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