Cover Story

Black money & grey areas

Print edition : June 27, 2014

Justices M.B. Shah (left) and Arijit Pasayat, Chairman and Vice-Chairman respectively of the Special Investigation Team constituted by the government, and other members of the team, after the first meeting at North Block on June 2. Photo: Subhav Shukla/PTI

Prime Minister Narendra Modi taking the oath as a Member of Parliament on the second day of the first session of the 16th Lok Sabha on June 5. Photo: PTI

The terms of reference of the SIT include investigation, initiation of proceedings, and prosecution of all matters concerning and arising from unaccounted money held by Hassan Ali Khan. Photo: PTI

Kashinath Tapuriah, Hassan Ali Khan's associate. Photo: PTI

The headquarters of Liechtenstein Bank in Vaduz. The Supreme Court had directed the SIT to take over the investigation of individuals with accounts in the bank. Photo: SEBASTIAN DERUNGS/AFP

The decision to constitute a Special Investigation Team to investigate cases of black money stashed away in foreign banks will prove to be an acid test for the Narendra Modi government as the fight against the black economy calls for strong political will.

MINIMUM GOVERNMENT AND MAXIMUM GOVERNANCE. This is what Narendra Modi promised the electorate during the run-up to the Lok Sabha elections in April-May. The very first decision his National Democratic Alliance (NDA) government took after assuming office on May 26 was one aimed at setting right the consequences of the failure of the United Progressive Alliance government in dealing with the major issue of bringing back the black money stashed abroad by Indian nationals.

It set up a 13-member Special Investigation Team (SIT), as directed by the Supreme Court, to achieve this goal. It was clear from the progress of the case ( Ram Jethmalani vs Union of India) that the UPA government lacked the political will to act on this systemic issue, irrespective of its size or efficacy. Whether it is minimum government or maximum governance, what matters ultimately is the political class’ determination to act against the high and mighty in business and industry and in other areas of the economy who also happen to be its patrons during and after elections. It remains to be seen if Modi will be able to fulfil his election promise of bringing back illicit wealth from the secret chambers of banks abroad and using it for the welfare of the people.

The Supreme Court was compelled to intervene in the matter of black money and issue directions to the Central government in 2011 for the constitution of the SIT, when it was clear that the very same government agencies, which are now part of the newly constituted SIT, and are entrusted with the task of controlling the black economy, had not intervened enough to do their duty.

The White Paper on Black Money, brought out by the Ministry of Finance in May 2012, admitted as much: “The fight against generation and accumulation of black money is likely to be far more complex, requiring strong intervention of the state, in developing countries like India than in developed countries. It needs a strong legal framework, commensurate administrative measures, and a very strong resolve to fight the menace. It also calls for political consensus as well as patience and perseverance.”

Clearly, the state cannot withdraw itself from regulation and control when the enormity of the black economy is undermining India’s growth potential significantly, as stated by Professor Arun Kumar of the Centre for Economic Studies, Jawaharlal Nehru University, in an interview to Frontline (see story on page 12). Estimates of the unaccounted economy in India vary. A July 2010 paper of the World Bank’s Poverty and Inequality Team, Development Research Group, and the Human Development Economics Unit, Europe and Central Asia Region, estimated the “Shadow Economies” of 162 countries from 1999 to 2007. It reported that the weighted average size of the shadow economy (as a percentage of official gross domestic product) of these 162 countries in 2007 was 31 per cent compared with 34 per cent in 1999. For India, these figures were 20.7 per cent and 23.2 per cent respectively, comparing favourably with the world average. No wonder then that the previous government cited these figures approvingly in the White Paper.

But it is the criteria of inclusion within the shadow economy that must worry the government. Shadow economy for the purposes of this study was defined to include all market-based legal production of goods and services that are deliberately concealed from the public authorities for any of the following reasons:

To avoid payment of income, value-added or other taxes,

To avoid payment of social security contributions,

To avoid having to meet certain legal labour market standards, such as minimum wages, maximum working hours, and safety standards; and

To avoid complying with certain administrative procedures, such as completing statistical questionnaires or other administrative forms.

That black money is generated not only through tax avoidance but through various other means, which impact the welfare of the marginalised people by not following certain laws meant for their welfare, is a cause for concern. Clearly, one cannot take comfort from the fact that statistically the share of black money in the GDP is smaller in India than in other countries. However, as Professor Arun Kumar states in the interview, the current share of black economy in the GDP is alarming, as it is around 50 per cent.

Estimates of black money generation or accumulation in India vary. It is because there is no uniformity, unanimity, or consensus about the best methodology or approach to be used for this purpose. Similar problems abound in the estimation of black money stashed away abroad. But there can be no underestimation of the debilitating effect of the black economy on the institutions of governance and the conduct of public policy in the country, as the White Paper admits. Pranab Mukherjee, who was then Finance Minister, observed in the Foreword to the White Paper that “the success of an inclusive development strategy critically depends on the capacity of our society to root out the evil of corruption and black money from its very foundations”. He admitted that three premier institutions were tasked with quantifying the magnitude of the black economy, but none of them has seen the light of day.

