In the pursuit of black money, India has been scoring a self-goal by arguing against taking tough action, citing secrecy and privacy. In contrast, courts in the U.S. went ahead successfully in unearthing black income, ignoring such arguments and despite non-cooperation and threats by Switzerland

The Supreme Court has received a sealed cover from the government with the 627 names of Indians holding black money abroad and it will ask the Registry to pass it on to the Special Investigation Team (SIT) even though the SIT had received this list in June. There was expectation that these names would be made public but that is something not to be till prosecution is launched. While some names have already been revealed or have been leaked, a question that arises is whether there are more names to this list.

Public curiosity about the illegal wealth of Indians, rich and corrupt, in foreign banks, broadly termed as Swiss banks, has been high ever since the Modi-led Bharatiya Janata Party (BJP) campaign during the 2014 general election focussed on the issue of black money and its promise of Rs.15 lakh to every family as a share of the spoils. Public expectation went up further when the Union Finance Minister Arun Jaitley recently said that the Congress party would be embarrassed by the disclosures.

The government has not been reconciled to the setting up of the SIT to probe black money held abroad and related matters so it filed an application for clarification of the orders. The Supreme Court, sensing it to be yet another attempt to stall the SIT, ordered that the list of names be handed over to it. The inordinate delay in conducting an investigation of the names received by the government in 2011 has raised suspicions of there being political manipulation which is why the top court has taken a strong stand and rejected the government’s plea that this would violate international obligations under the Double Taxation Avoidance Agreement (DTAA). All this has resulted in further confusion for the public.

Making an estimate



The attention on the issue has created an impression that all black money is being held abroad. According to this writer’s estimates, only 10 per cent of the black income generated annually accrues on foreign shores; 90 per cent is in the country. The annual generation of black income is 50 per cent of GDP or Rs.65 lakh crore. A part of it is consumed and the rest is saved. A part of these savings is sent abroad through hawala transactions, and on mispricing of trade and illegal activities. Thus, a bulk of black savings is in India and not abroad.

The estimate by the Global Financial Integrity (GFI) of the illicit outflow of funds from the country and the interest earned on it is $462 billion for the period 1948 to 2008. The Director of the Central Bureau of Investigation (CBI) scaled it up and gave it a figure of $500 billion (2010). However, these figures are hypothetical because they include interest that would have been earned on illicit funds taken abroad. Further, the GFI figure is a gross underestimate because it does not include the misinvoicing of services, hawala and criminal funds generated in narcotic drug trafficking, human trafficking, etc. This writer estimates it to be around $1.2 trillion for the period 1948 to 2012, if the missing elements are added.

Channels for capital



These are not deposits in Swiss banks. Out of the funds taken abroad, a part returns in the form of “round tripping.” There are several channels for this return of capital, one of which is the Participatory Note (PN) route. Thus, only a part of the money taken out of the country remains there. Out of the money that remains abroad, a part is spent on luxury goods while another portion is invested in real estate and other businesses. Only a fraction of the illicit funds taken out of the country goes into bank accounts. Hence, it is not as if huge sums of money are waiting to be brought back to the country from Swiss banks, as the BJP campaign promised.

There are at least 80 tax havens. Black wealth held in liquid form is parked in the banks of these countries/locations; it is not just in Switzerland even if it is the biggest centre. Thus, estimating how much of liquid black wealth Indians have in banks in tax havens is an almost impossible task. Switzerland has many banks and it is not just in HSBC, Geneva, where most of the 627 Indians in question hold accounts; how much money is deposited in them is not known.

Under pressure from the Organisation for Economic Co-operation and Development (OECD) to curtail its secrecy laws and cooperate with other countries in catching tax evaders, Switzerland has now made a show of relaxing its secrecy laws. However, its banks have opened subsidiaries in Dubai and Singapore. Multinational (MNC) banks are known to have a large number of subsidiaries in tax havens to facilitate client movement of funds.

