Thursday, September 22, 2011

India’s Plundered Money Abroad – Can we get it back?

Sent to Mr. RNP Singh on 21 Feb. 2011 for publishing in Eternal India

21 Feb. 2011

India’s Plundered Money Abroad – Can we get it back?

Ajit Doval, KC

In common parlance, all the money generated through illegality – ranging from heinous criminal activities to white collar tax avoidance and tax evasions is nomenclatured as ‘Black Money’. The basic problems that India faces are twofold. Firstly, a continuing rise in the share of black money that has acquired alarming proportions and secondly a substantial portion of it getting stashed in tax havens abroad. What compounds the problem is the fact that the state is seen as lacking both the capacity and the intention to reform the system or deter the wrong doers. A nexus between the black money and those exercising power is suspected by the people, weakening the national will and raising the level of public cynicism. Contrary to expectations, liberalization and economic growth, rather than abating, has multiplied the phenomenon manifold. Ironically, during the last five years, when the country witnessed a high economic growth, had an economist Prime Minister donning the mantle of ‘Mr. Clean’ and global environment was relatively conducive to track the dirty money, growth of black money and its illegal movement abroad has been the highest. The Global Financial Integrity (GFI) has estimated that more than two-third of the Indian money stashed abroad has been generated in post liberalization period after mid nineties. The Supreme Court of India observed it to be not just tax evasion but “Theft” and “Plunder” of Indian money.

Size of the Problem:

The first estimate of black money in the country was made in 1955-56 by Prof. Calder of Britain. He calculated it to be around Rupees 440 to 500 crore, 4% of the then GDP. Over the years, the share of this black money kept on increasing and by mid nineties touched nearly 40%. Today, it is estimated to be to the tune of 50% of the GDP. Prof. Arun Kumar of JNU has observed that, “Today, policy failure is writ large and governance is failing all around. This is due to the growth in size of the black economy from about 4 percent of GDP in 1955-56 to the present 50 percent… For illegality to flourish on such a vast scale, those involved in overseeing the functioning of society have to be systematically complicit.”
The Global financial Integrity GFI, a highly credible non-profit research organization, working in the area of Tax Havens has estimated that the present value of illegal Indian money held abroad is to the tune of $500 Billions. Most analysts estimate it to be a gross under estimation for want of adequate research. In money terms, it means 15 years of our defence budget and eight times of our plan budget at 2009-10 level.
What is a matter of greater concern is that the black money continues to grow at a staggering rate and so does the movement of money to tax havens abroad. Generation of black money in such large volume, besides lack of probity and integrity in public life, is a consequence of faulty policies, inadequate laws, institutional decay and lack of transparency in governance. Almost every economic activity in the country from sale of agricultural produce by farmers to procurement of defence equipments, is plagued with bribery, speed money, corruption or kick backs. The malice, which is both systemic and systematic, not only affects the government and the public sector but also the private sector.

How does it hurt?
Black money not only leads to economic deprivation and degeneration of a country but seriously undermines the authority of the government and the rule of law. Black money in India has tended to corrupt democratic polity of the nation as large amounts of it get siphoned to political parties and personalities for electioneering and personal favours. The money power in elections is one of the banes of Indian democracy and its containment is necessary for the growth of a healthy democracy. Control of unaccounted money that sustains terrorism, insurgencies, drug trafficking, organized crimes etc. will also go a long way in Internal Security management of the country.
The drain of scarce national resources to foreign coffers bleeds the country in diverse ways and erodes its Comprehensive National Power (CNP). In a country where more than 30 crore people live below the poverty line, it deprives the country of resources required for upliftment of their survival status. Most of the neglected areas of national growth like health, education, roads and communications, tribal welfare, housing etc., could be addressed by utilization of these funds. A large number of internal conflicts like Left Wing Extremism originating due to economic deprivation and non inclusive growth could be effectively dealt with. The country’s defence preparedness that has been hamstrung for want of adequate resources could be brought to the level where it could cope with emerging military challenges from our two nuclear neighbors.
India’s economic strength today is one of the major contributor to its Comprehensive National Power that has catapulted India into a new power orbit. If the huge amounts of Indian money stashed abroad could be ploughed back and their future out flows prevented, it will greatly enhance our national power. India would also be able to take advantage of having world’s biggest youth bulge by providing them gainful employment, totally revolutionizing the country and its economy. However, the failure to do so can turn it into a liability and a source of serious internal turmoil.