However, much of what the previous government had stated in the White Paper, and of what the leaders of the present government, especially Narendra Modi, claimed during the election campaign, smack of a reluctance to identify the real reasons for the thriving of black economy and to find a remedy. That is, there is less substantive discourse than what one would expect on a subject such as this and a complete absence of official acknowledgement about the enormity of the threat posed by the black economy to our standard of living and the kind of legal and administrative safeguards and regulation required to minimise it.

Put in this context, the terms of reference of the SIT, as announced by the Modi government, do not show that it is serious about addressing the issue in all its dimensions. The question is not whether the Modi government deserves credit for initiating action to constitute an SIT. It probably wanted to avoid the kind of embarrassment the previous government faced for not showing seriousness in bringing back the unaccounted money. In April, the court pulled up the Centre for failing to implement its 2011 directive.

Looking back, it appears as if the previous government was unduly paranoid and tried every trick in the book to delay the constitution of an SIT, although it was nothing more than a symbolic exercise. The SIT is an institutional mechanism invented by the Supreme Court to address executive inaction in matters of serious concern to the country. The UPA government’s constant denial and inaction in dealing with the issue of unearthing black money prompted the Supreme Court to direct it to constitute an SIT. The court gave its order while hearing a petition filed in 2009 by the eminent lawyer Ram Jethmalani, and five others, namely, Gopal Sharman, Smt. Jalbala Vaidya, K.P.S. Gill, Prof. B.B. Dutta and Subhash Kashyap, all of whom have held responsible positions in society.

The terms of reference of the SIT include investigation, initiation of proceedings and prosecution of all issues relating to matters concerning and arising from unaccounted money held by Hassan Ali Khan and his associate Kashinath Tapuriah; all other investigations already commenced and are pending or waiting to be initiated, with respect to any other known instances of the stashing away of unaccounted money in foreign bank accounts by Indians or other entities operating in India; and all other matters with respect to unaccounted money being stashed away in foreign banks by Indians or other entities operating in India that may arise in the course of such investigations and proceedings.

Hassan Ali Khan is a Pune-based horse racing punter and businessman. The Supreme Court’s judgment mentions that Hassan Ali was served with an income tax demand notice for Rs.40,000 crore and Tapuriah was served an income tax demand notice of Rs.20,580 crore. Upon raiding Hassan Ali’s residence in Pune in 2007, the authorities discovered certain documents and evidence regarding deposits worth $8.04 billion with the Swiss bank UBS in Zurich. Simultaneously, the authorities began investigating Hassan Ali for suspected money laundering. He allegedly stashed away billions of dollars in Swiss bank accounts, which were subsequently emptied, through the hawala route.

Tapuriah, a Kolkata-based businessman, is co-accused in the money laundering case against Hassan Ali. Both are currently lodged in jail. During the interrogation of Hassan Ali and Tapuriah, which was undertaken for the first time at the behest of the Supreme Court, many names of important persons, including corporate giants, politically powerful people and international arms dealers, are said to have cropped up. It is not known whether the agencies concerned have investigated and verified the same.

The SIT was also entrusted with the task of ensuring that proceedings are initiated and prosecutions conducted with regard to the criminality and/or the unlawfulness of the activities that may have been the source of such unaccounted money, as well as the criminal and/or unlawful means that may have been used to transfer such unaccounted cash out of and/or back into the country, and the use of such unaccounted money in India or abroad.

This was followed by a broader mandate to prepare a comprehensive action plan, including the creation of necessary institutional structures that can enable and strengthen the country’s battle against the generation of unaccounted money and their stashing away in foreign banks or in various forms domestically.

The SIT was also told to keep the Supreme Court informed about all the major developments by filing periodic status reports and to follow any special orders that the court may issue from time to time. All organs and agencies of the State and Central governments were directed to cooperate with the SIT, by extending necessary financial, material, legal, diplomatic and intelligence resources, whether such investigations or portions of such investigations occurred inside the country or abroad. The SIT was empowered to investigate even where charge-sheets had been filed previously and register further cases if necessary.

As if to take care of the reasons cited by the previous government for not constituting the SIT, the notification added that it was subject to the outcome of the review petition pending in the Supreme Court.

It has been pointed out by activists that with the exception of the retired judges and bureaucrats of the Finance Ministry, all other SIT members are representatives of organisations notified under the Second Schedule of the Right to Information (RTI) Act, which are not required to furnish any information other than that pertaining to allegations of corruption or violation of human rights. However, activists have expressed the hope that as the SIT has been set up by a notification of the Central government and as it will be wholly financed by the same government, it will be a public authority under the RTI Act. In any case, the notification setting up the SIT does not specifically deal with the applicability or non-applicability of the RTI Act to the SIT.

Observers have also pointed out a crucial omission in the terms of reference of the SIT. The Supreme Court’s judgment had directed the SIT to take over the investigation of individuals with bank accounts in Liechtenstein Bank as disclosed by Germany to India and conduct the same expeditiously, and to review concluded matters and assess whether investigations had been conducted properly.

