By Casey Sahadath (special to CDHR)
Following his electoral triumph in May 2014, Indian Prime Minister Narendra Modi raised the issue of illicit financial flows at his first cabinet meeting. He established a Special Investigation Team (SIT) to unearth Indian ‘black money’ stashed abroad, and appointed former Supreme Court justice MB Shah to spearhead the initiative. It was to be a zero tolerance approach to the illicit movement of taxable income and assets.
Now, wen months later, in March 2015, concerns about the efficacy of Modi’s black money SIT have begun to circulate. The BJP suffered a crushing defeat in the Delhi Legislative Assembly election to the anti-corruption focused Aam Admi Party (AAP). The notorious ‘SwissLeaks’ from HSBC surfaced in February, revealing over 1,000 Indian accountholders with the HSBC Private Bank in Switzerland. As a result Modi’s black money SIT has expanded it probe to investigate a larger number of citizens allegedly involved with the illicit outflow of wealth.
Last week Modi’s administration redoubled their anti-IFF efforts in the form of a new proposed law which, among its many initiatives, offers a window of prosecutorial protection to offenders who wish declare and pay penalties on illegally stashed income. It also ramps up punitive measures against tax dodgers in the form of greater fines and jail time, and creates better collaborative links between the United States and United Kingdom in fighting illicit financial flows.
But here is the question: are the steps taken by Prime Minister Modi significant enough to stop the hemorrhaging of billions of dollars which India loses each year to illicit outflows? Or, is this new proposed law window dressing on a Union Budget with a massive financial deficit?
The backdrop to this issue is the huge amount of wealth that India has lost, and is still losing, to illicit financial flow (IFFs). Some $462 billion were lost between India’s first full year of independence and 2008 – enough to liquidate all of India’s external debt at the end of that year. An additional $344 billion were lost between 2002 and 2011 with losses rising annually since 2002. Illicit assets held abroad by Indian nationals account for roughly 72% of India’s notorious underground economy which has been estimated at half of India’s GDP. Globally, India ranks fifth in average illicit financial flows per annum at $34.4 billion, and among the top ten illicit financial outflow countries, India is the poorest.
It is worth stating that the commitment by Prime Minister Modi and his black money SIT is a win as far as anti-IFF initiatives go. India has made fighting IFFs a major political issue. It was a campaign pledge by Prime Minister Modi, and he has built a substantial government apparatus around IFFs with the ability to track, investigate, recover, and prosecute assets and people involved in the process of offshoring funds.
In India, the IFF issue has been elevated to one that is at the centre of political discussion between parties and candidates, instead of a topic that only academics and bureaucrats care about. This is good for raising awareness about the issue, and broader learning for everyone involved. The SIT has acted as the locus for greater action against IFFs. The result has been justice Shah and his team leveraging existing institutional infrastructure in the form of courts, the Income Tax Department, the Ministry of External Affairs, and the Ministry of Finance’s Financial Intelligence Unit to investigate identified tax dodgers, punish them domestically, and attempt to repatriate lost assets.
That being said, supporters of this proposed law should be cautiously optimistic with regards to the efficacy of Modi’s proposed legislation and its associated initiatives. While effective in theory, in practice many pieces of anti-IFF legislation lack the necessary rigor to combat the problem root and branch. These measures may not be a silver bullet to rectifying the taxation issues India faces, its budget deficit, and the IFF problem as a whole.
The BJP’s proposed law for tax offenders is not without precedent. As Krishnan and Beniwal point out for Bloomberg Business, India’s treasury offered a similar amnesty program in 1997. The program brought in approximately 101 billion rupees ($1.6bn), with 470,000 citizens declaring 330 billion rupees of income held abroad.
Despite the success of the 1997 amnesty, there are criticisms that there is no impetus beyond a moral obligation for Indian nationals with assets held abroad to declare their offshored wealth. R. Kavita Rao of the National Institute of Public Finance and Policy is skeptical of Modi’s program’s ability to lead to a massive inflow of hidden funds, stating that “unless offenders feel there’s a flow of information and they will be caught”.
There are some new flows of information. February of this year brought about the ‘SwissLeaks’, a deluge of banking information from HSBC Private Bank in Switzerland. Over 1,000 new names were added to M.B. Shah’s SIT probe, and the names of the top 100 HSBC account holders with Indian addresses and their assets held were published by the International Consortium of Investigative Journalism, and then again to multiple Indian press outlets. Among the names on the list were the children of Reliance Industries founder, Dhirubhai Ambani, real estate developer Shravan Gupta, with $32 million held in Switzerland, and the family of the late stockbroker Harshad Mehta with mover $50 million held in HSBC Private Bank.
