Organised Crime, Drug Trafficking, Economic Crime, Terrorism, and Money Laundering The Unholy Nexus

The activities of organized criminal syndicates and terrorist groups constitute ‘serious threats aimed at destabilising the security, integrity and economy of India’. Such activities should not be construed as ‘acts merely of ordinary crime or of law and order nature’ .

The Soli Sorabjee Committee, appointed by the Supreme Court, inter alia, stated that, such activities constitute ‘serious threats aimed at destabilising the security, integrity and economy of lndia’. Such activities, it said, should not be construed as ‘acts merely of ordinary crime or of law and order nature’ . The Committee further felt that ‘such perilous activities cannot obviously be left to be routinely dealt with as ordinary crime or law and order problems by the concerned State Police Forces’ and should be considered as ‘Federal Crimes’.

The Committee observed that ‘with the blurring of the line of distinction between external aggression and internal disturbances engineered by terrorist groups etc., often instigated, abetted, aided and supported by inimical foreign forces and the organized criminal groups supporting them, with arms, ammunition, and funding through hawala transactions, any measures taken to combat their activities can be regarded as measures taken for defence of India in terms of Entry Number 1 of the Union List’.

Recently, the former National Security Advisor M.K. Narayanan stated, ‘Stock Exchanges in Mumbai and Chennai have, on occasion, reported that fictitious or notional companies were engaged in stock market operations … Some of these companies were later traced to terrorist outfits’.

According to the Annual Report of the Swiss Banking Association, 2008, the details of bank deposits within Switzerland by nationals of the following five countries are as follows:

(US $ in Billion)

India                                             1,891

Russia                                          610

China                                            213

UK                                               210

Ukraine                                        140

Rest of the World                         300

Total                                             3,364

When the G20 Finance Ministers’ summit took place in Paris in October 2011, Switzerland appears to have agreed to share information on Indian account holders from the next financial year. In this meeting, all the finance ministers and central bank governors agreed with India’s concern over sharing banking and tax-related information. This appears to have triggered a flurry of monetary transactions across Swiss bank accounts. According to the Income Tax Department and the Financial Intelligence Unit (FlU), at least 15 Indians have transferred huge chunks of money to other tax havens and in particular to Macau, the Isle of Man, Jersey Island, Cayman Islands and Seychelles, since India does not have any bilateral agreements with these tax havens.

According to the latest figures released by the Swiss National Bank (SNB), the foreign assets kept with Swiss banks came down by about Rs 5,00,000 crores last year, amid a global outcry against the practice of providing secret accounts for black money from different countries, including India. The securities kept by foreign entities in Swiss banks were valued at 2.39 trillion Swiss Francs at the end of 201 0 (about Rs 1,26,00,000 crores at the current exchange rates), down from 2.49 trillion Swiss Francs (about Rs 1,30,00,000 crores) a year ago. However, the influential Swiss Bankers Association (SBA) has said that one should be extremely careful before drawing conclusions about the value of securities held by foreign entities. SBA’s former Head of International Communications, James Nason said that ‘ … the changes are due to not only client behaviour (i.e. deposits and withdrawal of funds) but also to changes in the price of the securities (mainly shares and bonds) held in the custody accounts and also to developments in exchange rates’ . Nason noted that foreign clients probably hold more securities in Euros and Dollars than their Swiss counterparts.

The value of their portfolio has taken a greater bashing because of the decline in the value of the Dollar and the Euro vis-a-vis the Swiss Franc, he added. ‘A drop in value can be seen not only for foreign private clients but also for foreign commercial and foreign institutional clients’ , Nason pointed out. Overall, customer holdings of securities in Swiss banks fell by 1.3 per cent to about 4.45 trillion Swiss Francs in 2010.

Even though there are no definite figures on the amount of black money stashed away offshore by Indians, rough estimates had pegged the amount at around US $1.5 trillion. The Swiss Parliament has approved amendments to tax treaties with India and many other countries, following which the governments can now more easily secure banking information on citizens who have deposited illegal funds in secret Swiss accounts.

In contrast to the above figures, a recent comprehensive study conducted by the Global Financial Integrity (GFI), namely, The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008, released on November 17,2010, estimates that tax evasion, crime, and corruption have removed gross illicit assets from India worth US $462 billion.

