The image is easy to envision. Corrupt politicians, crooked corporate honchos and evil criminals stashing away their ill-gotten gains in shady Swiss banks. Thousands of crores of rupees that should be earning India tax revenue wilfully being hidden from authorities by fat cats only concerned about themselves, not the country. If only all of that could be brought back, India’s financial woes would be over.
A look at the details and it gets a little more complicated. For one, the accounts aren’t only in Switzerland. For another, few of the 627 names of Swiss account holders handed over to the Supreme Court by the government are expected to surprise. Many could be immune from prosecution because they are Non Resident Indians. And, most disappointingly, the accounts might not have a whole lot of money in them anyhow.
The Supreme Court has handed these names to the Special Investigation Team that was set up to look into the matters, even though it already had the lists. The SIT, which says it is on course to file its report on the matter by the first week of December, is looking into each of the accounts to ascertain whether the individuals can be prosecuted. Of the 627, the government has only gathered enough data to prosecute the holders of eight accounts, all of whose names were revealed to the public this week.
While the SIT navigates the web of international laws to figure out whether it can bring the money back, though, the question remains: how did all this black money turn up in the first place? And how did it get out of the country?
Generating black money
Simply speaking, there are two kinds of black money, which is basically defined as illicit cash that is outside the tax net.
The first kind is the plainly illegal sort: money that has been generated through crime. From drug trafficking to organised theft, India has no dearth of criminals who need some place to put all of their ill-gotten gains. This money usually doesn’t stay in the form that it is, though, with criminals usually attempting to launder it and convert the cash into reported wealth.
The second kind has more to do with evasion than pure criminality. Although the generation of this wealth is legal, the creators of the money want to avoid declaring their wealth and being taxed accordingly or want to use it for less-than-legal purposes, and so prefer to keep it off the books until it can be taken out of the country.
Most of the actual transactions sit right in between these two. They usually involve something at least partly legal, usually construction or government projects, that are inordinately delayed and come with inflated costs that are actually bribes.
Keeping it off the books
The real difficulty, considering the sophisticated tracking and regulatory systems that exist on the international financial network, is ensuring that the money isn’t noticed by authorities. Books of account are crucial to how the tax department examines the flow of money through the economy, so any manipulation of these is a clear sign that something is awry.
The Finance Ministry’s White Paper on Black Money in 2012, listed 11 main ways that this cash is hidden, from simple measures like simply maintaining parallel books of accounts to more complex approaches like underreporting of production and inflating invoices.
“Any number of more sophisticated versions of manipulation of expenses can also be resorted to by those intending to generate black money. Sometimes it can also involve ‘hawala’ operators, who operate shell entities in the form of proprietorship firms, partnership firms, companies, and trusts,” the white paper reported. “These operators may accept cheques for payments claimed as expense and return cash after charging some commission. There have been instances of claims of bogus expenses to foreign entities.”
Where is it coming from?
The white paper points to seven vulnerable sections of the Indian economy where this money is most likely to come from. Front and centre is, of course, the real-estate sector where values are variable and both over inflation and under-reporting is rampant. Besides this, bullion and jewelry transactions, financial market sales, misuses of non-profit organisations, the large cash economy and the movement of capital as a result of external trade see a lot of black money generation.
How is it leaving India?
A large majority of global trade – more than 60% – is carried out between enterprises that aren’t restricted to one country. These multinationals have a lot of leeway in fixing the prices of services in the country of operation because these are highly subjective, giving them lots of opportunities to transfer money in and out of countries to jurisdictions that are either more amenable to black money or that have more favourable tax regimes.
As a result, this formula of having shell companies across countries in order to move money around through “transfer pricing” is highly popular among those who want to stash their illicit cash away.
“Transfer pricing has emerged as the biggest tool for generation and transfer of black money,” the white paper said. “In recent years, after the 9/11 incident in the USA due to intense scrutiny of banking transactions, enhanced security checks at airports and ports, and relaxation of exchange controls, transfer of money through hawala has reduced significantly but now transfer pricing is now being extensively used to transfer income/profit and avoid taxes at will across countries.”
Besides transfer pricing there are lots of other ways that money gets out of the country, from putting it into another nation’s financial instruments that have fewer reporting requirements to other means of trade-based money laundering.