How is it generated?
Indian black money that find its way to tax havens abroad originates in diverse forms; following being the major contributors:
(a) One of the major sources is huge amounts of money paid as bribes to corrupt politicians, bureaucrats and middlemen in major deals and projects. The cuts and kick backs are hidden in the project costs of these mega deals or procurement orders. Through various dubious ways they are channelised to accounts of corrupt politicians and bureaucrats or their proxies. Favours in Defence deals, licenses and permissions for mega projects, grant of infrastructure contracts, amending or formulating rules and procedures that provide undue benefit to a particular company etc. are the considerations for payment. As most of these big companies or their subsidiaries maintain foreign accounts the movement of money goes undetected. It is estimated that nearly 60 per cent of the illegal money stashed abroad comes from this source.
(b) Business malpractices through which black money is created include evasion or taxes, under and over invoicing, violation of provisions of Foreign Exchange Management Act (FEMA) etc. While major portion of this black money stays within the country and is used for acquisition of properties at under valued prices, hoardings of gold and silver, various forms of wasteful expenditures etc, a portion of it is channelised out of the country through hawala or other illegal transactions. After reaching foreign destinations it is moved to banks and tax havens which assure total secrecy. Nearly 15 – 20 % of the money stashed abroad originates from these sources and mostly belongs to business men and companies existing only in paper.
(c) Another source of black money pertains to organized crime mafias who engage in large scale property deals, drug trafficking, gunrunning, human trafficking, terrorist related activities etc. Nearly 10% to 12% of the illegal money stashed abroad is through these sources.
(d) Other miscellaneous sources include the money earned by Indian nationals abroad but parked in tax havens to avoid heavy taxes in the West. A section of affluent Indians moving parts of their savings to foreign banks for security also at times prefer tax free destinations. All these miscellaneous sources account for nearly 8 to 9%.
In the recent issue of India Today [31-01-2011] it was mentioned that "Sometimes, the money is physically transferred abroad. The CEO of a Mumbai-based equity firm says that the money is flown abroad in "special flights" or chartered aircraft out of Mumbai and Delhi airports to Zurich. Perhaps this is one reason behind the demand for private planes." This reveals the gigantic dimension of the problem.

Scams and black money:
Scams are intricately intertwined with creation of black money as also illegal stashing of Indian money abroad. Scams in government are characterized by large volumes of money and important functionaries of the government being involved. According to a study made by Prof. Arun Kumar, a noted authority on black money, “While the 1980s saw eight major scams, in the period between 1991 and 1996 there were 26 and during 2005-08, there were around 150 scams.” The graph is co-terminus with increase in the volume of black money and the Indian money stashed abroad.
During the regime of Rajiv Gandhi, Bofors erupted as a major scam involving purchase of artillery guns for the Indian Army. The scam was valued at rupees 64 crores. This paled into insignificance when compared to Harshad Mehta scam during Narsimha Rao’s Prime Ministership in 1992. According to Janakiraman Committee report the loss suffered by the state was to the tune of rupees 3,000 crore; which most experts estimate to be a gross undervaluation. When Harshad Mehta was manipulating the market in 1990s and the matter witnessed a heated debate in the parliament, the then Finance Minister, said he would not lose sleep over it. He probably felt that it was a temporary and an affordable aberration of the liberalization process which over the period of time will eliminate itself. History, however, was to prove him wrong and hit the country with vehemence under his Prime Minister ship. During the decade of 90s more than 2,500 companies that got registered in the stock market disappeared in the thin air with public money. The loss suffered by people was estimated to be several thousand crores but the government could do nothing to prevent it or punish the guilty. This not only emboldened the unscrupulous businessmen but also led to emergence of an unholy nexus between the political class and others in positions of authority and these financial criminals. This nexus took diverse forms from outright bribery to political funding and ‘taking care of the comforts’. The major scams of the recent years include the Satyam scam of 2009 involving nearly 8,000 crores, the mining scams running into thousands of crores, the Madhu Koda scam of 2008 estimated to involve nearly 4,000 crores, Common Wealth Games, Aadarsh Society scam, the Deemed Universities imbroglio etc., to name a few in the long list.
The 2G spectrum scam of 2008, however, came as the greatest shocker to the country. The Comptroller and Auditor General of India estimated the loss to the tune rupees 1,76,000 crore. It is not only the astronomical figure but also the blatant manner in which it was done that shocked the nation. The fact that the Prime Minister during a press conference on February 16, 2011, tried to explain away the phenomenon as compulsion of coalition politics is illustrative of the level of degeneration in governance and raises some serious questions about the viability of the political system itself.
One of the major areas of concern in recent years has been serious erosion in the credibility of investigating agencies and their political misuse. Appointment of a Chief Vigilance Commissioner despite being an accused in a criminal case, handling of corruption cases by CBI against Lalu Prasad Yadav, Mayawati, Mulayam Singh etc. turning the heat on and off to meet political requirements, Additional Solicitor General becoming an instrument to get the funds of Quattrochi released from his London bank account are illustrative of the serious morass the country finds itself in.

