Illegal Indian money in tax havens: The way we debate it

Eloquent silences & obfuscations mark media coverage of this issue

The debate, or the lack of it, in recent days, on the important issue of our illegal money kept in Switzerland and other tax havens, has been rather interesting.

Many in the mainstream media have kept quiet, with hardly an editorial or analysis. TV channels, particularly the business ones, are silent. The Confederation of Indian Industry and the Federation of Indian Chambers of Commerce and Industry, which lobby for the interests of big business, are observing eloquent silence, too.

In the last few months, global newspapers, particularly the business publications such as Financial Times, Wall street Journal and The Economist, have been full of articles and analyses about tax havens and the determination of the USA and other Organisation for economic Cooperation and Development (OECD) countries to tear off the veil of secrecy over these tax havens, particularly Switzerland.

I have been following these developments for 15 years now. I have been arguing against tax havens and suggesting that we make plans to get our money back. I have also included this as a module in my finance course for many years. The latest is my column in this paper on March 4 on bringing back our illegal money from Swiss banks.

I now find that the CPI(M) in its manifesto has included the issue of our illegal funds in foreign tax havens and so have CPI, JD(U) and SP. BJP has also included it in its manifesto and LK Advani has even held a press conference on it.

After all this, one would have expected a major informed discussion on this vital issue. However, it has taken peculiar turns in our politically twisted atmosphere.
The political reactions first.

The Congress spokesperson has castigated Advani for raking up the issue now, instead of when he was in power. Perhaps the spokesperson is not aware of the fact that the global atmosphere regarding tax havens has dramatically changed in the last few months.

World attention was drawn to this issue after Germany stole data from LGT bank of Lichtenstein and got a long list of tax evaders including that of the head of German Post.
Then followed severe action from the US government against UBS, the largest Swiss bank, after which the latter agreed to part with details of tax evaders and to pay a fine. The OECD has published a list of these tax havens and categorised them according to the level of non-cooperation. The Obama administration is working on a legislation to deal a severe blow to these tax havens.

But see how absurd our political reactions have been. Congress spokesperson Abhishek Manu Singhvi said India could not discuss this item at the G20 meet on April 2 since it would be "out of line." This was when the major item on the agenda was dealing with tax havens.

There have been some articles in newspapers, too. One was by Ashok V Desai, who called the money "Advani's mythical trillion." Given his political orientation and bias towards big business, this was not unexpected. But what was shocking is the obfuscation of issues by bringing in the role of NRIs and their money.

Discussions on Indian illegal money in Switzerland do not involve NRIs and their deposits. But Desai makes absurd suggestions like 20 million NRIs making $25,000 per annum and a portion of it in Switzerland, etc. If the NRI is in USA or Norway, he will have his bank accounts in those countries --- why on earth in Switzerland?

Anyhow, we are debating not about the NRIs but about the resident non-Indians (RNIs) who have accumulated wealth in Swiss banks. Desai seems to be oblivious to the under invoicing ---over invoicing of exports or imports; commission in large projects or defence deals, etc in spite of being an "astute and expert" observer of the Indian scene for so long.

The following news items may illuminate him.In the first, a business news channel showed the Swiss Ambassador to India telling reporters at an event to commemorate 60 years of the Indo-Swiss Friendship Treaty, "Switzerland was accused of giving shelter to black money and there has been a lot of inflow of such wealth from India and other countries of the world… I would not say it would be stopped 100% (under a new law). But through this measure, it would be controlled up to a certain limit."

In another, a report in a business newspaper recently stated, "Swiss private bankers are likely to reduce their exposure to wealthy Indian clients as they cut down their discreet banking services in countries like Germany, France and the United States, analysts say. As the worldwide crackdown on tax evasion gathered momentum following the recent G-20 meeting in London, several Swiss banks, including UBS, which is the world's largest manager of private wealth assets, have issued travel directives to their "client-facing" staff not to visit foreign countries for carrying out what are called offshore wealth-management banking services. UBS, for instance, has asked its wealth management staff not to travel abroad to meet clients."

The report quoted Serge Steiner, a UBS executive, as saying this will also apply to India. "However, UBS India will continue to service wealth management for Indian clients," Steiner said. In effect, it would be a complete onshore (domestic) activity unlike the UBS wealth management staff descending from Singapore to service rich Indian clients."

Going by the report, Swiss banks currently manage around $2 trillion offshore assets of clients from various countries.

UBS, which is now mired in a major legal dispute with the US tax authorities, has passed information of over 300 accounts of wealthy American clients to the US Internal Revenue Service. But the IRS is not satisfied with UBS and wants the Swiss bank to provide information on some 52,000 American clients. Besides, two UBS bankers were arrested in the US on the ground that they were involved in tax fraud.

Consequently, UBS and other Swiss private banks are preparing ground to reduce their exposure to offshore banking services in a move to avoid further difficulties for the bank. Other Swiss private bankers too have been discreetly cautioned not to undertake visits in the wake of growing pressure from the G-20 leaders, especially Germany and France, who seem determined to pry open the secret tax havens. But a representative of the Swiss bankers association said there was no general directive to private bankers in Switzerland, suggesting that it is up to each individual bank to decide their foreign travel.

