruption movement of Anna Hazare, to put pressure on governments to stop such trade practices?

The public pressure is the way to ultimately get governments to change. That is the purpose of our work (think tank), to marshal the opinion of people on the evil of illicit money outflows. The final analysis should be made by the government officials to make a decision and respond to this pressure.

Are you satisfied with the way the government of India is approaching the problem?

We are never satisfied with where we are. We are gratified with the progress in that direction. I think the Indian government has made progress, important progress, but still a great deal of movement has to be made. Having worked with various governments around the world, I can assure you that there are not many governments addressing the problem with nearly the concern that the Indian government has. That does not mean we have solved all the difficulties, but indeed there is forward movement.

Recently, CobraPost did a sting operation on private banks and exposed how these banks are new tax havens within the country.

Indian banks will have to compete with the multinational banks. So, it is not surprising that they would service their clients with the wider range of services that international banks have. The bottom line is inadequate regulations of banks and their ability to receive and transmit money of dubious origin. Regulations need to be considerably improved. The banks convinced the world 25 years ago that capital liberlisation is good. It has been good thing but has been misused. You do not have to tolerate the misuse of it. We can curtail the movement of illicit money without impacting freedom of movement of legal money. But we have not done a good job in drawing distinction between the two.