Black Money

Fait accompli?

Print edition : November 28, 2014

Prime Minister Narendra Modi and Finance Minister Arun Jaitley during the launch of the Pradhan Mantri Jan Dhan Yojana in New Delhi on August 28. Photo: V. Sudershan

The headquarters of Liechtensteinische Landesbank, a file photograph. Photo: SEBASTIAN DERUNGS/AFP

Narendra Modi claims that bringing back black money stashed abroad is an “article of faith” for him, but it remains to be seen whether the NDA government will go beyond its rhetoric and take concrete actions for financial transparency.

ON November 3, Prime Minister Narendra Modi declared that bringing back black money stashed abroad was an “article of faith” for him. He promised not to disappoint the citizens. This fervent declaration comes at a time when the controversy around bringing back unaccounted wealth of Indian citizens stashed abroad has reached a crescendo, with the opposition parties accusing the National Democratic Alliance (NDA) government of a volte-face on the issue after making it a rallying point for its election campaign in 2014. The chorus of allegations and counter-allegations has only obfuscated the use of multilateral financial architecture by individuals to conceal unaccounted wealth in low-tax jurisdictions.

Earlier in the week, the Supreme Court, in response to an affidavit filed by the NDA government in an ongoing investigation on black money, instructed the government to hand over to it a list provided by France of Indian account holders in HSBC Geneva and a list provided by Germany of trusts holding bank accounts in Liechtenstein. France had handed over the list to India way back in 2011. The information was allegedly stolen from the bank by a disgruntled employee in 2006. Germany had provided a list of trusts and entities with LGT Bank in Liechtenstein in March 2009 under the India-Germany Double Taxation Avoidance Agreement (DTAA).

The affidavit filed on October 27 states that according to international standards of confidentiality, disclosure of names and information is allowed only after investigations are completed and when there is a prima facie case of tax evasion. The NDA government argued that such information could only be quoted in public court proceedings arising out of tax-related issues and the same could be accessed by other law-enforcement agencies.

This prompted a severe reprimand from the Bench, with Chief Justice H.L. Dattu asking Attorney General Mukul Rohatgi to reveal all the names and not just a select few as the government had done. Following high drama in the court, on October 30, the government finally handed over a list of 627 names of account holders in HSBC Geneva. Earlier, it had submitted a list of 18 individuals of Indian origin who owned trusts in Liechtenstein and three individuals with illegal money in Switzerland.

The recent developments in the Supreme Court have initiated a debate on whether the names of individuals with untaxed wealth abroad should be made public. In a recent Facebook post, Finance Minister Arun Jaitley said that the unauthorised disclosure of names would be in violation of tax treaties and that the state concerned could refuse to provide any evidence required for further investigations. The recent developments call for a scrutiny of the DTAAs that India has signed with low-tax jurisdictions and their impact on the public interest.

Government affidavit

In the October 27 affidavit, the government argued that information received under tax treaties could only be used by the relevant courts and persons or authorities concerned with the relevant taxes. It also stated that every account held by an Indian in a foreign country might not be illegal and the fundamental right of citizens to privacy under Article 21 of the Constitution could not be ignored as had been recognised by the Supreme Court in Ram Jethmalani & Ors vs Union of India & Ors in 2011. The court had then observed: “The revelation of details of bank accounts of individuals, without establishment of prima-facie grounds to accuse them of wrongdoing, would be a violation of their rights to privacy. We cannot remain blind to such possibilities, and indeed experience reveals that public dissemination of banking details, or availability to unauthorised persons, has led to abuse.”

The government’s affidavit stated that the order of the Supreme Court in May 2014 was not in consonance with the principles laid down in its judgment in 2011. The Supreme Court in May 2014 directed that the information/documents in eight cases, where no evidence of tax evasion was found, be revealed only on the grounds that the investigations were completed.

According to the government affidavit, the cases of the list of 18 individuals holding trusts in Liechtenstein it had submitted to the court merit prosecution under the Income Tax Act for evasion of tax. The affidavit further stated that a proposed Intergovernmental Agreement (IGA) between India and the United States under the U.S.’ Foreign Account Tax Compliance Act (FATCA) needed to be entered into before the end of December 2014 and also had the confidentiality provisions of the underlying DTAA between India and the U.S. It requires a specific commitment that information exchanged under the agreement shall only be used for tax purposes. The government argues that giving such a commitment is necessary and not doing so will have “very serious implications for Indian financial institutions”.