While the release of these names is a boon to the SIT and the Modi Government’s fight against black money, there are a number of hurdles associated with these leaks. Swiss financial officials have noted that the names associated with the HSBC leaks are from stolen information in 2007. Furthermore, HSBC has summarily denied the possession of any illegal accounts. These two points make it difficult for any government to penetrate the veil of secrecy which hangs over Swiss bank accounts. Regardless of the publicized names of account holders, in order for Swiss officials to investigate and reveal more information regarding account ownership, the onus is on the Indian government to produce sufficient evidence regarding the ownership of anonymous and secret accounts. This issue of sufficient evidence has plagued the Stolen Asset Recovery Initiative for decades, and has acted as a major barrier for countries like the Philippines and Nigeria in recovering assets stolen by former leaders Ferdinand Marcos and Sani Abacha. Many global south jurisdictions lack the budgets, personnel, and technical expertise to conduct substantive investigations and request mutual legal assistance from Global North states which absorb IFFs.
In addition to this, the terminological framework of ‘black money’ possesses a great deal of ambiguity. What constitutes black money for the Indian government is likely to be different for Swiss banking regulators and Swiss banks. If foreign income is legally being declared in a Swiss bank, is it ‘black money’? If income is earned in India by a company in the Cayman Islands who owns an account in Switzerland, is it ‘black money’? Swiss officials and bankers have committed to cooperate with Indian officials in probing for money laundering, but if ‘black money’ is being put in Swiss accounts under the pretense of legal business operations, is it money laundering or just offshoring of funds? These questions pose an unfortunate quandry for Prime Minister Modi, former justice Shah, and their SIT.
In addition to the expansion of the SIT probe to reflect the ‘SwissLeaks’ developments, Modi’s administration has committed to strengthening its cooperation with the United States and United Kingdom to combat tax evasion.
While this is good, given that the U.S. and UK have major roles in the OECD and Financial Action Task Force, involvement with the U.S. and UK in fighting tax evasion should come with a number of caveats.
First, both the United States and the United Kingdom are ranked highly in the Tax Justice Network’s Financial Secrecy Index. A number of U.S. states act as preferential tax destinations for non-resident individuals, corporations, and other financial vehicles. The U.S. also has very few tax information sharing agreements and obligations, and does not have such a treaty with India. Incorporation laws are state-governed in the U.S., and states such as Delaware, Wyoming, and Nevada offer anonymous incorporation for parties uninterested in tying their names to their funds. In a similar fashion to the U.S., the UK possesses what author and frequent IFF commentator Nicholas Shaxson refers to as a ‘spider’s web’ of an offshore system. This leads to my second point.
Second, the United Kingdom possesses a complex global network of tax havens in the form of Crown Dependencies, Overseas Territories, and other Privy Council Jurisdictions. This encompasses 20 states including Anguilla, Bahamas, Bermuda, Brunei, Gibraltar, Isle of Man, Jersey, et al. The United Kingdom has preeminence over its satellite territories and possesses the power to end legislation that allows financial secrecy to exist. However, the UK has taken a non-interventionist stance on exercising vetoes in its dependencies under the pretense of ‘good governance’, citing the negative domestic impacts of interfering with affairs in its satellite jurisdictions. As such, the financial service industries in the UK’s satellite states are largely if not wholly unregulated by the United Kingdom proper. They exist as incredibly effective and secretive bolt-holes for wealthy elites and corporations looking to hide money abroad, and exist in direct contrast to the narrative the UK has shaped in regards to its commitment against IFFs and financial secrecy.
Third, the U.S. and UK are both major vendors of anonymous shell corporations and offshore financial services. Together both countries account for over a third of the global offshore financial services market. In their report, Global Shell Games: Testing Money Launderers’ and Terrorist Financiers Access to Shell companies, Findlay, Neilson, and Sharman found that wealthy countries within the OECD that sell shell company services are the worst among all countries at enforcing global rules and regulations on corporate transparency. Their report found, at a statistically significant level, that it is 3 times harder to obtain an untraceable shell company in a tax haven (i.e. Switzerland) than a developed country (i.e. the United States and United Kingdom). Outside of Kenya, the United States and its incorporation services provide the easiest access to services which allow parties to incorporate and bank anonymously. The companies that provide shell incorporation services in the United States were found to require the least amount of identity documentation, i.e. no documents whatsoever, among all countries studied at a statistically significant level.
Again, committing to working with the U.S. and UK to fight tax avoidance is not necessarily a negative move. Both states possess a great deal of power within circles that create global anti-IFF recommendations and policies, and they are also working to create automatic exchanges of tax information between states. However it is worth bearing in mind that both of these states do a great deal of latent damage to global financial stability. Their lack of effort to end financial secrecy within their own borders and jurisdictions undermines global anti-IFF initiatives, and working closer with the U.S. and UK does not necessarily denote more productivity in fighting tax avoidance.
India is attempting to do what so many African countries are currently struggling with. Capturing what should be domestic revenue that has been lost to wealthy elite and corporate tax dodging, and leveraging that revenue into funds for domestic growth and development. The fact that Prime Minister Modi has elevated illicit financial flows to a major political issue is in it of itself, significant (and timely). However the subsequent black money SIT, and the more recent proposed laws, lack the necessary momentum to be significant steps in achieving the government’s greater goals, i.e., bridging the Union Budget gap, and recovering the necessary revenue to achieve greater growth and tax collection.
