Tax heavens and Common Indian

Numbered account in Swiss bank is still a fascination for many people. It doesn't matter whether it is politician, business man, writer or middle men. This neutral Alpine country (Switzerland didn't participated in the world wars, joined UN only in 2002, not part of NATO or European Union. Military service is compulsory and by law every Swiss resident must have access to nuclear bunker at home or at neighborhood) slowly emerged as a destination for unaccountable money from all over the world.

In Switzerland privacy is part of constitution itself. According to Article 13 of Swiss constitution,
1. Everyone has the right to privacy in their private and family life and in their home, and in relation to their mail and telecommunications
2. Everyone has the right to be protected against the misuse of their personal data.

This small Alpine country enacted their first banking secrecy laws in 1934, in 1998 government tightened its anti-money laundering rules to prevent corrupt dictators depositing ill-gotten money in Swiss banks through the new 'know your customer rules' after the Abacha episode. But these steps didn't prevented many others from using the Swiss banks and other tax heavens.

India has its own share of shocking stories, accusations are always on air regarding to the secret Swiss accounts and accounts in various other tax heavens belonging to corrupt politicians and other people who are close to the system. No one can say whether these accusations are right or wrong as there is no way to validate it. According to the recent report 'The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008' of Global Financial Integrity,

a) "The total present value of India's illicit assets held abroad ($462bn) accounts for approximately 72 percent of India's underground economy".
b) "From 1948 through 2008 India lost a total of $213bn in illicit financial flows (or illegal capital flight). These illicit financial flows were generally the product of: corruption, bribery and kickbacks, criminal activities, and efforts to shelter wealth from a country's tax authorities."
c) "The present value of India's total illicit financial flows (IFFs) is at least $462 billion. This is based on the short-term U.S. Treasury bill rate as a proxy for the rate of return on assets"
d) "Total capital flight represents approximately 16.6 percent of India's GDP as of year-end 2008"
e) "Illicit financial flows out of India grew at a rate of 11.5% per year while in real terms they grew by 6.4 percent per year"
f) "India lost $16 billion per year from 2002-2006"
g) "In the post-reform period of 1991-2008, deregulation and trade liberalization accelerated the outflow of illicit money from the Indian economy. Opportunities for trade mispricing grew and expansion of the global shadow financial system—particularly island tax havens—accommodated the increased outflow of India's illicit capital flight."

The above mentioned numbers doesn't include the amounts from havala, contraband, drugs, illegal trade, cross border smuggling etc.

The numbers are indeed shocking, even for a common man who is paying bribe, to move his papers from one desk to another desk and taking the regular news tablets of CWG, 2G, Adarsh, fodder scams, Radia tapes etc on a daily basis. Because of the alarming regularity of the corruption scandals, people no longer show any interest in it. The handling of corruption in the higher levels didn’t give any solace to the common man in the street. One day CAG is saying that government lost close to 1.76 lack crores rupees in 2G spectrum distribution and after some months one union minister says that there is no loss to the exchequer and CAG's calculation is wrong. It is better to say nothing about CWG, as far as other scams are considered the less said the better.

In such a situation if the common man believes that government will do little to bring back the illegal money from foreign tax heavens, it is not his fault. After all the number of people convicted for corruption in India is abnormally law. In 2008, out of 8554 corruption cases registered only 7292 cases were actually investigated and charge sheets filed only for 2543 cases. Out of 29783 people facing trials, only 2985 were completed and 977 people were convicted. Out of 736 people faced department actions only 268 were punished and a mere 65 people lost jobs.

If we can't regulate the domestic corruption, not much hope are left for the conviction of people for stashing the ill-gotten money abroad. We can’t say all the people invested in these banks are doing something wrong, but the question is why Swiss secret accounts and tax heavens? They can do the same in Indian or in any other countries, why they are going all the way to Switzerland and other tax heavens for investments?

Recession and 9/11 changed the scenario. Now the cash strapped governments across the world are pushing the governments of tax heavens and Swiss to reveal more about these accounts.

As usual US opened their own way by targeting UBS. On February 18, 2009, UBS agreed to pay a fine of $780 million to the U.S. Government and entered into a deferred prosecution agreement on charges of conspiring to defraud the United States by impeding the Internal Revenue Service (IRS). Of the $780 million that UBS will pay, $380 million represents disgorgement of profits from its cross-border business; the balance represents United States taxes that UBS failed to withhold on the accounts. As part of the deal, UBS also settled Securities and Exchange Commission (SEC) charges of having acted as an unregistered broker-dealer and investment adviser for Americans. The day after settling its criminal case, on February 19, 2009, the U.S. government filed a civil suit against UBS to reveal the names of all 52,000 American customers, alleging that the bank and these customers conspired to defraud the IRS and federal government of legitimately owed tax revenue.

But German secret service agency proved to be smarter; Bundesnachrichtendienst (BND) paid around €4m to a former Liechtenstein bank employee for CD containing detailed information about Germans with accounts at Liechtenstein's LGT bank. Their actions were said to have been sanctioned by the government.

It is in this situation Indian government have to rethink about regaining or at least taxing the huge amount of illegal money flown out of India in the past. The recent information received by GoI and CBDT about the secret accounts of 26 people in Liechtenstein’s LGT Bank should act as a starting point for cracking down on illegal capital outflow and underground money. It is the time for Indian government to act along with EU and US for flushing out the information of Indians who filled the coffers with ill gotten money. If we didn't act now tentacles of corruption will eat the edifice Indian political and bureaucratic system. This black money may even rerouted to India in the form of Foreign Direct Investment (FDI) and become as white as milk.

It's time for government to assert that, people who are drinking the sweat of common man will be held accountable for it. If we are not ready to act decisive against the wide spread corruption at this point, it will slowly but certainly creep in to Indian life style and become part of it. Its indeed hard for the people to pay for the mammoth Indian bureaucracy and politicians twice for every service which are supposed to free.

Sajeev.