From 1948 through 2008, India lost a total of US $213 billion in illicit financial flows (or illegal capital flight). These illicit financial flows were generally the product of tax evasion, corruption, bribery and kickbacks, and criminal activities. The present value of India’s total illicit financial flows is at least US $462 billion. This is based on the short-term US Treasury Bill Rate as a proxy for the rate of return on assets. India’s aggregate illicit flows are more than twice the current external debt of US $230 billion. Based on the last five years of the study, 20042008, India lost assets at a rate of US $19 billion per year. The total capital flight out of India represents approximately 16.6 per cent of India’s GDP as of yearend 2008. In present value terms, India lost an equivalent of about 36 per cent of its 2008 GDP, which represents a staggering loss of capital. Some 68 per cent of India’s aggregate illicit capital loss occurred after India’s economic reforms in 1991, indicating that deregulation and trade liberalization actually contributed to or accelerated the transfer of illicit money abroad. The study revealed that high net-worth individuals and private companies were found to be the primary drivers of illicit flows out of India’s private sector. India’s underground economy is also a significant driver of illicit financial flows. The report further states that from 1948 through 2008, the Indian private sector shifted from depositing illicit money in banks in developed countries and moved more of its money into Offshore Financial Centres (OFC). The share of OFC deposits increased from 36.4 per cent in 1995 to 54.2 per cent in 2009.

The author of the report, Dev Kar, says that the total present value of India’s illicit assets held abroad accounts for approximately 72 per cent of India’s underground economy. This means that almost three-quarter of the illicit assets comprising India’s underground economy, which has been estimated to account for 50 per cent of India’s GDP (approximately US $640 billion at the end of 2008), ends up outside the country.

The December 2011 report of Global Financial Integrity, Illicit Financial Flows from the Developing World over the Decade Ending 2009, finds that despite a tremendous drop in global trade following the financial crisis in late 2008, the developing world still lost US $903 billion in 2009. The report finds that from 2000 to 2009, the developing countries lost US $8.44 trillion to illicit financial flows, a sum that overweighs foreign aid by a ratio of 10: 1. The top five sources of illicit financial flows over that period were China, Mexico, Russia, Saudi Arabia and Malaysia (Mexico alone lost US $872 billion). The outflows were mainly due to ‘trade mis-pricing’, and ‘other’ , which includes kickbacks, bribes, embezzlement and other forms of corruption.

According to the February 2011 report of the Global Financial Integrity, Illicit Financial Flowsfrom the Least Developed Countries: 1990-2008, commissioned by the United Nations Development Programme (UNDP), approximately US $197 billion flowed out of the 48 poorest developing countries into many developed countries, on a net basis over the period. Bangladesh, with an outflow of US $34.8 billion during 1990-2008, topped this list.

The United Nations Human Development Report of 1999 commented that organized crime syndicates grossed US $1.5 trillion per annum, which is more than the revenue of many developed economies and multi-national corporations. Recent figures from the IMF suggest that the amount is now nearer US $2 trillion. In contrast, global money laundering each year is at least US $1.5 trillion.

The Tax Justice Network in its report The Price of Offshore Revisited, released in July 2012, estimates the total figure hidden globally at US $21 trillion, and this number could be as high as US $32 trillion. According to J ames Henry, the author of the report, at least 72.7 billion (Rs 4,06,900 crores) worth of assets have moved from India to secretive offshore jurisdictions between 1976 and 2010. James Henry, speaking to Businessline stated that the figures do not include non-financial assets such as real estate, yachts, or art collections. He further stated that the figures for India are likely to be an underestimate because of transfer mispricing-the under-pricing of goods exported or over-pricing of goods imported to minimize a firm’s income in high tax jurisdictions and shift profits abroad. He added that ‘in this report an assumption has been made that the actual current account as reported is accurate and doesn’t allow for any transfer mispricing by the corporate sector. If that is left out, one would understand the volume of capital flight; and if mispricing is added, the figure could be 50 percent higher’ .

The report states that the estimate for India is lower than many other major economies: US $307.8 billion for Saudi Arabia during the period 1976 to 2010, US $496.1 billion for Kuwait, US $60.3 billion for South Africa, US $306.2 billion from Nigeria, US $797.9 billion from Russia, and US $519.5 billion from Brazil. A wide spectrum of means is used globally, from the most simple to the most sophisticated.

The study states that ‘in Afghanistan, money goes to Dubai through the Hawala system-so at one end you have the very basic non-electronic mechanisms, through family connections, to move money, to the other extreme, the most sophisticated methods such as designing their own electronic transfer systems’ . James Henry adds that the ‘offshore sector-which specializes in tax dodgingis basically designed and operated not by shady no-name banks located in sultry islands but by the world’s largest private banks, law firms, and accounting firms headquartered in First World capitals such as London, New York, and Geneva’. The amount of money placed in offshore jurisdictions has risen sharply over the crisis. The world’s top 50 private banks managed US $12.1 trillion in cross border invested assets for private clients in 2010, from US $5.4 trillion in 2005 … ‘The rules are running way behind the industry. You find that havens such as Singapore are not even on the OECD black list’.

