A small news item from the Press Trust of India dated December 13 read thus: “Billions of dollars of laundered drug money and cash from other illegal activities kept the global banking system afloat at the peak of the financial crisis, the United Nations’ drugs and crime tsar has said. Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were “the only liquid investment capital” available to some banks on the brink of collapse last year.
A majority of the $352 billion of drug profits was absorbed into the economic system as a result, Costa was quoted as saying by The Guardian. Speaking from his office in Vienna, Costa said evidence that illegal money was being absorbed into the financial system was first drawn to his attention by intelligence agencies and prosecutors around 18 months ago. In many instances, the money from drugs was the only liquid investment capital.”
This report has created substantial consternation in various financial centres since it brings out the nexus between organised crime and respectable global banking system. This has given rise to demands by many experts and leaders from both sides of the Atlantic to call for reforms in the global financial architecture.
Not only that, a good number of organisations involved in financial sector reforms have combined with various human rights groups to put more pressure on the global financial system to clean it up. Of particular interest will be the tax havens, which are also impacting India in a significant way.
Global Financial Integrity (GFI) last week released a statement, dubbed the New Haven Declaration, which debuts a new partnership between human rights and church groups and financial transparency advocacy groups. The announcement follows a meeting of prominent human rights and financial transparency organisations at Yale University in early December, 2009. The groups discussed the link between illicit financial practices, secrecy in global finance and their adverse impact on human rights.
“The links between human rights and financial transparency are undeniable,” said GFI director Raymond Baker. “An estimated $1 trillion is siphoned out of poor countries annually. Further, some 18 million people die each year from causes stemming from economic deprivation. Of these, ten million are children under the age of five who die from diseases for which vaccines are available.”
“The New Haven Declaration makes clear that the solution to these interconnected problems lies in increased transparency and accountability in the global financial system,” said Baker. Signed by such groups such as Amnesty International, Human Rights Watch, Oxfam, Global Financial Integrity, the Centre for Applied Philosophy and Public Ethics, the Open Society Institute Justice Initiative, Tax Justice Network, and the National Council of Churches, the statement “represents a vanguard partnership in human rights, economic development, global poverty alleviation, and global financial accountability,” said Baker.
This is the first time financial crimes like money laundering, terror financing and drug financing, as well as secret financial centres (tax havens) and tax evasion are being attacked jointly by some of the global organisations in the area of human rights and Church groups as well as financial transparency and integrity groups.
Tax havens are already facing tremendous pressure due to actions by USA in the by-now-famous UBS case and also by the actions of France, Germany and Italy. European parliament members are talking about abolishing the tax havens.
Implications for India
Foreign inflows have significantly increased in the last few months in our stock markets. Up to mid-November, the amount invested buy FIIs for the fiscal year 2009-2010 is Rs 70,182 crore, of which Luxemburg, Mauritius, UAE and Hong Kong —- all of which are considered as tax havens or secretive tax jurisdictions —- have contributed a total of Rs 30,000 crore or more than 40%. UK has provided another Rs 5,000 crore and a part of it could have come from tax jurisdictions under the administrative protectorate of UK such as British Virgin Island or Channel Islands.
Not only that, there are reports of a significant rise in Indian investments in tax havens. Outflow of investment from was at $16.07 billion in 2008-09 and $18.1 billion the previous fiscal. The outward direct investment (ODI) included both equity and loan.
Singapore retained the No 1 spot in the list of India Inc’s favourite investment destinations with Indian companies investing $3.6 billion in that country in 2008-09. In the case of Mauritius, it went up from $1.4 billion in 2007-08 to $1.8 billion in 2008-09.
Isle of Man moved from $124.97 million to $334.7 million during the same period, and Cyprus from $544 million to $2.25 billion. Given such an inflow/outflow matrix and market perception that much of the FII inflows are of Indian money stashed abroad, the developments in the global regulatory framework will have a significant impact on India.
The issue is of paramount importance due to four reasons. First, as every expert on the stock market knows, our markets are increasingly moved by global flows.
Second, such flows may be the ill-gotten wealth of Indians kept in tax havens abroad — funds are sent out and brought back to facilitate undesirable activities. The concern expressed by national security advisor M K Narayanan on the possibility of terror funds coming through financial markets in his speech at Munich Security Conference on February 11, 2007 is worth mentioning here.
The third concern is whether these are adequately sterilised in terms of know your customers.
Fourth, if the flows are significant, they can destabilise our financial system in terms of interest rates, inflation and value of rupee.
What India can do
India can join countries like France and apply more pressure on these tax havens.
Since the financial flows from these secretive jurisdictions can destabilise our financial system — particularly if they are not well regulated — it is important that India takes steps to deal with them.
Also, the Parliament should in a joint sitting pass a resolution that all unaccounted money held by Indians in tax havens belongs to the people and hence the government. This will establish the basis for further action. India should fully implement ‘know your customer’ norms in all global financial flows. This implies issue of participatory notes only to entities fully under the glare and scrutiny of the market regulator.
According to global anti-graft watchdog Transparency International, India should endorse the United Nations Convention against Corruption for the recovery of its wealth hoarded in foreign banks. Should India join the 120 countries that have ratified it (of the 140 that have signed the convention), it would be possible to use it as an instrument to get details of Indian money stashed there.
India should be proactive, or it could be significantly affected by the omissions and commissions of these tax havens or impacted by the pressures of global activists on these jurisdictions. Better to be prepared than be left out or hurt.