In its May 1 order, the Supreme Court recorded that according to the Central government, investigations had been concluded against 18 of the 26 individuals who had accounts in Liechtenstein Bank. These names were received from Germany and investigation had concluded in 17 cases. No evidence was found against eight individuals and the investigation had been concluded against them.

Therefore, observers point out that the terms of reference should have included reopening of the cases to assess whether there is any need to proceed further. The terms of reference, however, does not explicitly refer to these two directions. Thus, it has led observers to wonder whether the SIT will interpret its mandate broadly to cover these directions as well and make up for what probably is an omission due to oversight.

Terms of reference and transparency

Observers have noticed another serious problem regarding transparency in the terms of reference. The case in the Supreme Court arose from an RTI application seeking disclosure of the names of the account holders that Germany had handed over to the Indian government. Initially the UPA government refused to share the information regarding the account holders against whom investigations had been completed wholly or partially, but it relented under the court’s prodding and handed over two sealed envelopes containing the names of the account holders to the court. The court again directed that the names be handed over to the petitioners. These names have not been made public so far. There is no reference to this direction in the SIT’s terms of reference either.

Said Venkatesh Nayak of the Commonwealth Human Rights Initiative and an RTI activist: “The NDA government could change policy in this regard as well and publicise the names contained in the sealed envelopes, as it would only be dutifully following the directions of the court. Such a step would demonstrate its commitment to transparency as a real one going beyond mere public relations exercises.”

The previous government took the plea that Germany had handed over the names of the Indian account holders in Liechtenstein Bank to India under a tax agreement that contains a confidentiality clause. The Supreme Court had examined this clause in its 2011 judgment and concluded that the tax agreement did not prohibit disclosure of information provided by one signatory to another if it was required in a judicial proceeding.

Secondly, it held that confidentiality clauses contained in international treaties and agreements were not to be interpreted as set in stone. Instead, they should be tested against the concept and practice of the rule of law guaranteed by the Indian Constitution and, most importantly, the right to freedom of speech and expression guaranteed under Article 19(1) and the right to seek redress for violation of fundamental rights guaranteed under Article 32. The confidentiality clause, the court held, would be tolerated only if it matched any of the grounds mentioned in Article 19(2) for imposing reasonable restrictions on the citizens’ right to freedom of speech and expression.

The SIT formed to unearth black money comprises Justices M.B. Shah and Arijit Pasayat as Chairman and Vice Chairman respectively. Its ex-officio members are the Revenue Secretary, the Deputy Governor of the Reserve Bank of India, Director of the Intelligence Bureau, Director of the Enforcement Directorate, Director of the Central Bureau of Investigation, Director-General of the Narcotics Control Bureau, Director-General of Revenue Intelligence, Director of the Financial Intelligence Unit, a Joint Secretary in the Central Board of Direct Taxes, and Director of the Research and Analysis Wing.

The SIT held its first meeting on June 2. As it goes ahead with its mandate, its ability to overcome its inherent limitations, to address the issues of transparency and fulfil the larger expectations on fighting the black economy, will be on test.

The setting up of the SIT is an unavoidable step, forced by the circumstances beyond its making. Therefore, it may be unfair to subject the new government with a fresh mandate to criticism that it has just yielded to the judiciary and its monitoring, even though the subject matter of the SIT is within the executive domain. The SIT begins its task with the hope that as a result of the court’s monitoring, the institutions that are part of the SIT could become effective instruments to control the black economy. The SIT should not send the unfortunate message that institutions, even with strong political backing and demonstration of will power, cannot act without constant prodding by the judiciary.

It has been rightly observed that the political will to act against big-time tax defaulters is inversely proportional to the quantum of corporate funds spent in electioneering by political parties. Observers, therefore, wonder whether the Modi government, which is as corporate-friendly as the previous UPA, and is essentially not opposed to the neoliberal system under which the quantum of black money has trebled, will exhibit the political will to bring back the black money and unearth the unaccounted wealth within India.

However, there can be no better articulation of the limitations of the SIT approach to control black economy than what has been attempted in the Supreme Court’s 2011 judgment. Justices B. Sudershan Reddy and Surinder Singh Nijjar said: “ If the politico-bureaucratic, power wielding, and business classes bear a large part of the blame, at least some part of blame ought to be apportioned to those portions of the citizenry that is well informed, or is expected to be informed. Much of that citizenry has disengaged itself with the political process, and with the masses. Informed by contempt for the poor and the downtrodden, the elite classes that have benefited the most, or expects to benefit substantially from the neoliberal policies that would wish away the hordes, has also chosen to forget that constitutional mandate is as much the responsibility of the citizenry, and through their constant vigilance, of all the organs of the state, and national institutions including political parties.... To expect instant solutions, because this law or that body is formed, without striving to solve system-wide, and systemic, problems that have emerged is to not understand the demands of a responsible citizenry in modern constitutional republican democracies” (Paragraph 19).

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