The report states that ‘an astonishing US $9.8 trillion uf offshore wealth is held by 1,00,000 people. Were we III assume the US $21-32 trillion to deliver a return of three per cent, and be taxed at 30 percent, it would generate between US $190 billion and US $280 billion, twice the overseas development spend of OECD nations’. James Henry states that ‘organizations such as the World Bank are just sitting on this data, which has never been analyzed. Since the G20 statement on bank secrecy, nothing has been done. We are still left with a black hole in the world economy which is growing’.

Various estimates have been made in India from time to time to ascertain the extent of black money generated. One of the first authentic studies on this subject was done by a group of scholars at the National Institute of Public Finance and Policy (NIPFP), New Delhi, supported by official agencies, and it has come to acquire a semi -official or quasi-official status. The NIPFP Report (popularly known as ‘Raja Chellaiah’s Report’) estimates the black income in India at Rs 405,000 million (US $32,440.48 million), in 1985, amounting to 18 to 21 per cent of the GDP. The study also estimated the tax evaded was anywhere up to 70 per cent.

The main headings under which the estimates were made are listed below.

  1. Grant of licenses and permits in return for bribes or ‘political contributions’.
  2. ‘Speed money’ to accelerate administrative procedures.
  3. The ‘sale’ of jobs, postings or transfers in various public services.
  4. Regular bribes to petty functionaries from different government departments (for instance, factory inspector, boiler inspector, health inspector, police force, tax inspector for different taxes); the collections are invariably shared with higher officials of the department concerned.
  5. Pugrees (bribes) to circumvent Rent Control Legislation.
  6. Bribes to alter land-use zoning or to ‘regularize’ unauthorized structures.
  7. Bribes to obtain and maintain scarce public goods and services, such as electricity, telecommunications, irrigation water, and rail wagon allotments.
  8. Bribes to obtain public contracts.
  9. ‘Contributions’ to political authorities at various levels, ostensibly to finance elections and post-election manipulations.

Apparently, the above report did not take into account many other factors responsible for generating unaccountable funds. Further, NIPFP excludes ‘illegal transfers in the form of bribes from one individual to another in its estimation of black income, on the ground that inter-individual bribes do not swell the total gross personal incomes, that an income should be counted only once and not twice over’. This argument is fallacious. In most cases, bribers bribe using tax-evaded and not taxpaid income. The very purpose of bribing is to gain and protect tax-evaded income. Suraj B. Gupta in his book Black Income in India estimates this figure for India at Rs 1,49,297 crores (US $113,241.9 million) in 1987-88.

Sonali Basu in 1996 revised these figures by correcting the bias in the NIPFP estimate and subtracting those elements that amounted to double accounting in S.B. Gupta’s estimate. With this, the size of the black economy turns out to be about 25 per cent of GDP for 1980-81. For 1987-88, the last year for which Gupta gave an estimate (51 per cent), the figure turns out to be about 30 per cent. After the corrections, a conservative estimate of the size of the black economy, including illegal activities, may be taken to be about 40 per cent of the white economy in 1995.

The next detailed study was undertaken by Dr Arun Kumar, and was published in 1999. After a detailed analysis, he observed that from the material-producing sectors (the primary and the secondary) and the public sector, the contribution of the black economy to the GDP would be 1 %, from non-agriculture primary sector, 8.7% from the secondary private sector and 1.6% from the public sector, a total of 11.3% of GDP. The rest of the economy is the nonmaterial goods sector (42.2% of GDP), broadly categorized as the services sector. The share of the public sector in this sector was 28.3% so that the contribution of the private services sector to the GDP was 30.2%. This was associated with a contribution of 20.7% of the GDP to the black economy. It follows that the proportion of black (economy) in this sector was 68.5%. This coincides with the general impression that the proportion of the black (economy) here is the highest of the three sectors. Most of the illegal activities are concentrated in the tertiary sector so that another 8% of GDP comes from them. If this figure is added, the share of black incomes in the tertiary sector becomes 95%. One implication of the above is that a mere suppression of material output of 11.3% of GDP is driving black economy of 40% of GDP.

Kumar further observed that the GDP in 1995 was Rs 11,20,000 crores out of which 40 per cent was the black economy, that is Rs 4,50,000 crores. The population in 1995-96 was 93.42 crore, of which 3 per cent (2.8 crore) had substantial black incomes. Assuming that 10 per cent, that is, Rs 1,10,000 crores constitutes white income, and that the entire black income equals Rs 4,50,000 crores, their total income would be Rs 5,60,000 crores, that is, 50 per cent of the white GDP and 38 per cent of the total GD P. The top 3 per cent then would have a per capita income of Rs 2 lakh. The bottom 40 per cent is at the poverty line. He takes the per capita income of this group as Rs 3,500 per annum. Their total income would be Rs 1,30,000 crores. Consequently, the ratio of per capita income between the bottom 40 per cent and the top 3 per cent would be 1:57 in 1995-96.