More needs to be done internally to prevent public and private sector corruption and create a culture of compliance with domestic tax laws. Those named in the ‘SwissLeaks’ list need to be summoned to public hearings to discuss their involvement with private banks abroad. Furthermore, India might be better off aligning itself more closely with states in Africa and the developing world that are actively campaigning against IFFs than with the United States and United Kingdom, two countries that, through both action and inaction, have undone much progress towards curbing illicit financial flows.
The BJP needs to work harder to create substantive anti-IFF measures. While the 1997 amnesty for tax avoidance saw $1.6 billion return to India, the country lost $1.6 billion in IFFs in 2010. A brief respite for tax dodgers may bring in a short burst of revenue but it is a drop in the bucket for a substantially larger problem.
Fagan, E. J. “Why Indian Prime Minister Narendra Modi’s First Act Was To Go After Illicit Financial Flows.” Global Financial Integrity, May 29, 2014. Accessed March 10, 2015. http://www.gfintegrity.org/indian-prime-minister-narendra-modis-first-act-go-illicit-financial-flows/.
Findley, Michael, Daniel Nielson, and Jason Sharman. Global Shell Games: Testing Money Launderers’ and Terrorist Financiers Access to Shell Companies. Report. Queensland: Griffith University, 2012.
The Indian Express, Le Monde, and International Consortium of Investigative Journalists. “#swissleaks: Top 100 HSBC Account Holders with Indian Addresses.” The Indian Express. February 09, 2015. Accessed March 5, 2015. http://indianexpress.com/article/india/india-others/top-100-hsbc-account-holders-with-indian-addresses/.
Kar, Dev. The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008. Report. November 2010. Accessed March 10, 2015. http://www.gfintegrity.org/wp-content/uploads/2014/02/GFI-India-Final.pdf.
Krishnan, Unni, and Vrishti Beniwal. “Modi Gives Last Chance for India Tax Evaders in $2 Trillion Hunt.” Bloomberg Business. March 4, 2015. Accessed March 5, 2015. http://www.bloomberg.com/news/articles/2015-03-04/modi-gives-last-chance-for-india-tax-evaders-in-2-trillion-hunt.
Sahadath, Casey. Fighting Illicit Finance: Policies to Curtail Illicit Financial Flows in Africa. Report. Toronto: Ryerson University, 2014.
Stephenson, Kevin, Larissa Gray, and Ric Power. Barriers to Asset Recovery: An Analysis of the Key Barriers and Recommendations for Action. Washington, DC: World Bank, 2011.
Tax Justice Network. Financial Secrecy Index – Narrative Report on United Kingdom. Report. November 7, 2013. Accessed March 5, 2015. http://www.financialsecrecyindex.com/PDF/UnitedKingdom.pdf.
 Unni Krishnan and Vrishti Beniwal, “Modi Gives Last Chance for India Tax Evaders in $2 Trillion Hunt,” Bloomberg Business, March 4, 2015, accessed March 5, 2015, http://www.bloomberg.com/news/articles/2015-03-04/modi-gives-last-chance-for-india-tax-evaders-in-2-trillion-hunt.
 Dev Kar, The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, report, November 2010, p. 18, accessed March 10, 2015, http://www.gfintegrity.org/wp-content/uploads/2014/02/GFI-India-Final.pdf.
 E. J. Fagan, “Why Indian Prime Minister Narendra Modi’s First Act Was to Go after Illicit Financial Flows,” Global Financial IntegrityMay 29, 2014, accessed March 10, 2015, http://www.gfintegrity.org/indian-prime-minister-narendra-modis-first-act-go-illicit-financial-flows/.
 Kar, p. vii, loc. cit.
 Fagan, loc. cit.
 Krishnan & Beniwal, loc. cit.
 The Indian Express, Le Monde, and International Consortium of Investigative Journalists, “#swissleaks: Top 100 HSBC Account Holders with Indian Addresses,” The Indian Express, February 09, 2015, accessed March 5, 2015, http://indianexpress.com/article/india/india-others/top-100-hsbc-account-holders-with-indian-addresses/.
 Casey Sahadath, Fighting Illicit Finance: Policies to Curtail Illicit Financial Flows in Africa, report (Toronto: Ryerson University, 2014), p. 51-57.
 Kevin Stephenson, Larissa Gray, and Ric Power, Barriers to Asset Recovery: An Analysis of the Key Barriers and Recommendations for Action (Washington, DC: World Bank, 2011), p. 31-32.
 Tax Justice Network, Financial Secrecy Index – Narrative Report on United Kingdom, report, November 7, 2013, The City of London: history and overview, accessed March 5, 2015, http://www.financialsecrecyindex.com/PDF/UnitedKingdom.pdf.
 Michael Findley, Daniel Nielson, and Jason Sharman, Global Shell Games: Testing Money Launderers’ and Terrorist Financiers Access to Shell Companies, report (Queensland: Griffith University, 2012), p. 22.
 Findley et al., p. 23, loc. cit.
 Findley et al., p. 23, loc. cit.