While these papers have brought the focus back on black money, the harsh fact is that big countries are involved. So how successful will the Indian government be in pursuing a probe?
By Ajith Pillai
Will the sensational revelations of financial fraud in the Panama Papers bring to book Indians guilty of stashing away black money in the tax haven strategically located between North and South America? The Modi government’s initial reaction to the disclosures was almost immediate. It quickly set up an expert team to investigate the Panamanian link after the story broke last fortnight in the international media.
The team drawn from officials of different arms of financial intelligence, the tax department and the RBI has been directed to fast-track their probe and report directly to the prime minister. However, a question mark hovers over whether the team will make much headway given the obstacles before it and whether it will end up as another exercise in the selective naming and shaming of political rivals and, perhaps, even dispensable friends.
In fact, Union finance minister Arun Jaitley almost gave a preview of the shape of investigations to come when he revealed to the media in Kolkata that the Congress will be on the backfoot once the probe gets under way. “An impartial multi-agency probe is going on. When the details will come out, the Congress will not have many reasons to celebrate,” he said. Jaitley may have been referring to the fact that the Panama Papers cover the period from the 1970s to 2015 when the Congress was largely in power and, therefore, its leaders were more likely to be guilty of funneling monies abroad.
However, investigators may not be able to ferret out information easily. A revenue intelligence official told India Legal that Panama has no tax treaty with any country, including India. So access to documents relating to financial transactions would be virtually impossible.
According to the official: “If the investigations have to make any headway, they will have to examine the method employed to take the money out of India. Was it through hawala or through over-and under-invoicing exports or imports? It will be a tedious and long-drawn-out process at best. Tracing the paper trail will not be easy since tax havens are interlinked and money is often parked in one under one name and then routed to another in an entirely new account in a new name. To add to the confusion, there are also genuine or legally tenable cases of firms opening offices and accounts in Panama or Mauritius.”
Those who have been identified as having accounts in bank documents in tax havens can outright deny it. “If someone says that his or her name has been misused, the trail will go cold. It may make news but without proper documentation, the case will fall flat. To source documents in this case would be difficult,” said the official.
The other major obstacle that investigators face is that despite all the international posturing on action against tax havens, the truth is that the developed world is not keen to root out black money. This is because tax havens, according to an estimate by Professor Jason Hickel of the London School of Economics, collectively hide one-sixth of the world’s private wealth. Also, financial markets the world over thrive on hot money or funds transferred from one country to the other for short-term profits. Flow of capital from tax havens is a major source of financial infusions into the stock markets, be it India or the US.
An official in the know of earlier crackdowns on black money told India Legal that at the root of the problem is that big international banks and financial institutions thrive on funds from tax havens. In 1992, India allowed the use of participatory notes (p-notes) by foreign institutional investors (FIIs) to invest in the stock market and this led to widespread use of tax havens.
Top 10 tax havens
Tax Justice Network is an international advocacy group of researchers and activists who focus on the problems of tax avoidance and tax havens. It released its Financial Secrecy Index in 2015 on places around the world that provide safe havens for tax evaders. The countries and territories are ranked according to the secrecy provided and scale of activities. The top ten tax havens are: Switzerland, Hong Kong, USA, Singapore, The Cayman Islands, Luxembourg, Lebanon, Germany, Bahrain, United Arab Emirates.
Panama is 13th on the list and the UK 15th. Incidentally, the Panama Papers referred to the dealings of just one company— Mossack Fonseca. There are several other such firms in Panama City. According to reports in several international financial journals, many accounts have of late moved from Switzerland and other traditional tax havens to trusts and secret accounts in Singapore, the US and Dubai (left). These are believed to be far safer and secure.
P-notes facilitate overseas clients to participate in the Indian stock market but their identities are kept a secret even from SEBI, the market regulator. Any dividends or capital gains collected go back to the anonymous investors on whose behalf the FIIs invest in stocks. “The P-notes have led to black money being routed to tax havens and then pumped into the stock market. Everybody knows what is happening but no government wants to act. No one demands that the FIIs reveal the identity of the anonymous investors. Many Indians use this route to pump black money into the stock market and take it out as laundered money to deposit in accounts abroad,” says the official.
Rashmin Sanghvi, a Mumbai-based chartered accountant and a leading tax expert, told a news channel that any crackdown on black money and tax havens would require more than lip service from the international community. “Many large international banks and financial institutions thrive on black money. They are the ones that float trusts, participatory notes and other instruments to facilitate black money inflows and outflows. It is in their interest that the tax havens continue to flourish.”
Sanghvi pointed out the banks and financial institutions are getting away with this mode of business because they have the support of their governments, be it in Britain or the US. “Whenever the Indian government has threatened action against P-notes, there is a threat to pull out of the market. That was the case in 2010 and it was the case in 2015. Since these financial institutions control the markets, should they withdraw, there will be a crash.”
According to Professor Arun Kumar, formerly of Jawaharlal Nehru University and an expert on black money, “the very financial architecture of the world is driven by money that flows in from tax havens. The big countries and their governments are involved. For instance, a large number of tax havens were promoted by the British after colonization ended in the 1940s to facilitate the flow of money from the rich in the developing world to the developed world.” He said that disturbing this architecture may not be easy since it has the tacit support of the richer nations and their governments.
Even international cooperation in a crackdown on black money may not amount to much, although it is being widely discussed in the context of monies being routed through tax havens by terrorist organizations. However, despite this concern, almost all the information on offshore accounts and shell companies, including those in Panama, have come from whistleblowers rather than through official channels. Therefore, Indian investigators would have to establish the paper trail largely on their own steam—they may not make much headway by rushing off to Panama.
The extent to which tax havens—official and unofficial—have embedded themselves into the mainstream financial system (see box) was revealed in a BBC report last week. According to it, the state of Delaware in the US has been in the news for being home to 9,45,000 firms! The state boasts of easy financial regulation and the “ghost companies” are said to be a favorite with those wishing to park funds. Similarly, the states of Nevada, Arizona and Wyoming have been identified in media reports as so-called tax havens.
The sub-text is that if all this is happening in the United States, will it be too much to expect Uncle Sam to help in the global crackdown on black money?
As for the Indian government’s effort, one will have to wait and see if it will act or will be restrained to act. Immense international pressure will bear upon it as and when larger deals come into focus. There will also be domestic considerations.
One damning revelation already in the media is that kickbacks for certain defense deals during the United Front, NDA and UPA governments were routed through the same middleman firm set up in Panama. Any deeper probe into this would leave many across the political spectrum red-faced. It seems black money like blood circulates through the entire body of the Indian system.