Taking into account the above studies, the current estimates of black money, according to certain reliable sources will not be less than Rs 100,000 crores in our country.

Most of the estimates of black income made by economists do not take into account unaccountable funds generated in arms sales, organized crime, drug trafficking, terrorism and money laundering. The underground economy, by definition is informal, invisible, subterranean and off the books. These factors make it extremely difficult to guesstimate, leave alone estimate the volumes involved in these transactions.

The demand for secret funds generate supply and such funds are acquired, at a cost, and are kept in safe havens or used for a range of objectives, like:

  1. Tax evasion-taxable earnings are not reported to fiscal authorities and stashed in financial repositories abroad.
  2. Smuggling and related activities (evasion of exchange control regulations) involving contra-band shipments or financial instruments, the payments for which have to be shielded from national authorities. Such payments are frequently made from offshore shell corporations.
  3. Capital flight triggered by anticipated political, economic, or cultural uncertainties. Political instability/unrest; civil war, insurgency; social and cultural unrest, a swing towards fundamentalism, persecution of minorities, ethnic and cultural groups; chaotic handling of the economy resulting in massive trade deficits; budgetary gaps followed with deficit financing, ultimately resulting in worthless currencies, can all result in capital flight.
  4. Maintenance of slush funds received by corrupt politicians and public officials in major international deals, like purchase of arms, aircraft, ships, major projects, etc.
  5. To undertake securities transactions, including corporate raids using offshore funds, insider trading, etc.
  6. Fraud/theft of real or financial assets kept hidden and out of reach of the investigating authorities.
  7. Money laundering associated with illegal activi-ties, like drug-trafficking, organized crime, gun-running, etc.
  8. Undercover activities of intelligence agencies to achieve government objectives generally under-taken abroad, to support particular political groups, or destabilize or change a government; other clandestine operations, including supporting terrorist outfits, though illegal, but considered in the national interest.
  9. Financial resources received covertly by various ethnic resistance or terrorist groups fighting internecine wars with the government of the day.
  10. Contributions to individual politicians or political parties.

The unlimited availability of unaccountable funds from the above sources to organized crime provides immense opportunities to corrupt the political systems of developing economies where the state still regulates or controls designated economic activities by imposing formal restrictions/conditions on production, distribution and prices of selected commodities, Formal barriers are raised against the free flow of resources and goods. It is usually claimed that the state does this in national interest and to safeguard the interests of the weaker sections of society. These formal barriers to a free market create a seller’s market, resulting in abnormal profits and is an attractive proposition for organized crime to enter the fray. Such outfits use traditional techniques—both scrupulous and unscrupulous—to cross official barriers by bending or breaking them with or without the collusion of state personnel. Unaccountable funds are deployed to subvert the process and treated as investments, as the returns are not only attractive but many times over the normal business profits.

At this stage, it may be necessary to understand how the underground banking systems came into existence in India, with a network of branches in almost all the principal cities of the country and in places like Singapore, Bangkok, Hong Kong, Dubai, Kuwait, Frankfurt, Amsterdam, London, and some important cities in the United States.

When India was partitioned, millions of people were displaced and most of them had to leave their assets behind. However, a few of them were wise enough to utilize the underground financial systems, then in their formative stage. People who sold their properties in India received compensatory payments in Pakistan and vice versa. Later, when a number of persons of Indian origin had to leave Burma, Malaysia, Sri Lanka, Uganda, and other East African countries for political reasons, they utilized the underground financial systems to salvage their assets. With the expertise thus acquired for a necessity, certain ethnic groups perfected the system and realized the immense possibilities of using this ‘vehicle’ for organizing capital flight operations.

One such major ethnic group hails from two villages namely, Kilakarai and Kayalapattnam, in the district of Ramanathapuram in the state of Tamil Nadu. Other powerful groups hail from the district of Kutch; Jam Salaya, Jamkhambalia in the district of Jamnagar in Gujarat and Daman (an enclave) close to Valsad, all in the State of Gujarat. A few major groups hail from Kerala, Punjab and Sind. Barring Punjab, all other places have inhospitable terrains, and this made a few enterprising families to migrate to different countries to seek their fortunes. In the case of people from Punjab, and Sind they were displaced during the Partition and quite a few families migrated to Hong Kong, the United Kingdom, Canada, and the United States. Most of them have formed into close-knit syndicates based on bloodline, friendship, and geography. Part of the extended families of these syndicates look after the ‘operations’ in different countries and are part of the network. Periodic recruitment takes place, either to replace or to provide the manpower needed for expanding operations. Care is taken while selecting personnel to take them through different stages of training, starting from the ‘Courier’ stage upwards. The recruit has to be from the same ethnic group, possibly from the same village, and has to be sponsored, if not closely related. Loyalties are tested and inductees are trained carefully regarding their future role. They are required to withstand interrogation in the unlikely event of getting caught by the enforcement agencies. Rarely do any of them know—or reveal if they know—for whom they are working. Over the years, they move up the ladder based on their performance, achievements, and, above all, loyalty. If any of them get involved with an enforcement agency, they get transferred to other ‘stations’ after they are released on bail. Sometimes, they are treated as expendable and suitable compensation is given to their dependents. A study conducted by the Indian working group on behalf of the ICPO- INTERPOL (March 1991) observed that capital flight operations take place through coded communications in the form of chits, letters, couriers, telephones, or even faxes. The money is picked up and delivered at the doorstep for transfer for a fee, which may amount to 15 to 30 per cent, depending upon the strength of the currency dealt with. Physical movement of cash does not generally take place, but accounts are periodically reconciled within the organization. There is a certain amount of specialization and division oflabour, and where the organization has more than one type of illegal activity, the division is total and they have separate subdivisions to deal with each type of illegal activity. Interestingly, the members of each subdivision, particularly at the junior levels, may not even be aware of the size and spread of the organization. With the advent of mobile phones and iPads, the speed with which these transactions are taking place is mind-boggling.