What could be done?
To get back the money stashed abroad is a painstaking and time consuming task. The nation will have to design a well thought out multi-pronged strategy ranging from enacting appropriate laws, empowering its investigative and intelligence agencies, using political and diplomatic pressures and leveraging its new economic clout to achieve its goals. Most importantly, a political
consensus and national will have to be created to achieve this national objective. The government of India can consider following measures:

a) Taking cognizance of reports of the IMF, GFI etc, the Government of India should enact a law emphasizing that huge Indian capital has been illegally stashed away and needs to be ploughed back. It should be a penal law so that all the defaulters could be treated as criminals. On the strength of this law the government should declare itself as the sole owner and beneficiary of all Indian monies, assets and bank accounts held abroad by or the dependants of Indian nationals without due declarations to the Indian authorities. The law may provide that where the Indian national are able to prove that the assets held by them have been acquired through proper means and the non-declaration was merely a technical default, the government should restore the assets back to the claimant. It, however, should shift the onus of proof on the person who holds undeclared wealth abroad. On the strength of the said law, the Government of India can ask the world governments and the foreign banks, like the Swiss Banks, to recognize Indian government as the beneficiary of the undeclared wealth and freeze the accounts till owners of the wealth are able to prove that they had acquired it by fair means and from legally valid sources.
b) On the basis of various expert reports and other credible information available, there are reasonable grounds to infer that a substantial portion of Indian illegal money stashed in foreign banks owes its origin to criminal activities like corruption, misappropriation of government funds, fraud, cheating, activities of organized criminal gangs, drug mafias, terrorist financing, ransoms etc. All these are cognizable offences punishable under criminal laws of India including the Indian Penal Code, Prevention of Corruption Act, The Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, Foreign Exchange Management Act, The Narcotic Drugs and Psychotropic Substances Act, Money Laundering Act, The Smugglers and Foreign Exchange Manipulators Forfeiture of Property Act etc.
Government of India should suo moto register an omnibus criminal case against suspected unidentified persons who have been indulging in criminal activities and unauthorizedly transferring the money to tax havens abroad. The case may be transferred to a special team of the CBI and investigated under supervision of the Supreme Court. They must register the FIR under varios sections of the IPC, money laundering and anti-terror laws etc. Registration of the criminal case will enable the investigating agencies to summon people for questioning, interrogate suspected persons, seize incriminating documents, conduct raids, make arrests, examine documents etc.
This would also enable the Government to get assistance of foreign police and investigating agencies for gathering requisite evidence and information. Most importantly, this will empower the government to approach different banks abroad, as also the concerned governments, for information regarding the money trail as they pertain to criminal cases.
c) Lots of monies of Indians in secret bank accounts have been appropriated by the banks, as the account holders cannot by legal and open documentation bequeath them to their progenies and most of them die without informing their progeny about the account. This may run into billions from the 1950s. Such monies should be declared by a special law as and vested in government of India with a provision that the progenies of the account holder may claim the same by providing requisite evidence to show that the monies in such accounts were sourced in legal business.
d) Indian political system needs to recognize that India is already a leading economy and an emerging geo-political power. In the shifting economic centers of gravity in the new world order, countries, particularly the tiny tots like Switzerland, will have enormous stakes in our country. The present and potential power of India should be leveraged, like US and Germany, did to reclaim the black monies of its nationals stashed abroad. Switzerland has billions of dollars of investments in India that they would not like to jeopardize by ignoring our laws or undermining our bonafide national interests. If our geo-political power was properly exercised, the Swiss government could never have behaved the way it did in Hasan Ali case.
e) Every electoral candidate should file an affidavit before elections that he does not hold illegal money abroad. The same should be applied to senior appointees in the Government like RBI Governor, SEBI Chairman, CBI Director, Cabinet Secretary, IB Director, RAW Chief, CVC etc. By an act of Parliament, persons who have accumulated funds abroad should be barred from holding any public office and getting loans from banks etc. as a form of punishment.
f) India must join global efforts against tax havens and secret banking. Recently there was a Task force meeting of the Financial Integrity & Economic Development— in Bergen Norway on 28-29 September, 2010. Our Finance ministry representatives also attended the conclave but remained a passive participant. The Task Force, a consortium of more than 60 governments, NGOs and foundations, is focused on the need for greater transparency in the global financial system for the benefit of both developing countries and industrialized nations. Governments participating in the Task Force include Norway, Germany, Denmark, the Netherlands, France, Spain, Chile, Canada and the Paris-based Secretariat of the 59 government members of the Leading Group on Innovative Financing for Development. Global Financial Integrity leads the Task Force. We are currently full member of the FATF [Financial Action Task Force] that gives us more elbow room from being an observer than in the past. The FATF provides opening to us for taking up national interest financial issues at global fora as also the type of actions we could initiate at the domestic front. India should play a lead role in all these initiative.

