‘Black money’ flows — time for global action

| | in Oped

The government is doing nothing with a list of 498 Indians holding secret accounts in tax havens. But illicit money flows are rapidly coming under the international scanner as governments are increasingly conscious of the harm they do to their economies

Discussions about ‘black money’ are hardly new in India, though what is said is often based on little more than wild guesstimates and rumour.  Everyone knows it exists, but it is notoriously difficult to find, much less curtail.  Among the sea of banners at Ramlila during Anna Hazare’s fast-unto-death two years ago was a list of Indians who allegedly hold secret accounts in Swiss banks.  “We have proof” was its shaky declaration, as it fluttered in the wind.

Fortunately, the hard evidence on the drivers and magnitude of illicit capital is mounting steadily, as is information on where it is stashed away.  Of equal, if not greater consequence, is the growing recognition in international circles that the problem is not one that India and other developing countries can solve alone.   The report of the UN’s High Level Panel on the Millennium Development Goals  (MDG) replacements, released at the end of May, is representative of this welcome shift, at least in terms of intent. The report points to the “special responsibilities” of developed countries in shutting down tax havens and ensuring that multinational companies pay taxes fairly in their countries of operation.  

Draining India dry

Last month, the release of a database on secret companies, trusts and funds in tax havens such as the British Virgin Islands caused quite a stir in India.  Published by the International Consortium of Investigative Journalists (ICIJ), the database contained the names of 498 Indians, including those of several MPs and civil servants.  ICIJ took care to point out, however, that the people mentioned in their database were not necessarily involved in tax avoidance or evasion as “there are legitimate reasons to use offshore companies and trusts.”

While these shades of grey may not matter to the ordinary citizen, experts working on the subject distinguish “illicit flows” from the more general category of capital flight, which would also include “normal” or “legal” outflows arising from investors’ portfolio choices.

According to Global Financial Integrity (GFI), the leading watchdog in the field, “illicit flows are comprised of funds that are illegally earned, transferred, or utilised — if laws are broken in the origin, movement, or use of the funds, then they are illicit.  The transfer of these funds is not recorded anywhere in the country of origin, for they typically violate the national criminal and civil codes, tax laws, custom regulations, VAT assessments, exchange controls, or banking regulations of that country.”

The global scenario

GFI has estimated that more than $540 billion are drained out of developing countries every year, through a combination of tax evasion, drug trafficking, fraud in international trade, and corruption.  Studies by Christian Aid, the Tax Justice Network, and other advocacy organizations have come up with similar numbers. While these estimates have not gone uncontested, there is broad agreement, even among critics, that the phenomenon is real and large enough to warrant urgent attention and action.  The most worrying finding of GFI and others is that illicit financial flows (IFFs) dwarf development assistance, removing $10 for every dollar spent on overall development aid, and $80 for every foreign aid dollar spent on basic social services.

Sadly, India has come to be known as a major contributor to the global flow of illicit finance.  The ICIJ list, mentioned above, is only the tip of the proverbial iceberg.  A GFI report published in 2010 indicates that India lost a total of $213 billion in IFFs from 1948 to 2008 as the result of activities such as tax evasion, trade misinvoicing, and bribery and kickbacks.  This is money that could have been spent on servicing India’s debt — on roads, bridges, public hospitals, schools, and plenty of nourishing midday meals.

GFI’s report on India finds that High Net-Worth Individuals (those who hold at least $1 million in financial assets) and private companies are the primary drivers of illicit flows out of India, and identifies the mid-1990s as a turning point of sorts, when the private sector’s use of offshore financial centres began to increase quite dramatically.  Indeed, among the salient findings of the report is that the market reforms of 1991have only made things worse.  This revelation is somewhat counter-intuitive, as liberalisation is typically associated with an improved investment climate and greater confidence in the economy.  With the dismantling of India’s notorious ‘license, permit, quota Raj,’ rich people should have wanted to keep their money in the country.  Or so the theory goes. 

As GFI points out, however, in the absence of strong institutions and improved governance, deregulation and trade liberalization “merely provided more opportunities” to engage in fraudulent transactions, such as the misinvoicing of trade.  Worsening income distribution during the post-reform period is also at fault, the report suggests.The combination of rapid economic growth and greater income inequality has bred a large number of high net-worth individuals who are aggressively seeking new avenues to conceal their wealth, much of which is ill gotten.  Thus, in addition to issuing a host of standard recommendations, such as strengthening regulatory and legal institutions and improving tax collection and compliance, the report makes an important appeal for inclusive growth.

Developed country responsibilities

The mention of IFFs tends to bring to mind corrupt political elites from the poorer countries of the world: Nigeria’s Sani Abacha or the Philippines’ Ferdinand Marcos.  India could probably add a few recognisable names to the list. It is the rich world, however, that has created the architecture — the structures, institutions and rules — that have allowed IFFs to thrive.  Countries such as Switzerland, the United Kingdom and the United States, along with their dependencies (Bermuda, the Bahamas, Cayman Islands, Guernsey, and so on),are as much if not more to blame for the burgeoning of illicit flows.  Yet developed countries have been slow to acknowledge their contribution to the problem, and the crucial role they must play to solve it, through forceful initiatives that will tighten the regulatory oversight of banks and offshore accounts in their territories. In recent years, however, illicit flows have become a focus of discussion at the annual meetings of the IMF and World Bank boards and the G20’s summits.  World leaders, including UK’s Prime Minister David Cameron — who also chairs the High Level Panel on the MDG-replacements — have paid plenty of lip service to the problem, highlighting its negative impact on development.


Of course, powerful countries such as the US, UK and Russia now shave abundant reasons of their own to want to curb IFFs.   IFFs are seen as a contributing factor in the global financial crisis and a source of instability in the world financial system.  They have come to be a central target of the Financial Action Task Force (FATF),an initiative to combat money laundering and terrorism financing that was revamped substantially after 911.   Whatever self-regarding motivation has propelled the reinvigorated interest in IFFs, the shift in gears is a good one for the ordinary Indian citizen. 

In the end, though, it may still boil down to a matter of political will. In 2011, a Guernsey court froze the assets of Tommy Suharto while waiting for action by the Indonesian government, which was not forthcoming.  When and if there is a global crackdown on tax havens, will India be ready to surrender its biggest fish?

(Mitu Sengupta is an Associate Professor of Political Science at Ryerson University, Toronto, Canada, and the Director of Research and Development, Centre for Development and Human Rights, New Delhi)

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