More often than not, these syndicates carry out a variety of related operations to generate the funds required for the ‘banking system’ . These include smuggling of gold, silver, diamonds, drugs, arms and ammunition, and other goods of conspicuous consumption. They have no preference for a particular commodity. Profitability, the extent of risk involved, the alertness and awareness of the enforcement agencies about the likelihood of a particular commodity being smuggled, the difficulties involved in transporting, handling and storage, marketability and quick absorption into the system are what determine their decision. Usually, goods of high value and low volume get preference over others, particularly if profitability is also high.

An international survey conducted on behalf of the Indian Working Group (1991) shows that the Indian hawala operations are spread across Philippines, Hong Kong, Singapore, Sri Lanka, Oman, Dubai, and other countries in the Middle East, the UK, a few centres in Europe, and the United States of America. The quantum of capital involved was estimated at Rs 100 billion to Rs 200 billion (US $10 billion). It was also estimated that US $5 billion is stashed away by resident Indians in Swiss banks. The above figures are only indicative and do not reflect flight capital operations of a secret nature.

Most developing countries are victims of invoice manipulations. Under-invoicing of imports would mean a differential to be paid abroad. Over-invoicing of imports would lead to outflow of foreign exchange. By overinvoicing exports, surplus foreign exchange generated or concealed abroad is repatriated through banking channels to claim benefit of export bounties and income-tax exemptions. Under-invoicing of exports would help generate foreign exchange abroad either for retention or for meeting the differential value for under-invoiced imports. The Indian working group came to the tentative conclusion estimated that under-invoicing of exports in a year exceeds Rs 1,400 million; this includes non-repatriation of export proceeds. Over-invoicing of imports in a year was estimated at Rs 450 million. Fictitious transactions like bogus imports are still being estimated. However, the total leakage by invoice manipulation was estimated to cross Rs 4,500 million that year (US $225 million, in 1991). Deliberate over-invoicing of exports is likely to take place in view of various incentives like income-tax exemptions on export earnings, replenishment licenses for imports and cash incentives for exports. The working group observed that: Within the framework of international trade, there are always strong inducements for the exporters and importers to fake trade invoices. On the import side, tariffs and quotas provide a rationale for under-invoicing of imports in an attempt to skirt such matters. Incentive to overvalue imports leads to exchange build up abroad with the connivance of the foreign purchaser of Indian goods. Given the opposing forces on incentives, there is a net incentive to under-invoice imports when tariff rates exceed the premium on foreign exchange. The tendency to over-invoice imports exists, if the premium on foreign exchange exceeds the duties evaded. These incentives apart, the balance interest will be largely determined by the risk of the international trade transactions. Thus, if the enforcement of illegal trade transactions by faking invoices is dealt with strongly both nationally and internationally, the developing countries with exchange controls stand to benefit. This will require a political will on the part of all the countries of the world …. The Indian Working Group feels that this area of leakage of foreign exchange through bogus imports ultimately build up hawala reserves abroad. The quantum of such leakage is still being assessed. However, indications are that the figures may be higher than the initial estimates. It is essential that quick exchange of information on the alleged exporters of the goods takes place and verification of their antecedents initiated at the request of the enforcement agencies. Double taxation agreements should be invoked to conduct investigations abroad. These would help cutting at the roots of the attempts to launder the illegal proceeds of crime by making them appear as genuine trade earnings.

The figures mentioned by the Indian Working Group ( 1991) in the above study confined themselves to one area of cross-border transactions, and did not take into consideration the funds generated in various forms of serious crime.

Similarly, remittances of commission on exports and imports are not audited, and many times, excess remittances are made or remitted to fictitious suppliers.

