Don’t feel too excited about the swiss decision to share details of Indian account holders; the billions of dollars stashed abroad might have been invested in global assets or rerouted back as white money
By Alam Srinivas
How easy or difficult is it to get back the black money, which is stashed away by Indians in foreign accounts? Given the euphoria today, it seems a not-too difficult task. Listen to what a hawala trader, who regularly channelizes cash from India to various tax havens, told me: “Like the six degrees of separation in personal relationships, there are at least six layers of separation between the owners of illegal money and their foreign bank accounts. Investigators would need to wade through millions of accounts to pinpoint the culprits.” Therefore, he sarcastically added, India would find it worthwhile to go after the ill-gotten wealth earned in the country, and prevent it from going abroad.
Several economists, like Arun Kumar of Delhi’s Jawaharlal Nehru University, argue along similar lines. They feel that the euphoria about Switzerland’s recent decision to share banking and clients’ information with India, and the cabinet’s decision to set up a special investigation team, headed by MB Shah, is misplaced. While it may result in brownie points for the government—Narendra Modi and the BJP want the money to come back—the investigators are unlikely to nab the big fish. What one may witness is the arrest of a few small-timers, who were stupid enough to have accounts in their own names, and income tax cases that may drag on for years, may be decades.
The focus among politicians, judiciary and economists to recover the money stashed abroad is lopsided for various reasons. One, the quantum of money in tax havens, and especially Swiss banks, is exaggerated. Two, the hyped figures of trillions of dollars stashed abroad are estimates of the money that may have flown out since Independence, or in the past 67 years. Three, the chances are that the bulk of the tainted money was invested in global assets or came back to India as white money. Four, a sizeable portion of this money may not be illegal; India allows its citizens to open accounts abroad, even in tax havens. Finally, as global experiences prove, even if the foreign banks help the investigators, the process still gets mired in legalese and technicalities for years.
All those zeroes
A few years ago, BJP leader LK Advani said that black money in foreign accounts, owned by Indians, was a staggering $1.4 trillion. In a presentation in the US, an Indian academician said the figure was a mindboggling $14 trillion (was it a case of a missing decimal point?). A report by Global Financial Integrity put the amount at under $500 billion in 2008, and most experts felt that it was a grossly-underestimated figure. In recent times, while ASSOCHAM, an industry association, talked of $2 trillion stashed abroad, its counterpart, FICCI was more conservative and said that the money in tax havens was over $700 billion.
These figures seem meaningless, when seen from the perspective of the Swiss authorities. A few days ago, they claimed that the money in their bank accounts, owned either directly or indirectly by Indians, was a mere Rs. 14,000 crore, or just over $2.33 billion at the current exchange rate. In 2010, the Swiss Bank Association estimated it at over Rs. 9,000 crore, or over $1.5 billion. Clearly, there is kite-flying about the money taken out of the country. This is evident from other secret sources, which became public in the past two years.
Arvind Kejriwal, the head of Aam Aadmi Party, claimed that he had received a CD with names of 700 Indians, who had accounts in the Geneva branch of HSBC Bank. He alleged that the names included prominent industrialists, such as Mukesh Ambani (`100 crore), Anil Ambani (`100 crore), Jet Airways’ Naresh Goyal (Rs.80 crore), and three members of the Dabur Group’s Burman family (together `25 crore). About 150 accounts had small amounts of Rs. 5-7 crore. If some of the richest names in the country have such paltry sums in foreign accounts, whether legal or illegal, the overall amounts are unlikely to be huge.
Not too long ago, India received information from Germany about 26 Indians and 12 Indian trusts that owned accounts in the tax haven of Lichenstein. Ger-many had bought the CD from a banker whistleblower for Euro 4 million. As a part of the ongoing hearings in the Supreme Court on black money, the government revealed that proceedings were initiated against 18 Indians, of which 17 were prosecuted. However, the amounts held by them in these accounts were paltry; 18 Indians held Rs. 43.83 crore, and a tax demand of Rs. 24.26 crore was slapped on them by the income tax department.
Most black money estimates by think-tanks have a similar problem. They are based on the amounts that may have gone out since the country became independent, or for nearly seven decades. It is stupid, almost facile, to believe that the money is still lying in the accounts, and waiting for India to get it back. In most cases, it was used to buy assets (real estate and bullion) internationally, or re-routed back into India through legitimate ways to make it white and, (voila!) tax free. This is the reason why there is so little of it still lying in Swiss banks and other tax havens. This trend has increased since 1991, when India opted for economic reforms.
