Hunt for black money leads Enforcement Directorate to 10 British Virgin Islands investors

MUMBAI: The hunt for black money stashed abroad is moving beyond Liechtenstein and Switzerland. Over the last fortnight, at least ten individuals — all from Mumbai and holding shares of companies in the Caribbean tax haven British Virgin Islands (BVI) — have been told by the Enforcement Directorate (ED) to spell out details of their overseas investments.

The persons in question will have to share photocopies of their passport, and information on their local businesses, foreign visits and offshore assets. The notices served by the Directorate, which tracks cross-border transactions, says that non-compliance — or, failure to show up in the ED office with the documents — will be in violation of foreign exchange laws and attract penalty.

“None of the notices make any mention of BVI, but all these people had incorporated firms in BVI through a service provider in Singapore. First, they had either set up companies abroad or bought into entities without the Reserve Bank of India’s permission; second, they are signatories to bank accounts of these entities,” said a person familiar with the development.

“It’s all illegal and the government may find it easier to prosecute these cases than those having bank accounts with LGT Bank in Liechtenstein and HSBC Geneva,” the person added.

Till now, the standard legal refuge of persons facing prosecution by the Indian tax office in the LGT and HSBC cases is the protection offered by discretionary trust structures: they have argued that they hold no numbered accounts but have been only named as beneficiaries of trusts which have accounts with LGT and HSBC Geneva; also, none of their signatures figure in the bank documents.

However, most of the 610 in the BVI list have signed documents and interacted with the Singapore service provider in the course of incorporating companies in the tax haven – acts that could put them on a comparatively weaker ground (than the LGT and HSBC accountholders).

Funds were transferred abroad using the ‘hawala’ route and well before RBI allowed residents to directly invest in shares and properties abroad under the liberalised remittance scheme that was launched in 2004.

The yearly investment limit per individual was initially fixed at $25,000, gradually raised to $200,000 and later scaled back to $125,000 where it currently stands.

Since no bank in India would have entertained an individual accountholder to remit funds abroad without the central bank’s approval, illegal money transfer channels were used – entailing payment of cash or cheque against some fictitious transaction to a hawala operator in India whose counterpart abroad handled the second leg of the deal by delivering foreign currency to parties abroad.

“It’s unclear whether the government will seek more information on the BVI firms under the Tax Exchange Agreement that India had signed with Virgin Islands in 2011. But whatever they do, the present move by the ED – which we believe has kept the income-tax department informed – is to put pressure on the shareholders of BVI firms to come out with the details. It’s expected to move in a predictable manner. First, these individuals would say we are not aware of any shares in BVI; second, their lawyers would argue that it’s stolen data and government authorities cannot penalise tax payers on the basis of stolen information,” said a senior lawyer.

Indeed, just a few months after media reports on BVI companies, the Singapore firm which handled the deals had filed a complaint in August 2013 with the Virgin Islands police about a data theft. In its edition dated April 1 2013, ET had reported that the income-tax department was investigating several hidden offshore BVI companies having Indian shareholders.

On April 4, the Indian Express newspaper reported the findings of The International Consortium of Investigative Journalists and named some of the Indians connected to BVI entities. On June 14, the consortium released information about thousands of secret companies, trusts and funds in offshore hideaways.