Unlike the first generation of families who pioneered the underground banking systems entirely based on their initiative, resourcefulness, and understanding of the political events and their economic consequences, the second and third generations who controlled the syndicates were educated and advised by professional chartered accountants, investment consultants, and legal experts. This helped them not only to consolidate their assets but make an entry into legitimate business to seek respectability in society. The legitimate business offered them new avenues for investment as well as opportunities for power and further generation of wealth. It opened for them a world of white-collar crimes, in which prosecution is rare and punishment genteel. The corporate veil allowed them to remain anonymous. It is not the ownership, but the techniques and objectives that made their entry into the business world illegal. While they complied with the taxation system up to a point, the vehicle of legitimate business was abused to perpetrate various forms of economic crimes that pillaged the economy. Bankruptcies have been used to avoid payment of liabilities; insurance frauds are big businesses; consumers are victimized and various types of consumer frauds committed; self-improvement schemes, charity frauds, and real estate swindles have become the order of the day. The Indian experience shows that these syndicates entered new areas of operations like civil construction, financing and producing movies, setting up educational institutions including engineering and medical colleges, exporting processed and finished diamonds, etc. Charitable trusts were created with a small corpus, and funds from public limited companies were siphoned off into these trusts, ostensibly set up for laudable purposes. A number of politicians have also adopted these techniques, including being weighed with currency notes or being garlanded with higher denomination notes, as if to show that the public at large has donated these funds to show their admiration and affection. On the contrary, most of these gimmicks and operations have been sumps for laundering hot money and ill-gotten wealth in corruption and bribery. Even a cursory look at the figures declared by politicians to the Election Commission would show that their wealth has grown exponentially.

At the same time, the syndicates consolidated their overseas operations. New businesses and industrial establishments were set up in Hong Kong, Thailand, Singapore, Indonesia, Sri Lanka, and other countries offering soft options for overseas investments. Most of them operated accounts in offshore banks located in tax havens. Having consolidated their assets outside the legitimate banking system, they deployed these assets with alacrity for ‘corporate raids’ to take over well-established public limited companies. Most of these companies were made ‘sick’ in order to bilk shareholders and public financial institutions. The ‘husks’ were than made over to the Board for Industrial & Financial Reconstruction [established under Section 4 of the Sick Industrial (Special Provisions) Act, 1985] for rehabilitation of sick units with the help of public financial institutions and nationalized hanks. Thus, the cycle of further draining the economy of investible funds was repeated at the cost of the taxpayer.

The syndicates operating the underground banking systems (UBS) are now deeply entrenched and have almost acquired a stranglehold on the economy and the political system. They are able to influence political parties and pressurize them to bend policies to suit their requirements. Even the multinational corporations (MNCs) have had to utilize their services.

Most MNCs in India work in joint collaboration, through their branches or Indian subsidiaries. Evidence came to light during investigations that quite a few utilized—the services of the UBS for circumventing exchange control regulations and for providing secret money. The Parliamentary debates reveal (India, Rajya Sabha, Debates Vol. XII, No. 14, 14th May, 1975) that ‘Forty American companies—widely believed that many of them have liaison officers, who in tum probably deal with Indian officials, made donations to political parties, spend money to maintain lobbies inside the Government and in Parliament and provide other inducements such as liquor supplies, entertainment in luxury hotels and hospitality outside India when officials travel abroad’. A survey of the major corporations in the USA disclosed that in the 1970s, 36 US corporations handed over US $100 million in illegal payments to foreign officials and agents. The Boeing Company is alleged to have paid bribes to officials of airlines in developing countries in connection with sales of cargo and commercial jets (Hindus tan Times, February 15, 1976) and has been reported to have paid a substantial slim in illegal payments to airlines in India (Times of India, April 2, 1977). Kakuei Kanaka, who became Prime Minister of Japan in the mid 1970s was embroiled in a huge bribery scandal involving Lockheed, the American plane maker, and was forced to resign. However, he kept his seat in Parliament with huge support, and carried on where he had left off. Ironically, he had himself elected to the Parliamentary Ethics Committee. In South Korea, two former Presidents have been convicted of receiving huge bribes from industry while still in office and fined a total of US $610 million. At least a dozen former Presidential aides and nine businessmen were also found guilty of bribery. Among the businessmen convicted were the chairman of Samsung and the founder of Daewoo. Daewoo allegedly gave a US $6.5 million bribe to win a contract to construct a submarine base. President Roh Tae Woo allegedly threatened to give the contract to another company unless Daewoo paid the bribe.

The mechanism ofMNC’s operations is multifaceted; they operate partly through corrupt bureaucracy, partly through corrupt politicians and partly through local business, with the help of the underground banking systems. They employ all methods or a few methods simultaneously, depending on the situation and the specific demand at a particular time.

