Black Money and Its Footprints

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High net worth entities and the banks aiding tax evasion should be the focus of the probe.
It required harsh comments from a visibly upset bench of the Supreme Court for the government to hand over the information it has received from foreign countries, particulars that would presumably help identify money illegally held abroad and aid in bringing its Indian-resident holders to book. “Why are you trying to keep a protective umbrella for these people?” the bench of Chief Justice H L Dattu and Justices Ranjana P Desai and Madan B Lokur asked, and asserted that “unless we monitor the probe, nothing is going to come of it”. Why is the Bharatiya Janata Party-led union government proving as reluctant as the earlier Congress Party-led government in recovering the money illegally held abroad and booking its resident Indian holders?

The Bharatiya Janata Party had emitted a lot of hot air about the huge amounts of “black money” of Indian origin that are stashed in Swiss banks and even made tall promises that when it came to power it would take prompt action to bring the moolah back. Indeed, the public really believed it meant business, for soon after assuming office at the centre, the Narendra Modi-led government appointed a Special Investigation Team (SIT) to begin the process of accomplishing the task. Actually, the Modi government really had no option but to constitute an SIT. Ram Jethmalani had filed a public interest litigation in March 2009 which sought the Supreme Court’s intervention to order the government to take appropriate measures to bring back the money which allegedly has been kept illegally in foreign banks by resident Indians. The Supreme Court had passed an order in July 2011 obliging the government to set up an SIT to initiate the process. The Congress-led government adopted various delaying tactics, even filed a review petition, but upon the dismissal of this petition, the government had no other alternative but to constitute the SIT.
But five months had gone by since the institution of the SIT and the government was in possession of the relevant information from governments such as France, Germany and Switzerland, but it resorted to the same alibi of the previous Congress-led government, that the confidentiality clause in the tax agreements with the foreign governments prohibits the disclosure of the information provided. But can such clauses be valid even in judicial proceedings? Rightly, the Supreme Court dismissed the government’s plea. So are there now grounds for optimism of an ultimately positive outcome? Despite the Court monitoring the SIT it is not in a position to look into the details of the investigation, with the income tax department and the enforcement directorate controlled by the government. One cannot be optimistic about the investigations being fair. Besides, high net worth individuals and companies appoint portfolio managers to manage their funds parked overseas and bank deposits are just one type of asset in their diversified portfolios of financial and non-financial assets. And, in today’s financial world, deposits in Swiss banks can be moved in quick time into other assets in other tax havens and offshore financial centres, perhaps even brought back for another round of business in India.
The government also knows that the return flow of such capital takes the form of foreign direct investment through beneficial tax jurisdictions, the raising of funds by Indian companies through global depository receipts, and investment in Indian stock markets through participatory notes, as has been mentioned in the Congress-led government’s Black Money: White Paper, dated May 2012. The latter, the participatory note – an instrument which permits a foreign investor to invest in Indian securities but remain anonymous to Indian regulators – an easy route to money laundering, is still going strong. If the Modi government really wants to prevent money laundering it should do away with the participatory note. Indeed, like the Congress-led government, this government too welcomes the preferential routing of foreign investment through tax havens like Mauritius and Singapore even though it knows that this route is used by foreign investors to avoid payment of taxes and to conceal the identity of the ultimate investors from the regulatory authority, and that resident Indians are using this route to invest in their own companies.
The size of India’s black economy has advanced dramatically since the 1990s, according to one estimate, from 40% of the country’s official gross domestic product in 1995-96 to 50% of the same in 2005-06. We are reminded of the ancient Roman myth of Cacus. This Roman mythological figure used to steal oxen by dragging them backwards into his den so that the footprints seemed to suggest that the stolen oxen had, in the first place, strayed out from his den, and he was merely drawing them back in. If we choose to limit our investigation to only what is immediately apparent, namely, the footprints that some of the “crooks” – Jethmalani called even those who were aiding the cover-up by that name – (perhaps) deliberately leave behind (i e, deposits in Swiss bank accounts as one such ruse), then we will never get to the truth of the matter. In the real world of globalised finance, where investment portfolios for the major centres are combined, where the markets (stock, bond, money, real estate, government securities, forex and commodities) tick almost round-the-clock from Tokyo Monday morning to New York Friday 5 pm, via London, Frankfurt, etc, in between (and the digital books are passed at the appropriate times), tracking such practices as “round tripping” – discovering the real footprints – is going to be exceedingly difficult. It would be better to focus on tracing the footprints of the black incomes where they are generated, i e, in India itself.
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