Political flak

The stance of the government in the Supreme Court drew flak from political opponents. The Aam Aadmi Party (AAP) has demanded that the government immediately disclose all the names of account holders with unaccounted money abroad. The Congress accused the NDA government of criticising it while in the opposition and then replicating its stance in the Supreme Court.

The previous United Progressive Alliance (UPA) government, in a submission to the court, had mentioned that there was no presumption that every account holder in Liechtenstein banks had acted unlawfully. The Solicitor General at that time, Mohan Parasaran, arguing on behalf of the UPA government, submitted: “This Honourable Court has observed in paragraph 76 of the order dated 4th July, 2011, that there is no presumption that every account holder in banks of Liechtenstein has acted unlawfully. The court has held that where no wrongdoing has been found, it would be inappropriate for this court to order the disclosure of such names, even in the context of proceedings under clause (1) of Article 32 of the Constitution.”

Although the government stance has been widely criticised by political parties of all hues, independent commentators say that international standards indeed make it difficult to share information about account holders in tax havens with the public at large. Speaking to Frontline, Pooja Rangaprasad of the Centre for Budget Governance and Accountability said: “International standards and bilateral treaties on taxation mostly allow for information on account holders to be shared only for tax-evasion cases. This makes it difficult to track information where there are other sources of unaccounted wealth generated through corruption, money laundering, etc.”

Pooja Rangaprasad also highlighted the need to develop multilateral instruments for a more robust information exchange. “We are not seeing enough commitment from secrecy jurisdictions to sign the automatic information exchange agreement of the Organisation for Economic Cooperation and Development [OECD]. There are problems with the existing OECD template too. For instance, the information obtained cannot be used for purposes other than investigating tax evasion. There are high standards of confidentiality requirements too. The provision for reciprocity requires the developing countries to provide a lot of information to be able to receive information from tax havens. They do not have the infrastructure to do the same,” she said.

She further pointed out how the obsession with bringing black money back was obfuscating issues around regulatory mechanisms to stop generation and outflows of unaccounted wealth. “In India, the debate is entirely framed around bringing black money back. This diverts attention from the fact that a significant portion of the black money remains within the country. Also, there is the issue of beneficial ownership of trusts. There needs to be a public registry of the beneficial owners of trusts. At present, people use shell companies and trusts to conceal black money,” she said.

Double taxation agreements

The recent developments have raised pertinent concerns about the DTAAs being used as instruments of tax evasion by the political elite and corporates. In a detailed analysis of the DTAAs titled “Are International Treaties Superior to Indian Parliament, the Judiciary and the People’s Right to Know?”, Venkatesh Nayak of the Commonwealth Human Rights Initiative argues that little freedom is available in the international architecture of Double Taxation Conventions for any country to deviate from the model tax agreements. He cites Article 26 of the OECD Model Convention with Respect to Taxes on Income and on Capital, which forms the basis of most DTAAs. This article clearly states that any information received by a contracting state shall be treated as secret in the same manner as information obtained under the domestic laws of the state and shall only be disclosed to persons or authorities involved in the assessment of taxes covered by the agreement. The clause further states that the information may only be disclosed in public court proceedings or in judicial decisions.

The paper further notes that India had signed 15 DTAAs with various countries, including Austria, Qatar, Portugal, Slovenia and Ireland, when the previous NDA government was in power and all of these have similar secrecy provisions.

He also pointed out how the DTAAs were undermining the right to information as information covered under the DTAAs was not available even to the Supreme Court of India unless a tax-related dispute was involved.

The former Swiss banker-turned-whistle-blower Rudolf Elmer also emphasised the importance of revealing more information in the larger public interest. “Generally speaking, I agree that the names of individuals should only be revealed in court proceedings, but in the present scenario I believe that the public has a right to know who maintains and benefits from offshore accounts. Consider a politician who is supposed to serve the public interest. If he has an offshore account where he is hiding unaccounted wealth, I believe that the right of the people to know should override his right to privacy. The politician is after all elected by the man in the street. Such disclosure would not hurt the politician if he has declared all his wealth lawfully.”