A surprising reaction was that of Bibek Debroy. In an article on April 3, the erudite and scholarly Debroy talked about pricing the loot and suggests the difficulties involved in the same. He used the Global financial Integrity (GFI) report but unfortunately looked only at the summary version.

In their website (http://www.gfip.org/storage/gfip/executive%20-%20final%20version%201-5-09.pdf), a detailed report is available (Illicit Financial Flows from Developing Countries: 2002-2006, authors Dev Kar and Devon-Cartwright Smith --- A project of Ford Foundation). Page 30 of the full report gives a clearer picture for India.

Financial flows in the context of this report include the proceeds from both illicit activities such as corruption (bribery and embezzlement of national wealth), criminal activity, and the proceeds of licit business that become illicit when transported across borders in contravention of applicable laws and regulatory frameworks (most commonly in order to evade payment of taxes).

In 2006, the most recent year of the GFI study, developing countries lost an estimated $858.6 billion to $1.06 trillion in illicit financial outflows.

According to the report, the average amount stashed away from India annually during 2002-06 was $27.3 billion, which works out to $136.5 billion over the five years (page 30 of the Ford Foundation Report). It is not that all this money went to Swiss banks, but to different tax and secret shelters. The share of Swiss banks in dirty money from India is at least a third due to historical and geographical reasons. Some $45 billion out of the $136.5 billion stashed away from India would have been hoarded in these five years in Swiss banks.

Notably, this figure is only for five years. More money was stashed away during the Nehruvian socialist regime. So, the loot for 55 years preceding 2002 would be several times the about money. In fact, in those days, the Indian rupee commanded a better value per dollar. So, fewer rupees could get more dollars. Hence the estimation that the Indian money stashed away may be of the order of $500 billion to $1.5 trillion.

Not only that. 'The International Narcotics Control Strategy Report - Money Laundering and Financial Crimes - March 2009' by the US department of state suggests that 30-40% of the inflows may be by Hawala market --- not accounted. During 2007-2008, according to that report, formal inflows into India were $42.6 billion and so 40% of this, namely $1.8 billion, could be reflected as illegal "flows" not captured by the law. This sum could be paid for in rupees domestically but stored in tax havens abroad.

]This implies at least $2 billion is salted away only on the hawala route. One can imagine the total including under-invoicing/ over-invoicing of exports and imports and getting the balance stored abroad and kickbacks from major defence/ civilian contracts. Then there are funds earned by artists/ entertainment/ sports people, which are not brought in but stashed abroad.

It will be of interest to note that OECD estimates the amount in tax havens to be in the range of $1.7 trillion to $11.5 trillion, on a conservative scale. The US suggests it is losing at least $100 billion per year due to tax havens.

Switzerland is specifically mentioned among tax havens as it is the largest and the oldest and also the most uncooperative. For instance, a report dated April 10, 2009 by AFP mentions that "The head of the Organisation for Economic Cooperation and Development, Angel Gurria, referred in a letter to Swiss President Hans-Rudolf Merz to the "inaccuracy" of charges of unfair treatment made by Swiss officials. Switzerland has expressed its disapproval of being targeted as a tax haven by refusing to authorise a budget contribution to the OECD. "There are no 'blacklists' and the OECD did not include or 'threaten to include' Switzerland on any black list," Gurria wrote, according to a statement made available by the OECD. "We only shared the criteria that have been approved by our committees and the jurisdictions that were adopting or not the OECD standard," he said.

"As you know very well, Switzerland does not yet have a single agreement on the exchange of tax information that conforms to the OECD standard." That is the reason all eyes are on Switzerland.

Another interesting thing which is taking place is the result of the crackdown in Germany. An April 8 report by Reuters says, "A crackdown on tax havens that prompted Switzerland to loosen its banking secrecy is encouraging more and more Germans to come clean about foreign accounts they use to evade taxes. Berlin has waged a very public campaign to stamp out tax evasion since Klaus Zumwinkel, then chief executive of Deutsche Post and one of Germany's top businessmen, was arrested in a major tax probe last February.

"Zumwinkel kicked off a bit of an avalanche," said Andreas Boehm, a lawyer based in central Berlin. "Afterwards, the number of people coming clean with us... rose by about 400-500%. And that level has been maintained." This is a positive outcome of the LGT affair where India has been reluctant to grab the names of Indians in the list with the Germans.

A report in a leading Indian magazine in February regarding the foreign travels of the ministers of the Union cabinet states that a large number of them have visited Switzerland including side personal trips, definitely not for skiing in the Alps.
Hence, we can say there are three issues at stake here: 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 issues, we are debating about the need to provide exact pin code address and permanent account numbers of the culprits before we even debate.
As for the silence of our business media, both print and electronic, we can surmise that hedge funds etc have invested in many of these companies and it could be through or from these tax havens. That might explain the eloquent silence.

But as a Tamil proverb outs it, 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, it will make us a banana republic worse than that of Sani Abacha's Nigeria.

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

The writer is professor of finance and control, Indian Institute of Management - Bangalore, and can be contacted at vaidya@iimb.ernet.in. Views are personal.