How to tackle black money menace

The following article, How to tackle black money menace appeared in The Hans India on December 22, 2011

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In its report released in November 2010, Global Financial Integrity (GFI) a global watchdog of corruption and illegal money flows across nations estimated that India lost US$ 213 billion between 1948 and 2008 due to illegal outflows. If interest accruals are added, the figure rises to US$ 462 billion, twice the size of India’s external debt @ US$ 230 billion for the same period. GFI agrees that in all likelihood the figures could be understated. Additionally, the figures did not take into account smuggling, mispricing and gaps in available statistics. If these are added India’s losses due to illegal money flows in the sixty-one years between 1948 and 2008 could cross the half a trillion mark. The story does not end there. The estimated US$ 462 billion stashed abroad represents only 72% of India’s black economy, the remaining 28% being held within India. With that India’s underground economy reaches US$ 640 billion (till end of 2008) and represents – 50% of her GDP! The more worrying aspect of the report is that economic liberalization did neither halt nor reduce illegal outflows. On the other hand it accelerated them with increased number of high net-worth individuals (HNWIs) and companies brazenly resorting to stashing money abroad.

We might inch closer to the truth when Julian Assange (of WikiLeaks fame) makes his promised sensational revelations about Indian black money hoarders abroad in early 2012. According to media reports Assange warned that sensitive information relating India’s illegal wealth is being intercepted both by China and the West.

It must be noted here that although Switzerland has earned notoriety as a secret haven for parking illegal funds there are many others including Austria, Luxembourg and Lichtenstein (a small town in Germany) which offer the same services. GFI identified 70 such havens.

Corruption and black money may be said to be two different manifestations of the same disease. While corruption affects populations within a country, money-laundering may have more pernicious effects on a global scale. Kofi Annan, former UN Secretary General found a cause and effect relationship between the two. In his foreword to the 2004 report on “United Nations Convention Against Corruption”, Annan said, “Corruption is an insidious plague that … undermines democracy and the rule of law, leads to violations of human rights … erodes the quality of life.” While conceding that it is a global phenomenon, however, Annan felt its destructive effects were more harmful to developing nations as it was a “major obstacle to poverty alleviation and development.” But it was Annan’s observation relating to transnational money-laundering that was more significant from a global perspective. He said that it aided and abetted organized crime and terrorism and allowed other threats to human security to flourish.

Recognizing this pernicious aspect of transnational money-laundering, the UNGA’s report to the Secretary General (“Uniting against terrorism: recommendations for a global counter-terrorism” - Sixtieth session, Agenda items 46 and 120 of April 27 2006) ratified the nine recommendations of the Paris-based Financial Action Task Force (FATF) on terrorist financing. The most important of these is the one relating to denying financial support to terrorism. It demands that “[e]ach country should criminalise the financing of terrorism, terrorist acts and terrorist organisations.” And that “Countries should ensure that such offences are designated as money-laundering predicate offences.”  The US Patriot Act, passed in the aftermath of New York WTC bombing on September 11, 2001 has a specific section for “International Money-laundering Abatement and Financial Anti-Terrorism.” Other nations of the developed world made similar legislations to deny financial support to terrorism.

Till recently it had been impossible to make the Swiss or other tax havens divulge information relating to money stashed in their banks. Even legal measures did not help. ‘Suing a Swiss bank in a Swiss court’ had been no-go in a nation obsessed with protecting customer anonymity in its banking transactions. But thanks to the American and other nations’ legislations cited above to discourage financial support to terrorism and the pressure they have been exerting, the tax havens began seeing illegal money flows in a different light, much as they contributed to their national economies. As a result the US was able to pressurise Swiss bank UBS not only to agree to provide information about American citizens illegally hoarding money in it but also pay a fine of US$ 780 million being loss to the US exchequer. Even small countries like Ireland were able to collect back moneys illegally deposited by their citizens abroad.

The Indian government has been saying that it has been taking active measures to bring back illegally stashed money abroad by signing double taxation treaties (DTT) with various countries. This only amounts to sidetracking the issue. The ideal course would be to make stashing money abroad a criminal offence not just tax evasion. The government is also guilty of being not fully transparent even in signing the DTTs. For example, the revised Indo-Swiss double taxation treaty enables India to seek information on black money and tax evasion only from January 2011 and has no retro-active effect. Therefore we can kiss goodbye to the US$ 462 billion already lost! 

The GFI report mentioned above makes two pertinent points: one that the illicit financial flows from India pose a grave challenge to national security. It cites the FATF report to say that the anti-money-laundering (AML) / combating terrorism regime in India is weak as a result of which the country faces many risks. 

Secondly it says that countries with strong governance (e.g. Norway) have smaller illicit financial outflows whereas countries with weak governance (e.g. Nigeria) have larger outflows. The key to the conundrum lies in making tax compliance easy and tax evasion costly and attracting exemplary punishment. Only confiscating the culprit’s whole property and sending him/her into long imprisonment would meet the case of exemplary punishment. Why is the government baulking to do so? Whom does it want to protect?