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Wednesday, June 22, 2011

Why now is the right time to bring home the black money from tax havens abroad

Thanks to Baba Ramdev, concern about vast quantities of black 
money and illegal wealth of Indians stashed in tax havens abroad 
has spread far and wide among the public in our country. 
Suddenly Switzerland has become a suspect destination and tax 
authorities have said they will monitor Indians travelling to that 
country and other tax havens.

The current rulers claim that they have done more than any 
previous regime to deal with the issue of black money and 
tax havens. They question the credibility of earlier governments 
of V.P. Singh, Atal Bihari Vajpayee and others, and say that 
they did not do anything.

However, to set the record straight, there has been a sea 
change in the international attitudes to the role of tax havens 
prior to global financial meltdown of 2008 and after. While 
earlier, there was a certain global indulgence towards them 
as “innovative” financial centers, they have since 2008 come 
under pressure from powerful Western countries such as USA 
and Germany to cooperate in the investigation of money 
laundering, tax evasion, and recovery of illegal wealth earned 
through criminal and corrupt dealings. There is no more a climate 
of tolerance towards illegal financial transactions, and due to 
pressure from OECD and international agreements such as the 
UN Convention Against Corruption, Switzerland and other tax 
havens stand ready to share information and cooperate in the 
repatriation of illegal wealth; this has already happened in the 
case of Philippines, Peru and Nigeria, and only recently Swiss 
banks froze the wealth in the accounts of Tunisia’s ousted 
president and forty leading figures in his government.

Also, we need to remember that whatever action being taken 
by the present Government is due to prodding by the Supreme 
Court based on a case filed by Ram Jethmalani and other 
senior citizens and not out of its own volition.

What has happened now?

After the twin towers attack on 9/11 in the USA in 2001, 
attention turned to the financing of international terrorism. 
Around 2006 many countries in the West realized that 
terrorists are using the tax havens for funding of arms 
smuggling and terror financing. Because of the secrecy 
provided by the banking system in these off-shore 
jurisdictions, the terrorists were finding it easier to route 
their funds through these locations. 
Hence the functioning of the tax havens came under the radar 
screen of the US and other Western countries.

Then came the financial meltdown in US and Europe in the year 
2008, from which these countries are yet to fully recover. The 
meltdown impacted US after their sub-prime crisis wherein a 
significant number of banks and other financial institutions had to 
be saved by the Government. Later it spread to Europe with one 
country after another facing severe economic crisis. This is 
primarily due to lack of savings by households and consumption 
in excess of savings. Crisis of such magnitude with significant 
unemployment, made these countries look closely at the tax havens 
since their rich citizens were evading taxes by stashing funds in 
these locations. It is like a severe crisis in a family wherein members 
desperately try to find some money under the rice box or inside 
some old books!

France and Germany were in the forefront of the fight against tax 
havens. UK is a reluctant follower since UK has good number of 
tax havens under its own protection. USA is also against its citizens 
hiding money in these tax havens.

Around late 2007 Germany obtained from an informant data stolen 
from the LGT Bank of Liechtenstein and got information about 
thousands of names having illegal money in that bank. The chief of 
German Post had to resign since his name was there in that list. 
The German foreign minister announced that he would share the 
data with any other country interested. US, UK, Australia, and 
many other countries showed interest and collected the data. 
India was not interested. After much prodding by the leader 
of opposition in Parliament that time namely, L.K. Advani, the 
government approached German authorities and has been able 
to obtain data on accounts held by Indians.

Even after getting it the Government has not shown interest in 
releasing the names. Presumably there are nearly 100 Indian 
names. Government hides behind the double taxation treaty with 
Germany when this data has nothing to do with that treaty since 
it is about Indians illegally holding money in a third country bank 
namely that of Liechtenstein.

Thus, the global situation is conducive now compared to ten or 
twenty years ago to deal with these tax havens. The main reasons 
are concern about terror financing in USA and Europe and the 
economic meltdown in developed economies which have made 
these countries decide not to show any forbearance towards illegal 
money stashed in these jurisdictions.

So the contention that nothing was done by V.P. Singh, or by 
P.V. Narasimha Rao or by Vajpayee is not meaningful since 
in those days the global situation was not conducive to raise 
issues about tax havens. Actually USA and Europe were praising 
these tax havens and even calling them “innovative” financial 
centers. Post 2008 the entire situation has changed.

Hence the present is the most appropriate time to deal with this 
issue and India should take a lead in the campaign to close all 
these tax havens and create a new global financial architecture 
based on transparency and integrity rather than on privacy and 

R. Vaidyanathan is Professor of Finance in IIM-Bangalore


1 comment:

Anonymous said...

Dear Sir Sri Vaithinathan Hariharan

People of America are very good but the havoc caused by American policy makers, more importantly Americal foreign policy makers is something incorrigible. Just to stall the Russian Block, the American Block or the Capitalist Block was instrumental to this day's woes. Now there is no Russian Block. The fundamentalism resulting in terrorism was nurtured and encouraged by the American policy makers and now it is turning against them. The development activities in China and in other third world countries has forced American policy makers to turn 180 degrees and now they cry for humanism. This is the case in India as well. The Congress leaders of late 70's encouraged regional outfits and the next big political party also succumbed to this concept and now the two parties are made to go behind the regional outfits. It is sad that two major Natinal Parties cannot win a mojority of seats in UP, Bihar, Punjab, West Bengal, Tamil Nadu, consequently there can be no single party rule in India in near future. What you do for small gains will end in terrible mess and the wrong concepts will come to light very late and by this time the people who chose the wrong ideas might have passed away or retired. Ironically the generations that follow are put to suffering.Utter selfishness and gaining political headship without any sacrifice, wihtout any clear programme, policy and economic know how is a danger as they mostly come under the control of the Officers and about the Officers of India, less said better. There is nothiing to choose. We have to wait for the God's will and till then we have to bear the brunt.

With warm regards