White paper on black money

Mr Pranab Mukherjee, the Hon’ble Finance Minister, as he then was, while submitting White Paper on Black Money in his covering letter dtd. 16.5.2012, inter alia, stated as follows:

In the past year the public discourse on the issue of corruption and black money has come in the forefront with the active participation of the civil society and our Parliamentary institutions. Two issues have been highlighted in this debate. First, several estimates have been floated, often without adequate factual basis on the magnitude of black money generated in the country and the unaccounted wealth stashed abroad. Secondly, a perception has been created that the Government’s response to address this issue has been piecemeal and inadequate. This document seeks to dispel some of the views around these two issues and place the various concerns in a perspective.

The ‘White Paper on Black Money’ presents the different facets of black money and its complex relationship with policy and administrative regime in the country. It also reflects upon the policy options and strategies that the Government has been pursuing in the context of recent initiatives, or needs to take up in the near future, to address the issue of black money and corruption in public life.

While explaining the context and the objective of the white paper, it has been mentioned that ‘Generation of black money and its stashing abroad in tax havens and Offshore Financial Centres have dominated discussions and debate in public fora during the last two years. Members of Parliament, the Supreme Court of India and the public at large have unequivocally expressed concern on the issue, particularly after some reports suggested estimates of such unaccounted wealth being held abroad. The Finance Minister, while responding to an adjournment motion on the ‘Situation Arising out of Money Deposited illegally in Foreign Banks and Action Being Taken against the Guilty Persons’ in the Lok Sabha on 14 December, 2011 gave an assurance that a white paper on black money would be prepared. This document is being presented to Parliament as a result’.

The white paper proposes to adopt the following strategies for curbing generation of black money from Legal and Legitimate Activities.

  1. Reducing disincentives against voluntary compliance.
  2. Reforms in vulnerable sectors of the economy.
  3. Creating effective credible deterrence.
  4. Supportive measures.

As part of reducing disincentives against voluntary compliance, the report suggests that the costs involved in complying with the law and its reporting regulations costs consist of two major components, namely, the tax that needs to be paid as part of the compliance and the costs that need to be incurred in addition to the taxes for complying with the regulatory obligations. This can improve disclosure and lessen the generation of black money.

  1. Rationalization of tax rates;
  2. Reducing transaction costs of compliance and administration;
  3. Further economic liberalization;
  4. Reforms in sectors vulnerable to generation of black money:
  5. a) Financial sector;
  6. b) Real estate;
  7. c) Bullion and jewellery sector;
  8. d) Cash economy;
  9. e) Mining and allocation of property rights over natural resources;
  10. f) Equity trading;
  11. g) Misuse of corporate structure for generation of black money;
  12. h) Non-profit organizations and the cooperative sector;
  13. i) Creation of effective credible deterrence.
  14. The Report suggests multi-pronged strategies as detailed below:
  15. a) Integration of databases leading to actionable intelligence by monitoring agencies;
  16. b) Strategies to strengthen direct tax administration;
  17. c) Strengthening of the prosecution mechanism;
  18. d) Enhanced exchange of information;
  19. e) Income tax overseas units;
  20. f) Efforts to be undertaken at international forums;
  21. g) International taxation and transfer pricing;
  22. h) Effective curbing of structuring through tax havens;
  23. i) Strengthening of indirect tax administration;
  24. j) Strengthening of FIU-IND, Financial Intelligence Unit-India [The core function of FIU-IND is collection, analysis, and dis-semination of financial infonnation. The FIU-IND has already initiated project FINnet (Financial Intelligence Network) so as to adopt industry best practices and appropriate technology to collect, analyze, and disseminate valuable financial infonnation for combating money laundering and related crimes];
  25. k) Strengthening of CEIB;
  26. l) Strengthening of other institutions; and
  27. m) Other steps to curb generation of black money within India [The joint task force (JTF) approach needs to be adopted for dealing with serious cases of corruption, tax frauds, terror financing, money-laundering, ponzi / MLM schemes, banking / financial frauds, illegal betting / lottery, etc. The JTF in such cases could consist of all the concerned agencies led by the agency connected with the main infraction of the law].
  28. Supportive Measures:
  29. a) Creating public awareness and public support;
  30. b) Enhancing the accountability of auditors;
  31. c) Protection to whistleblowers and witnesses;
  32. d) Need to join international efforts and use international platforms;
  33. e) Need to fine-tune relevant laws and regulations;
  34. f) Strengthening of social values;
  35. g) Strategies for curbing generation of black money through illegal or criminal activities [Illegal and criminal activities are an equally significant source of black money generation and curbing them is as an equally important priority of the government. Since many of these activities fall within the ambit of law and order issues, they lie primarily in the domain of state governments. Without undermining the role of the Central Government, it can be said that strategies for curbing these illegal activities require active participation of state governments, making it even more important that a broader national consensus is achieved in these areas and all political stakeholders commit themselves to pursuing these strategies];
  36. h) Organized Crime [Organized crime, wherever and whenever it exists, leads to profiteering and accumulation of wealth that cannot be reported, thereby generating black money. Such black money is either laundered and brought back into the accountable economy; taken out of the country; or remains within the country, where it may get invested in benami properties, both tangible and intangible in nature. Organized crime can exist in many areas and can often get mixed up with unreported legitimate activities in vulnerable sectors. Strict action by state governments is necessary to curb these crimes];
  37. i) Corruption; and
  38. j) Other criminal activities that lead to significant black money [There are many illegal activities and crimes that lead to significant income that cannot be reported due to the illegal nature of the activities generating it. These include counterfeit currency, drug trade, and terrorism. Each one of these can be a major source of black money generation and controlling them is one of the great challenges before society. It requires all agencies of both the Central and the State Governments to actively draw out long-term strategies to bring them to a halt].