We are living in extra ordinary times – with possibilities ahead both of great opportunities and historic blunders. As a nation, we owe it to the deprived and ordinary people of India and future citizens of India the sacred duty of unearthing these vast national resources which has the potential to transform the country into a developed nation much sooner than we can otherwise. India is not only a country, but, also a great civilization, which has from time immemorial propagated non conflicting ideas and practiced non-conflicting methods. As a rising nation, we need to set proper standards for ourselves so that we become the alternative model for the world of conflict in search of peace and harmony. Being viewed as a corrupt and dishonest nation, and being seen as a nation of buccaneers who bolt away with billions of Dollars when a vast population of our country is living in abject poverty will hardly give us the moral and ethical authority to be of example to the world. The time is propitious and we need to act displaying highest degree of national will to get our looted money back.

(The author is Director, Vivekananda International Foundation)


Unknown said...

Sir, very intresting article. But i doubt does law makers who have derrivative power of the state and are in nexus will actually ever make such legislations?

learning about society said...

Excellent artical..see some background illegal activities also need to take to get our money back.It is easier than legal way .I hope if there is good dictator , getting 25% to 50% of money is piece of cake .Somebody who has will surely do under narendra modi.The way legal framework is managed by old part politicians to stash blackmoney, we need to use methods above the legal framewoerk. i hope you understand the methods..

Unknown said...

Mind Blowing article sir.

Unknown said...

Nice and appropriate article.I think the NDA government under the able leadership of Narendra Modi has already initiated steps to stop flow of black money to tax haven countries.A bill perhaps already placed in Parliament to enact a stringent law to curb flight of black money abroad.Lets hope the present NDA government under the leadership will be successful not only in plugging the hole in generating internal black money and its flightto tax havens.

Unknown said...

Almost every politician and Bollywood stars have huge amounts of black money. All jewellers and real estate operators also generate black money. The huge infrastructure projects that govt is undertaking are continually generating black money even today. The state level politicians are all involved too. The informal sector including even vendors, some of whom are making big money evade taxes and generate black money.

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Latheef Abbas said...

This article is about the anti national money smuggling of BJP