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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 secrecy
R. Vaidyanathan is Professor of Finance in IIM-Bangalore