Pooja Rangaprasad said: “There should be a comprehensive review of these treaties as some of them are also aiding the movement of black money back into the country through round-tripping. There is hardly any analysis on how much of these are actually aiding foreign investment. Mongolia recently carried out a review of all its treaties. In 2004, Indonesia revoked its double taxation treaty with Mauritius citing tax treaty abuses.”

Multilateral agreement

In a related development, India stopped short of signing the Multilateral Competent Authority Agreement (MCAA) of the OECD signed by a Global Forum of 51 countries in Berlin on October 29. The signatories to this agreement pledged to share financial data and crack down on tax evasion.

Andres Knobel of Tax Justice Network, an organisation that tracks activities in tax havens around the world, pointed out why it was a necessary first step for India to sign the MCAA. “For India (and any other country), signing the Multilateral Competent Authority Agreement was necessary, though not enough, to receive information on tax evasion and unaccounted money automatically. It was ‘necessary’ because countries engaging in automatic information exchange (AIE) need a legal framework to send and receive information. The Multilateral CAA provided this legal framework. A bilateral agreement could also provide the necessary legal framework, but it is more costly to negotiate a bilateral agreement with every jurisdiction and there is a risk of inconsistency. That is why the Multilateral CAA offered the best means of engagement to implement AIE.”

He, however, felt that this agreement too had its limitations. He said: “However, signing the Multilateral CAA is ‘not enough’ because there are many obstacles before a country may start receiving information from another signatory jurisdiction. Based on Section 7 of the Multilateral CAA, a country willing to engage in AIE needs to have the domestic legal framework to implement the new OECD standard on AIE (called the Common Reporting Standard, or CRS), the domestic legal framework to ensure confidentiality and data protection safeguards, and meet the subjective ‘safeguards for protection of personal data’ (if any), imposed by the jurisdiction sending information. Also, as per the present agreement, each jurisdiction may choose whom to engage with in an automatic information exchange.

For example, if India wants to receive information from Switzerland—and from any other secrecy jurisdiction (tax haven) or major financial centre—it will need an agreement (ideally the Multilateral CAA or, if not, a bilateral one) and it will need to make sure that its domestic legislation allows it to implement the CRS and to meet confidentiality and data protection requirements, and comply with any other safeguard for protection of personal data imposed by Switzerland.”

In the global forum, the NDA government thus stopped short of a commitment which would have initiated a multilateral process of ensuring greater financial transparency and a seamless exchange of information across jurisdictions. This does not square with the Prime Minister’s strident assertion of bringing back black money as an “article of faith”. Also, on the domestic front, the NDA is faced with increasing pressure from the judiciary, civil society and political opponents to take more proactive measures on the black money issue. This might call for renegotiating multilateral commitments of previous governments with tax havens and reworking existing DTAAs. This international and domestic pressure to give in to demands of financial transparency comes against the backdrop of ongoing negotiations with tax havens such as Switzerland.

India and Switzerland

On October 15, a high-level Indian delegation met its counterpart in Bern, Switzerland. Switzerland assured it that it would commence talks with India to conclude an automatic exchange of information at the earliest on a bilateral basis.

Elmer was not too optimistic about the outcome of this agreement. “Switzerland has recently stated that automatic information exchange has to be reciprocal. I am not sure if Indian banks have the infrastructure in place to supply a reciprocal amount of information to Switzerland. This demand is merely a delaying tactic to shield people holding offshore accounts. As of now, it is pretty simple to open an offshore structure where the beneficial owner, the beneficiary as well as transactions can be concealed from any investigative body. The automatic information exchange does not cover accounts with false names, offshore structures where nominees (lawyers, accountants, bankers) are used to hide beneficial owners or complex offshore structures over several secrecy jurisdictions.”

As tax havens continue to employ strong-arm tactics and delaying methods to weaken the seamless exchange of information on tax matters, it remains to be seen whether the NDA government will go beyond its rhetorical commitment to take concrete actions for financial transparency. Also, the government faces the mammoth task of both honouring international treaty obligations and responding to a growing clamour from civil society and the judicary for more transparency and information.

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