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On a Wild Goose Chase for Black Money in Switzerland

D Ravi Kanth (dravi_kanth@hotmail.com) is a journalist based in Geneva who writes on developments at the World Trade Organization and other multilateral institutions.

The noisy call to "bring back black money" from Swiss bank accounts of Indians ignores the larger and growing deployment of illegal wealth in financial centres like Dubai. It is also overlooked that such money is rarely kept in the bank accounts of individuals but is held by trusts which make investments and whose beneficial owners are hidden from public gaze. Is this a serious effort to end tax evasion and capital flight or is it a public drama in which everyone knows no one is serious?

A banking expert on tax havens recently flew down to Dubai to provide investment advice to an Indian group based in the Emirate. He was taken around a warehouse and shown a large quantum of funds stored as cash that he was required to inject into unauthorised accounts in Swiss banks.

Given the popular image of the Swiss banks as the world’s storehouse for illegal funds, the adviser’s task should have been easy. That is what many expect to be common place as evidenced by the ongoing drama about bringing back black or illegal money stashed in Swiss banks.

During the general elections earlier this year, the Bharatiya Janata Party (BJP) flagged the issue of illegal wealth held by Indians abroad and the need to repatriate it home as one of its main priorities if elected to office. A BJP leader often mentioned a figure of $1 trillion that he said had been siphoned off from India to Switzerland.

But the hue and cry about bringing money back that is now engaging the National Democratic Alliance (NDA) government, the courts and the media seems to be a deliberate attempt at obfuscating the process by which illegal income is generated, how and to what extent it is taken out of the country, how it is deployed, and where it is invested. If the government, the courts and the special task force constituted to investigate the issue were to focus their efforts on “bringing back black money from Swiss banks” they might find that their objective would be better realised if they direct their energies elsewhere.

Misplaced Focus

The banking expert who went to Dubai declined to enter into any transaction to recycle the rupees into Swiss Francs or dollars saying it was a crime to do so under the existing Swiss laws. According to the adviser, who did not wish to be identified, “The Indian government should be focusing on the new financial centres of Dubai, Singapore, Virgin Islands, Luxembourg, etc, where much of the Indian black money has accumulated over the last two decades rather than on Swiss banks, which are used as a smokescreen to divert attention from the real problem.” These funds in tax havens are often routed back to India through Mauritius, which has a double taxation avoidance agreement with India.

The focus, however, remains on Switzerland. There is no clear estimate of the size of unauthorised funds held by Indian nationals in Swiss banks. The Swiss National Bank (SNB), the central bank, releases data annually on deposits held by foreign nationals, but these are of all funds – both legal and illegal monies. And it is difficult to discern which of these accounts can be treated as declared and which as undeclared funds.

According to the SNB, the deposits held by Indian companies or citizens in the Swiss banks are estimated around Swiss Francs (CHF) 1.95 billion in 2013, CHF 1.34 billion in 2012, and CHF 2.03 billion in 2011. These figures do not tell us whether they are deposits by Indian banks, companies, or individuals, and of course how much of it may be illegal. The CHF 1.95 billion of Indian deposits in Swiss banks is about $2.02 billion, a far cry from the $1 trillion figure that has been bandied about. The informal estimate is that somewhere around $25 billion is what Indians are holding as illegal wealth in Swiss banks.

New Centres

Bankers in Europe say that much of the illegal monies held by Indians abroad that have been obtained by over-invoicing of imports/under-invocing of exports, corruption in defence deals, and from the gold and diamond trade with Dubai, among others, are deployed either in the Asian financial centres or ploughed back into the domestic market. Instead of maintaining unauthorised accounts in the names of individuals, the holders of illegal wealth turn to gold and diamond traders in Dubai who can place them in the market without any trace of identity. The government has abundant financial intelligence to know where the illegal wealth and funds are accumulating, particularly about the role of Dubai and Singapore.

Dubai, of course, is the headquarters for the hawala operators. It is now India’s largest trading partner and there are strong reasons to believe that the mysterious growth of India’s trade with a non-oil producing emirate is linked to the transfer of illegal monies to this offshore financial centre (Krishnaswamy and Shaw 2014). In short, the bulk of Indian money is in Dubai, Singapore, and within the country. But, by focusing on Switzerland, the government is able to divert attention from real money laundering centres that have emerged during the last few years.

Changes in Swiss Rules

That Switzerland has long been the world’s financial magnet for attracting foreign deposits and maintaining them under a rubric of confidentiality-cum-secrecy provisions is well known. But growing international pressures from the Paris-based Organisation for Economic Cooperation and Development (OECD), the rich country macroeconomic policy club, and other major trans-Atlantic capitals, particularly Washington, have forced the Swiss government to reform their banking secrecy provisions.

For instance, in 2009 the United States forced the largest Swiss bank, Union Bank of Switzerland (UBS), to share information on nearly 4,500 rich American clients and pay a financial penalty of $780 million. Following the disclosures made by a former UBS official Bradley Birkenfeld, an American citizen, the US government exerted pressure on the Swiss government. Washington declared a commercial war on Switzerland threatening Berne that it would cancel US banking licences to UBS and other Swiss banks if information was not promptly shared. The Swiss government panicked and chose to act on a war footing. The UBS case led to a large-scale reform of Swiss bank secrecy laws and, finally, the Swiss government had to fall in line.