Once it’s moved out of the country, places like Switzerland or Mauritius have a much more relaxed approach to opening accounts and keeping cash. Although they are required, by international law to know their customers, the banking systems of these havens are entirely dependent on a reputation for confidentiality, giving them little incentive to assist other governments in their efforts to crack down on fraud.
A look at the details and it gets a little more complicated. For one, the accounts aren’t only in Switzerland. For another, few of the 627 names of Swiss account holders handed over to the Supreme Court by the government are expected to surprise. Many could be immune from prosecution because they are Non Resident Indians. And, most disappointingly, the accounts might not have a whole lot of money in them anyhow.
The Supreme Court has handed these names to the Special Investigation Team that was set up to look into the matters, even though it already had the lists. The SIT, which says it is on course to file its report on the matter by the first week of December, is looking into each of the accounts to ascertain whether the individuals can be prosecuted. Of the 627, the government has only gathered enough data to prosecute the holders of eight accounts, all of whose names were revealed to the public this week.
While the SIT navigates the web of international laws to figure out whether it can bring the money back, though, the question remains: how did all this black money turn up in the first place? And how did it get out of the country?
Generating black money
Simply speaking, there are two kinds of black money, which is basically defined as illicit cash that is outside the tax net.
The first kind is the plainly illegal sort: money that has been generated through crime. From drug trafficking to organised theft, India has no dearth of criminals who need some place to put all of their ill-gotten gains. This money usually doesn’t stay in the form that it is, though, with criminals usually attempting to launder it and convert the cash into reported wealth.
The second kind has more to do with evasion than pure criminality. Although the generation of this wealth is legal, the creators of the money want to avoid declaring their wealth and being taxed accordingly or want to use it for less-than-legal purposes, and so prefer to keep it off the books until it can be taken out of the country.
Most of the actual transactions sit right in between these two. They usually involve something at least partly legal, usually construction or government projects, that are inordinately delayed and come with inflated costs that are actually bribes.
Keeping it off the books
The real difficulty, considering the sophisticated tracking and regulatory systems that exist on the international financial network, is ensuring that the money isn’t noticed by authorities. Books of account are crucial to how the tax department examines the flow of money through the economy, so any manipulation of these is a clear sign that something is awry.
The Finance Ministry’s White Paper on Black Money in 2012, listed 11 main ways that this cash is hidden, from simple measures like simply maintaining parallel books of accounts to more complex approaches like underreporting of production and inflating invoices.
“Any number of more sophisticated versions of manipulation of expenses can also be resorted to by those intending to generate black money. Sometimes it can also involve ‘hawala’ operators, who operate shell entities in the form of proprietorship firms, partnership firms, companies, and trusts,” the white paper reported. “These operators may accept cheques for payments claimed as expense and return cash after charging some commission. There have been instances of claims of bogus expenses to foreign entities.”
Where is it coming from?
The white paper points to seven vulnerable sections of the Indian economy where this money is most likely to come from. Front and centre is, of course, the real-estate sector where values are variable and both over inflation and under-reporting is rampant. Besides this, bullion and jewelry transactions, financial market sales, misuses of non-profit organisations, the large cash economy and the movement of capital as a result of external trade see a lot of black money generation.
How is it leaving India?
A large majority of global trade – more than 60% – is carried out between enterprises that aren’t restricted to one country. These multinationals have a lot of leeway in fixing the prices of services in the country of operation because these are highly subjective, giving them lots of opportunities to transfer money in and out of countries to jurisdictions that are either more amenable to black money or that have more favourable tax regimes.
As a result, this formula of having shell companies across countries in order to move money around through “transfer pricing” is highly popular among those who want to stash their illicit cash away.
“Transfer pricing has emerged as the biggest tool for generation and transfer of black money,” the white paper said. “In recent years, after the 9/11 incident in the USA due to intense scrutiny of banking transactions, enhanced security checks at airports and ports, and relaxation of exchange controls, transfer of money through hawala has reduced significantly but now transfer pricing is now being extensively used to transfer income/profit and avoid taxes at will across countries.”
Besides transfer pricing there are lots of other ways that money gets out of the country, from putting it into another nation’s financial instruments that have fewer reporting requirements to other means of trade-based money laundering.
Once it’s moved out of the country, places like Switzerland or Mauritius have a much more relaxed approach to opening accounts and keeping cash. Although they are required, by international law to know their customers, the banking systems of these havens are entirely dependent on a reputation for confidentiality, giving them little incentive to assist other governments in their efforts to crack down on fraud.
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