Black money

Swiss Leaks

Print edition : March 06, 2015

Former Maharashtra Chief Minister Narayan Rane. Photo: VIVEK BENDRE

Anil Ambani. Photo: PAUL NORONHA

Mukesh Ambani. Photo: PUNIT PARANJPE/AFP

The investigations revealing the names of several thousand HSBC clients, including prominent Indians, highlight the problems of banking secrecy that enables individuals and corporations to hide unaccounted and untaxed wealth.

THE revelations following a three-month-long investigation by The Indian Express, the International Consortium of Investigative Journalists (ICIJ) and Le Monde in Paris have once again blown the lid off banking secrecy jurisdictions that enable individuals and corporations to hide vast amounts of unaccounted and untaxed wealth.

The Swiss Leaks project has revealed the names of 1,195 Indians, including high-profile industrialists and politicians, with accounts in the banking giant HSBC’s Geneva branch. The ICIJ investigation ranks India “16th among the countries with the largest dollar amounts in the leaked Swiss files”. The revelations are of great significance to India because the Supreme Court-appointed Special Investigation Team (SIT) is already looking into the black money Indians have stashed in offshore tax havens.

As per The Indian Express report, prominent account holders in the HSBC list include businessmen Mukesh Ambani and Anil Ambani; top diamond traders Rusell Mehta and Anoop Mehta; and former Maharashtra Chief Minister Narayan Rane, his wife Neelam Narayan Rane and son Nilesh. The Ambanis and Narayan Rane have denied holding any illegal bank accounts abroad.

The Swiss Leaks project is based on 60,000 leaked files, which provide details of about 100,000 HSBC clients and their bank accounts. The clients hold more than $100 billion in total. The ICIJ website informs that the data come from three types of internal bank files from different time periods. “One [of these files] reflects clients and their associated private accounts at the Swiss branch of the bank mostly from 1988 to 2007.”

The leaked files also include a snapshot of the maximum amounts in the clients’ accounts during 2006 and 2007 as well as notes on the clients and conversations with them made by bank employees during 2005.

On February 9, Union Finance Minister Arun Jaitley told the media: “Some new names have been revealed whose veracity would be checked by the authorities.” He said the government had sought information in more than 600 cases from foreign jurisdictions in suspected cases of tax evasion.

In 2014, the National Democratic Alliance (NDA) government constituted a 13-member SIT in pursuance of a 2011 directive of the Supreme Court. The court’s intervention was in response to a petition filed in 2009 by the renowned lawyer Ram Jethmalani. The United Progressive Alliance (UPA) government had dragged its feet on the issue of black money for several years, citing international treaty obligations. It did not facilitate the setting up of the SIT.

The SIT was assigned the responsibility of initiation of proceedings and prosecution of all issues relating to matters arising from unaccounted money held by Hassan Ali Khan, a Pune-based horse racing punter and businessman, and his associate, Kashinath Tapuriah, a Kolkata-based businessman. The SIT was also looking into other known instances of stashing away of black money in foreign banks by Indians or other entities operating in India as well as dealing with new matters with respect to unaccounted money stashed abroad that may come to light in the course of such investigations.

The Swiss Leaks revelations are expected to considerably expand the scope of the SIT investigations. SIT vice-chairman Arijit Pasayat said: “We will consider all new cases where there is evidence of black money.”

As per the latest SIT report submitted to the Supreme Court in December 2014, out of the 628 Indian account holders in HSBC Geneva, 201 are non-residents or are non-traceable. Actionable evidence has only been found against 427 cases.

Jaitley told the media that the Centre had completed assessment of 350 foreign accounts and tax evasion proceedings had been initiated against 60 account holders.

Information sharing

It is important to note, however, that the data that are available to the investigating journalists at present are leaked data provided by a whistle-blower. In 2008, Herve Falciani, an employee with HSBC in Geneva, leaked vast amounts of data on account holders to the French government. The French government shared the data with India in 2011. The recent investigation has, however, revealed the names of many more Indians who have accounts with the bank.

The revelations have underlined the failure of bilateral and multilateral instruments to cope with the menace of unaccounted wealth. Markus Meinzer of the Tax Justice Network pointed out in an email interview to Frontline: “It reveals how the demands to exchange data simply among tax administrations are not good enough. It is becoming increasingly clear that even in the presumably ‘well-governed’ Organisation for Economic Cooperation and Development [OECD] countries, data available to tax administrations has not always been used to prosecute but is ‘lost’ or only leads to tax collections but no prosecutions. This shows that governments must be much more open about details, for instance on multinational corporations financial reporting.”

In fact, the issues that remain unaddressed are the ways in which tax havens share information about untaxed wealth in their banks with the developing world. The regulations released by the OECD on country-by-country reporting on February 6 pose several difficulties in the way of a seamless sharing of information. In a blog post, Richard Murphy of Tax Research UK provides a detailed criticism of the regulations. He notes that the OECD requires that country-by-country reporting should never be available in the public domain. The OECD is backing large multinational companies’ demands that their accounts should remain as opaque as possible. He further notes that the regulations provide for a global accounting standard to measure unaccounted wealth with no discussion on a post-implementation review. He notes: “To put it politely, these measures, in combination, appear to be the USA trying to strangle the impact of country-by-country reporting at birth. When coupled with the failure to share this data of developing countries, that I’ve already noted, this is a bad day for country-by-country reporting, and for progress in seeking to make sure that multinational corporations pay the right amount of tax that they owe in the right country that they owe it.”

Pooja Rangaprasad of the Centre for Budget Governance and Accountability pointed out the problems that persisted with the OECD model for Automatic Information Exchange, “The automatic information exchange will start off from 2017. However, there are a number of problems with the automatic information exchange model as it exists at present. It gives enough leverage to the tax havens such as Switzerland to refuse information to the developing countries. Also, some developed countries continue to insist on standards of confidentiality when information is provided to the developing countries. However, there is no global standard of confidentiality as yet which only makes exchange of information more difficult.”

About the future course of investigations of the names on the HSBC list, she said: “At present, the process of obtaining information from Switzerland is cumbersome. A large amount of information is required to be provided about the account holders for the government to be able to obtain information about their offshore accounts.”

She also pointed out the failure of regulatory mechanisms to rein in erring banks. “This is not just an issue about the HSBC bank, but a larger issue of the lack of enough checks and balances on the banking system which allows hiding of untaxed, unaccounted wealth. As per the findings of the investigation, the bank was complicit in the process.”

The Swiss Leaks revelations do not address the issue of generation of black money. In 2011, the National Institute of Public Finance and Policy (NIPFP), the National Institute of Financial Management (NIFM) and the National Council of Applied Economic Research (NCAER) conducted a study on black money. Pooja Rangaprasad said: “The NIPFP report was submitted last year but it is yet to be released in the public domain.”

Estimates about India’s black economy vary. A July 2010 report of the World Bank estimated the “Shadow Economies” of 162 countries between 1999 and 2007. The figures for India in these two years were 20.7 per cent and 23.2 per cent of the gross domestic product (GDP) respectively. A study by the Global Financial Integrity puts the figure at 3 per cent of the economic output between 2002 and 2011. There are problems in estimating black money generation accurately as it is often generated through corruption and crime and involves complex offshore financial instruments.

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