The Swiss government, under international pressure, has also relaxed the “confidentiality” provisions for sharing information about illegal or unauthorised deposits with all other countries, including India, subject to certain conditions (caveats). In cases not based on “fishing expeditions” – i e, searching for information without knowing whether such information exists – it is now relatively easy to get information about unauthorised deposits of foreign account holders from the Swiss banks.

Earlier, any government seeking information about unauthorised deposits held by its citizens in Swiss banks had to provide the names and bank details, including the account numbers, without which the Swiss government refused to share information. Under the new Swiss law, India and other countries, which have entered into double-taxation agreements with Switzerland, can obtain information after providing the account number or the name of the account holder along with legitimate proof or evidence of the account holder having violated domestic tax obligations.

A major change in the Swiss law is that the government can now share information without involving the account holder/client if it is satisfied on the basis of the evidence provided by India or any other country.

The legal work is now cut short but not entirely removed. The foreign account holder, for example, has the right to appeal once – while a decision has to be taken in 30 days. Within those 30 days, the Swiss government can decide whether to share or refuse information on a case by case on the basis of evidence from the foreign government. But even with all these changes India and other governments will continue to find it difficult to receive information of holders of accounts with unauthorised money based on fishing expeditions.1

Forms of Disguise

However, to look for illegal wealth held in “bank accounts” is looking for something that may not be there. With the increasing difficulties involved in individuals maintaining undeclared accounts, there is a shift towards maintaining funds through a structured company or trust with nameplate addresses often located in Mauritius or other tax havens. By maintaining trusts, it becomes doubly difficult for the Government of India to provide evidence about the real identity of individuals behind these trusts.

But where are these trusts registered? And where do they park their funds? The shell companies and trusts usually look for registration in tax havens like the Cayman Islands, Virgin Islands, the Isle of Man and of course Dubai, Singapore, and Mauritius. There certainly continues to be the occasional spurt of fund flow to Switzerland because of the sophisticated investment advice offered by Swiss banks. Unlike Swiss banks, the banks in Dubai deploy unauthorised deposits in risky products such as reversible convertibles that bet on the movement of equity or basket of equities or currencies. Therefore, there will always be some demand for the services of Swiss banks.

And as everyone knows if the government really was serious about preventing the recycling of black money it would have ended the practice of foreign institutional investors (FIIs) making investments through Participatory Notes (P-Notes). By not doing so, the government is deliberately allowing undeclared Indian funds to be channelled back into areas like real estate. For decades the government has known that a large chunk of foreign direct investment (FDI) and FII funds coming through Mauritius is Indian black money being laundered back via door plate companies in the island-nation. If the government were to be brave enough to abrogate the double-taxation treaty with Mauritius, it should be able to know the identity of individual beneficial owners of trust, offshore companies and family foundations, etc, which are routing funds back to India.

Round-tripping

Big money illegal income is generated by tax evasion in real estate and exports/imports. It is also generated by corruption in large government procurement orders. A large part of it is used and reused in the domestic economy, again in real estate, and in smuggling, crime, for payment as bribes and of course in elections. A part – only a part – is temporarily stashed abroad and invested in various avenues out of the reach of the domestic tax official. But it is rarely kept as “cash” in accounts in Switzerland or elsewhere. This illegal income is turned into illegal wealth but it keeps getting recycled back into the domestic economy through illegal hawala trade or legally through the Mauritius FDI/FII/PI route.

All this brouhaha about bringing back illegal monies parked in Swiss banks has come back to embarrass the BJP government. That the Narendra Modi government came to power by spending an unprecedented amount on elections is as clear as day and night. That the BJP has been heavily funded by, among others, the gold and diamond traders in Surat and Mumbai is also well known. Most of the illegal money held outside India belongs to corporates, owners of family companies and politicians. It is fairly clear why the periodic exercises to “unearth” or “bring back” black money resemble a charade which is increasingly looking tired and bored with itself.

Note

1 In the odd case, governments have been lucky with fishing expeditions. One such case was the Liechtenstein affair which surfaced in 2008. The Indian government was provided with information about unauthorised account holders which was delivered to the Supreme Court. The German government purchased the information from a former Liechtenstein bank official in the LGT Group, a banking firm owned by the ruling dynasty of Liechtenstein. Based on the information received from Germany, the Indian government began proceedings – without having established a case of tax violation. The 627 names of Indian holders given to the Supreme Court by the Indian government are from the Liechtenstein list.

Then there was the HSBC case, where a software professional, Herve Falciani, stole the bank’s list of private clients and handed them over to the French government. Paris, in turn, informed Germany, India, and other countries about their citizens maintaining illegal accounts in the HSBC in Switzerland. Following the information received from the French government about the Indian account holders in the HSBC, the then Indian Minister of Finance, P Chidambaram, pressed the Swiss government to share information. But the Swiss government and courts dismissed the Indian request on the ground that it was based on the stolen evidence provided by a former bank official – which is a crime under the Swiss law. In short, the Swiss government said it could not provide information based on a criminal action by the HSBC employee.

Reference

Krishnaswamy, R and Abhishek Shaw (2014): “The Puzzle That Is India-UAE Trade”, EPW, 18 January.

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