Black money conundrum

The wise thing is to forget the past, bring reforms to prevent generation of black money

Considering other man’s point of view is Decency

— George Orwell

This quality seems to be in short supply in India although it is the most needed even to understand any black money retrieval. Both UPA (in 2009) and NDA (2014) governments said that they would take steps to bring black money from abroad in 100 days. So far, three names of holders of ‘black money’ abroad have been given out. All the three have denied it. On the direction of the Supreme Court, the government submitted a list of 628 names. And the apex court gave it to the ‘Special Investigation Team’ led by Justice M. B. Shah. He said that it was the same list which he already had.

Meanwhile, speculation about the quantity of black money abroad — from Rs.20,000 crore to Rs.25 lakh crore — were flying in the Internet, and suggestions on how to spend it were aplenty. Let me first make it clear. The Indian black money held in Switzerland or elsewhere will not come back, and so the dreams about how to spend it can be stopped. If you want to know why, you need to know more about Switzerland.

Money-spinners

Switzerland is a small, land-locked country with mountainous terrain in Europe and only 10 per cent of its land is arable, and it has only four sunny months. Its population is just 8.5 million. Berne is its capital. Machineries, precision instruments, watches and textiles are manufactured here. All other needs, including fuel, electricity, coal and the like, are imported. Financial services and tourism are the two money-spinners. The country was established in 1848 after several Cantons were united in a Federal set-up. Forty-four per cent of the labour force is women. Seventy-one per cent of the work force is employed in financial services, 27.7 per cent in manufacturing and 1.3 per cent in agriculture. But its per capita income is the highest at $54,600. Its minimum wage is $22 an hour. Its inflation is 0.07 per cent for several years.

Its credit rating is AAA (both domestic and foreign). Of all the off-shore funds in the world, 28 per cent are in Switzerland. It is interesting to see how this was achieved.

Switzerland is neither a member of the European Union nor a member of the United Nations (UN). During the World Wars, when things remained uncertain, Switzerland remained neutral, and its stable economy stood steady like a rock. So, investing in Switzerland was considered safe. During the World Wars, Switzerland supplied arms to Germany and Britain. Investors in both countries invested their money in Switzerland.

Investments pour in because the names and the quantum of investment are kept secret. There is no savings bank account or current account for outsiders. All come under Wealth Management. Yield for investors is less than one per cent. Economy boomed by the financial services offered by banks. Now think, why should Switzerland lift the veil of secrecy and give out the names? Will it dig its own grave? This writer has visited Switzerland twice in 1990 and in 1991, and had discussed the issues with bank employees. According to the Constitutional provision 13 FC, details of money of the clients and their identity should not be disclosed without the client’s permission. Violation by employees will attract jail sentence.

You may wonder how then we keep hearing about the treaties by which certain countries get the names. The pact between Germany and Switzerland is regarding avoidance of double taxation. A German, who does business or invests in Switzerland, does not have to pay tax in both countries as they will share the tax collected once. Even then, names will not be disclosed to the public.

The treaty between the U.S. and Switzerland, under the Joint Economic Commission, besides double tax avoidance, is to prevent money laundering. Switzerland has passed several Acts to prevent money laundering by terrorists and terror activities. Recently, the funds of Al-Qaeda were frozen. Any information given out under these Acts will help in investigation, but they have to be proved in a court of law. India withdrew at the last moment from signing a treaty with Switzerland on multilateral Competent Authority, which will provide for automatic exchange of information from 2017. But still, it is possible to sign the treaty.

Switzerland has clarified (or warned?) that any information given under the Double Taxation Avoidance Treaty should not be passed on to a court or to any agency outside the court. This clarification came a day after the Supreme Court in India ordered the government to submit the list of 628 names. Now you know why the Supreme Court passed on the list to the Special Investigation Team without opening the envelope. The politicians make a hue and cry knowing the facts full well. But TV critics, blissfully ignorant, make noises.

Veil of secrecy

Yet, there are chances that the veil of secrecy can be lifted just a little. If you prove money laundering, chances are more. Now money launderers and terrorists cannot hide behind the veil of secrecy. Although there are Acts since 1977 against this, only recently on January 1, 2011 an amended strong Act came into force. Switzerland has returned $1.7 million in the past 15 years under this Act.

Now certain other changes have been made through enactments. Money obtained through stealing, extortion, money to be used for terrorist activities, earned through drug trafficking, smuggling, kidnapping, human trafficking and through tax frauds do not enjoy the same protection. Such monies will be returned if these crimes are proved in a court of law in the respective countries and ordered by a court.

Tax fraud is tax evasion through forgery, false documents, fake invoice, fake orders and the like. Now in India, one has to identify the persons who have committed these crimes, prosecute them and prove the charges. On the basis of the court order, the government must request the Swiss banks, if they have invested there, to disclose the details. Then after several steps, money from Swiss banks must be retrieved. Are these in the realm of possibility? Remember Haasan Ali, the horse trader from Pune? He has been accused, even ten years ago, of parking black money abroad. So far there is no progress in action against him. Now you know why.

Besides, the income tax department has certified annually that the returns of businessmen, politicians and industrialists are correct and there are no arrears. It is difficult to prove now they committed some of these crimes years ago. P. Chidambaram wanted the black money to be used for the economy. So, he permitted ‘Participatory notes’ by which one can invest in stock exchange and no question would be asked about the real owner or the source. These ‘notes’ usually come through the Mauritius route. The wise thing is to forget the past and bring reforms to prevent generation of black money and its flight abroad and, thus, save time.

(The author is founder, Consumer Protection Council)