Double taxation agreements



Money is also moved via layering. So, identifying who the real beneficiary of an account is is difficult to figure out. For example, the LGT Bank in Liechtenstein list contained the names of little known people.

“The Supreme Court cases on black incomes are a part of court proceedings. So, this information can be legitimately given under the Double Taxation Avoidance Agreement. ”

People are also confused about the provisions under the DTAA. The government has argued that data on foreign bank accounts comes under this treaty which does not allow the revelation of names. Thus, the government has repeatedly argued before the Court that it cannot divulge the names. It has further argued that the privacy of individuals would be violated by the revelation of data. These arguments are only designed to stall the revelation of names of some favoured entities.

DTAA is about declared (white) incomes of entities so that tax may be levied in one or the other country and not in both. Black income is not revealed in either of the two countries so there is no question of double taxation. Further, this data would not be available to either of the two countries to be exchanged. It is no wonder then that till date, no data has been supplied to India by any of the countries with which this treaty has been signed. In brief, DTAA is about white incomes and not black incomes, so it is disingenuous to say that in future no data would be given to us if names are given to courts.

There is a clause in these treaties about the exchange of information regarding incomes. This information can be used for purposes of taxation. However, the Indian government has not yet got any information on this ground to unearth black incomes. Further, this clause has a provision for sharing information with courts. Thus, secrecy is not absolute.

The Supreme Court cases on black incomes are a part of court proceedings. So, this information can be legitimately given under DTAA. Further, if the Court passes on the information to the SIT to investigate black incomes, that would also be legitimate. The government’s argument that this would lead to a drying up of information from other countries does not hold water. Also, if new treaties are signed in the future, they can be examined then; they should not be allowed to hold up information from courts now since the present treaty does not prevent it.

What is under reference is the stolen data of the LGT Bank from Germany and the data of HSBC Bank in Geneva from the French government. Since this data does not pertain to incomes in either Germany or France, the respective DTAA are not applicable in these cases. Therefore, the secrecy clause cannot be invoked. This data was offered by the German and French governments on their own. Initially, the Indian government refused to take this data but under court pressure, it was accepted and investigation initiated.

Global parallel



Some entities who were investigated are reported to have admitted to income tax authorities that they had illegal accounts in these banks but many denied being associated with these accounts in the hope that they would work out a solution to their predicament using political settlement. It is then not surprising that there has not been much headway in investigating these accounts since 2009.

That is the history of investigations in India. Cases are delayed and usually spoiled so that prosecution is rare. Contrast this with the Birkenfeld-UBS case in the United States. Inspite of non-cooperation by the UBS Bank and the threats by the Switzerland government, courts in the U.S. pressed ahead ignoring the argument of secrecy and confidentiality of information. UBS was forced to admit wrongdoing, pay a fine of $780 million and provide a list of 4,500 names of U.S. citizens who had accounts with it. Recently, Credit Suisse was also fined $2.5 billion for such fraud. Thus, investigation and toughness paid off. In contrast, the Indian government has been scoring a self-goal by arguing against taking tough action, citing secrecy and privacy.

Today the focus is on 653 names from the two lists. But lakhs of rich and corrupt people have their wealth stashed abroad and the government has not even taken the preliminary steps to act against them. Finally, one of the banks in question has been revealed to have acted like a hawala operator. Other MNC and private Indian banks also indulge in these activities. Why has the government not initiated action against them and hawala operators? Why is the government not proactive in analysing relevant data from the International Consortium of Investigative Journalists (ICIJ) and Julian Assange? No wonder the perception is that the government is stalling on unearthing Indian black money and “Ache Din” is not around the corner.

(Arun Kumar is Sukhamoy Chakravarty Chair Professor, Centre for Economic Studies and Planning, Jawaharlal Nehru University and the author of Indian Economy since Independence: Persisting Colonial Disruption .)