  1. Strategies for repatriation of black money stashed abroad and issues related to confidentiality of information.
  • Repatriation of Black Money Stashed Abroad [The Restitution of Illegal Illicit Assets Act 2011, passed by Swiss Parliament in October 2010, provides for freezing, forfeiture and restitution of politically exposed persons, or their associates, where a request made under Mutual Legal Assistance Treaty [MLAT] cannot produce a result due to failure of state structures in the requesting state. The failure of state structure would be in cases where the requesting state cannot satisfy the requirements of MLATs owing to the total or substantial collapse, or the unavailability of its national judicial system. Since India has a well-functioning judicial system as also a well-functioning MLAT with Switzerland, we do not need to take recourse to this Act]. India has ratified the Multilateral Convention on Mutual Administrative Assistance in Tax Matters on 2 February 2012 and it will be in force from 1 June 2012. This Convention provides for assistance in tax collection from countries that are parties to the Convention (provided they have not placed any reservation on this type of assistance) and thus India will become better equipped to repatriate the money from these countries to the extent of tax liability.

Stolen Assets Recovery (StAR) is a partnership between the World Bank Group and UNODC (United Nations Office on Drugs and Crime) that supports international efforts to end safe havens for corrupt funds. Towards this end, it brings together governments’ regulatory authorities, financial institutions, and civil society for collective responsibility and action for the deterrence, detection, and recovery of stolen assets. India has taken steps to associate itself with the StAR initiative.

  1. Within this legal framework, the Indian government has been taking steps to recover illegal money that has been stashed abroad. The Government will need to expand the legal framework of Double Taxation Avoidance Agreements and Tax Information Exchange Agreements as in last few years they have been a very useful source of information. The Government will also need to sustain its efforts to obtain such information and take strict follow-up action against tax evaders. Building global consensus on assistance on repatriation of money in tax-evasion cases would facilitate the process.

  1. Voluntary Disclosure Schemes and Tax Recovery Agreement between countries for revenue sharing [An administrative agreement between the UK and Switzerland two countries that allows Switzerland to share taxes with the UK on accounts of UK citizens in Swiss Bank. In this regard, it may be noted that on 24 August 2011, UK and Switzerland have initialled a tax agreement in respect of capital income derived by UK residents from assets in Switzerland]. The agreement facilitates the levying of tax by the UK on such income in two ways:

(i)   A retrospective charge in respect of accounts that were operative as on 31 December 2010 and on 31 May 2013; and

(ii) A tax charge on any future income.

In terms of the retrospective tax charge, the UK resident will be charged tax either as a one-off lump-sum payment (tax rate between 19 and 34 per cent of the value of assets) without disclosure of name; or s/he can allow disclosure of her/his account and then be taxed in accordance with the law. The tax charge on future income will be subjected to a final withholding tax of 27 per cent (for capital gains) and 48 per cent. Thus, India will have to take a decision first as to whether such type of an agreement will meet its national objective where it can get an opportunity to share taxes with the Swiss government on assets held by Indian residents in Switzerland without learning the identity of the defaulting Indian residents. The Government of India looks forward to discussion on this important issue within and outside parliament before taking any further steps.

  1. Confidentiality of Information under Double Taxation Agreements/Tax Information Exchange Agreements.

While the strategies for curbing generation of black money from legal and legitimate activities appear to be a good road map for the Central Board of Direct Taxes and the Agencies concerned, one has to wait and watch as to how much of the proposed strategies would be put into action. A theoretical exposition of the strategies for curbing generation of black money may not achieve the desired results unless it is combined with fiscal and monetary reforms so as to provide the necessary incentives to canalize such funds for productive investment, reviving the economy, and to put it on an accelerated growth curve.


(Based on the excerpts of the author’s The Darker Side of Black Money, Second Edition, 2013, Konark Publishers)

By B V Kumar

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