Show me the money
Reforms created new investment opportunities, both productive and speculative, in India. Indians realized there were several legal ways to bring back unaccounted wealth without attracting tax authorities. The most prominent way was to bring it as foreign money to be invested in projects (foreign direct investment, and foreign venture capital and private equity), stock markets, and real estate. It is an established fact that most of the FDI that came through tax havens, such as Mauritius and Singapore, was tainted money abroad that was rerouted by Indians. The process was dubbed “round tripping”.
Investment in Indian stocks was another option. For example, court documents in the family infighting after the death of LP Jaiswal, patriarch of Jagatjit Industries, which makes popular liquor brands, proved that Higro Trading and Orissa Holdings, both registered in British Virgin Islands, held over 2 million global depository receipts (GDRs) in the company. GDRs are convertible into shares and normally issued to foreign investors in Europe. Both the entities were controlled by Jaiswal, who funneled the money he had in tax havens, to buy the GDRs. A declaration by Higro Trading, dated September 2003, said that the “holding (1.23 million GDRs) in our name is held by us as your (Jaiswal) nominee and we undertake to exercise all voting and other rights attached… as you shall direct….”
Participatory notes have become another favorite instrument to bring back money to India. These are generally issued by foreign institutional investors to foreigners, who wish to invest in Indian stocks, but are not—or don’t wish to be—registered with SEBI, the market regulator. However, Indians, using benami accounts and shell companies, use the P-Notes mechanism to convert their black money into legalized and speculative assets to earn impressive returns.
Not too long ago, the International Council of Investigative Journalists (ICIJ) got a list of accounts held in tax havens by prominent individuals across the world. The list included the names of nearly 600 Indians, along with the trusts and companies through which they held their accounts. Some of the prominent names were those of industrialists and their family members—Vijay Mallya, Ravikant Ruia, Abhey Kumar Oswal, Samir Modi, Chetan Burman, Rahul Mammen Mappillai, Vinod Doshi and Meenakshi Jatia. However, many of these accounts were legal and even approved by the Reserve Bank of India.
Not everything is black
When an Indian Express journalist and a member of ICIJ, investigated the names, she found that several businessmen were upfront about their accounts. Spokesperson for Essar Group, owned by Ruias, said that the accounts were in accordance with the laws. “These (eight) companies were started as special purpose vehicles (SPVs) to make investments and are in the knowledge of the concerned authorities,” said Essar. Mallya’s spokesperson clarified he was a non-resident Indian and could open foreign accounts. He added that it was common for businessmen to use tax havens to invest money, and Mallya had disclosed the details to parliament.
Burman maintained that he wanted to use the tax haven to route exports, mainly honey, through Singapore. The plan failed; he told Indian Express that “the company was set up through a verbal communication since I wanted to make Singapore the export hub of my products. But no trade transaction actually materialized and the company has thus remained dormant.” Lankalingam Murugesu and his wife, Reeta, who export papad, said that they started the company in a tax haven for “better tax planning”.
In June 2008, US Internal Revenue Service (IRS), akin to Income Tax agency in India, got the local court permission to summon UBS, the largest Swiss bank, to disclose records of Americans, who held “unreported” accounts in Switzerland. Over a year later, in August 2009, UBS agreed to pay a fine of $780 million for helping US citizens to take money out and evade taxes, and disclose the identities of 4,450 account holders. IRS said that the settlement was a “major step” towards “piercing the veil of bank secrecy”. It was a historic case, which opened the doors to pry into accounts in tax havens, or so people thought.
However, a recent study by Laura Szarmach found that the US got the information about the account holders under its bilateral tax treaty with Switzerland. The loophole in the agreement is that information can be obtained only if the US knows the identities of the account holders. Thus, the Swiss won a great battle; it avoided automatic information sharing that would have opened the floodgates. In addition, the US would receive information on 4,450 accounts, and not the tens of thousands it had demanded. Therefore, the US “succumbed to the Swiss desire to preserve as much bank secrecy as possible.”
The above case, where a powerful nation attempted to arm-twist Switzerland, showed how difficult it is to get information about foreign accounts. For a country like India, the obstacles would be higher and more in numbers; the information given may be sketchy, requests may be rejected, and it may take a long legal battle to take action against individuals. Therefore, despite the Swiss’ decision to part from banking information, don’t get excited that India is likely to receive billions of dollars over the next few years.