Black Money issue – SIT on a Wild Goose Chase?

More to the point, extant global financial architecture facilitates transfer of illicit money through the Hawala route first to a Tax Haven, only to launder it in specialised locations like London.

“There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.” That was the then Finance Minister [FM] Mr. P Chidambaram in para 126 in his Budget speech of 2013-14 in February 2013.

In a way this statement of the then FM was a candid confession of the complete failure of our Income-Tax department, revenue intelligence and associated authorities in fighting the menace of Black Money within the national economy.

Red Money – Not Black Money

But much water has flown under the bridge since February 2013. In response to a Public Interest Litigation filed by some public spirited citizens the Honourable Supreme Court [SC] in 2011 directed the formation of a Special Investigation Team [SIT].

It may be recalled that the then UPA Government was reluctant to pursue this idea of an SIT and instead preferred a Review of this order of SC. So much for its commitment on this issue!

Nevertheless, as the Supreme Court turned down this Review, it coincided with a change of Government at the Centre and the NDA assumed charge in May 2014. One of the first decision of the new Government was to comply with the order of SC and formed the SIT.

The SC, through the terms of reference, mandated the SIT to “have jurisdiction over all the cases, where investigation has already commenced or pending or awaiting to be initiated or have complete with regard to instances of black money and illicit funds generated and sent to overseas destination and tax haven nations.”

Further, the SC directed the Union Government to “accord all the necessary financial material, legal, diplomatic resources both inside and outside the country to the SIT.” In short, it is apparent that the thrust of investigations mandated by SC was to look at black monies parked by Indians abroad.

Readers may be aware that Black Money is defined as that which has escaped taxation. On the other hand, monies that are illicit [and hence hazardous for anyone to claim its ownership] and hence secreted abroad are termed as Red Money. And let me hasten to add that that this is not an empty exercise in semantics.

Let me elaborate. For instance, a bribe received by a Minister, being illegal, needs to be classified as Red Money and not Black Money. Recipients of such illicit monies find it risky to claim ownership of such income. Hence the necessity to park it abroad by sending such monies through the hawala route, preferably to tax havens where the identity of its ownership is kept secret by banks. Paying tax on such illicit income, I must reiterate, is a minor issue when the very source is illegal.

Professor Vaidyanathan of IIM Bangaluru brilliantly captures the entire paradigm when he says – Black Money is a No Confidence on the Government of the day while Red Money is a No Confidence on the nation itself.

As stated earlier, the SIT was formed in the last week of May 2014 with retired Supreme Court Judge MB Shah as its chairman and Justice (retd) Arijit Pasayat as its Vice Chairman. The eleven officers who form part of the SIT include Secretary of the Department of Revenue, a Deputy Governor of RBI, Intelligence Bureau Director, Director of ED, Director CBI, CBDT, Chairman and Director General Narcotics Control Bureau, Director of Revenue Intelligence, Director Financial Intelligence Unit, Secretary RAW and Joint Secretary (Foreign Tax and Tax Research).

Interestingly, these eleven officers head departments that are legally tasked, individually and collectively, with fighting Black Money within India. And as the statement of the then Finance Minister quoted at the outset clearly demonstrates that they have been a spectacular failure even in tackling Black Money within India. Yet these very men form the SIT and are expected to unearth Red Money parked abroad, especially in tax havens!

Wonders never cease, do they?

The Global Money Laundering Machine

It is pertinent to note that the world of finance is structured to launder Red Money parked in secret accounts in tax havens into lily white money for recirculation into global economy. And it is here that a reference to “The City” of London [which is distinct from London City] becomes mandatory.

At its broadest, the term “The City” – a state within a state – refers to the financial services industry located in London. More precisely, “The City,” is a 1.22 square mileslab of prime central London that stretches from the Thames at Victoria Embankment, clockwise up through Fleet Street, the Barbican Centre and to the tower of London.

The seminal work on this subject is best articulated by Nicholas Shaxson in his outstanding book titled “Treasure Islands.” Shaxson points out since 1950s financial services companies have flocked to “The City” because it lets them do what they cannot do at home. For instance, when the US introduced the Sarbanes-Oxley regulations in 2002 to protect Americans against the likes of Enron and WorldCom, “The City” did nothing. No wonder several global banks have centralised crucial financial operations from “The City.”

One of the attractions, Shaxson says, for “The City” is its secrecy. According to him “Britain does not follow the Swiss approach to bank secrecy, which makes its violation a criminal offence, it uses other mechanisms,” – one that would shame the best of Tax Havens and lax jurisdiction like Luxembourg.

Shaxson explains how under UK law offshore companies [which in turn masks the ultimate owners] can be directors of UK companies. Hence it is usually impossible to know who the real owners of UK Companies are. This systemically ensures proliferation of Red Money and its laundering.

Alexander Zvygintsev, Russia’s deputy prosecutor general, brilliantly summed up the issue when he said that ‘Londongrad’ was “a giant launderette for laundering criminally sourced funds.”What is galling to note is that as Shaxson points out how “The City” has never transmitted even the smallest piece of usable evidence to foreign magistrate.”

More to the point, extant global financial architecture facilitates transfer of illicit money through the Hawala route first to a Tax Haven, only to launder it in specialised locations like “The City” and probably use Mauritius route [because of an obnoxious Double Taxation Avoidance Agreement between India and Mauritius] to re-invest in India as FDI or FII with all tax benefits and legitimacy.

What is astonishing is that most in our financial sector or regulator or Government are unaware of the existence of “The City,” much less its dark underbelly.

Innocence thy name is Indian Establishment

Now come to my alma mater – the Institute of Chartered Accountant [ICAI] which innocently believes one way of fighting this menace of illicit money is to improve transparency in financial reporting. It is in this connection the ICAI believes that India has to adopt the accounting standards [IFRS] prescribed by the International Accounting Standard Board [IASB].

Now pray who owns IASB? Where is IASB located? What is the agenda of IASB in thrusting its standards on unsuspecting nations across continents?

Shaxson points out the IASB which sets rules for how companies around the world should publish their financial data, is head quartered – you guessed it right – in “The City!” Crucially, IASB that pontificates on transparency and disclosure has several unanswered questions about its ownership as it is a private company registered in Delaware [which again is a state in US with extraordinary lax regulatory regime].

That implies IASB is not a multilateral rule-setting body representing Governments [like for instance the WTO is for trade]. Consequently, Shaxson opines IASB is not accountable to national Governments but to unknown private individuals who in turn set the global agenda for financial reporting! And Shaxson points out that rules framed by IASB invariably obfuscates the reporting of ownership of multi-layered entities.

Lamentably, the ICAI swears by IASB despite such disturbing facts. In the process, the world’s second largest body of accountants has reduced itself to become a cheerleader for this secretly owned Delaware Company.

Probably, egged on by honchos of ICAI or oblivious to everything stated above, the new Finance Minister Arun Jaitley in his Budget speech for 2014-2015 observed, “There is an urgent need to converge the current Indian accounting standards with the International Financial Reporting Standards- IFRS. [Para 128].

This fixation to anything “global” or “international” by our very best without critical appreciation of facts baffles me no end. Nonetheless it reveals our fatal flaw in our collective character.

Even as we set up an SIT on “Mission Impossible” we have several discomforting unanswered questions. Do the readers appreciate the enormity of the task? Do we as a nation comprehend what will it take to bring this illicit money back to India? Does the NDA Government realise the complexity of the issues involved?

Given the sinister contours of global financial architecture, our inadequate preparation and consequential ignorance on these issues, the trillion dollar question remains — is the SIT on a wild goose chase?