Time to shake down the Swiss banks

Financial experts used to exhort other countries to follow the example of these innovative financial centres and emulate them in offering imaginative products as well as privacy. But these are now the tax havens where the ill-gotten wealth of tax evaders of many countries is hoarded.

A decade earlier, they were the cynosure of the financial world, but the recession in the West has changed the situation beyond imagination. From being innovative financial centres, they have become secretive hubs and every leader in the West is after them.

These tax havens are now in the news because developed economies like the USA, Germany, and France feel the need to recover some of the ill-gotten wealth that their citizens have stashed away there.

The US government and its congress are concerned about these tax havens due to pressure from sections of economists to “clean up” the global financial system. There are also concerns regarding the financing of terror groups with some of the tainted money from tax havens.

Seventy tax havens
A detailed discussion on tax havens was provided by the Internal Revenue Service of the United States Department of Treasury in a paper on ‘Abusive Offshore Tax Avoidance Schemes’. We quote from that paper:

“These are foreign jurisdictions that offer financial secrecy laws in an effort to attract investment from outside their borders. These jurisdictions are commonly referred to as ‘tax havens’, because in addition to the financial secrecy they provide, they impose little or no tax on income from sources outside these jurisdictions. It is difficult to quantify the amount of assets being held offshore or the rate at which the industry is growing. But it is estimated that some $5 trillion in assets is held ‘offshore’ in tax havens. One authority estimated the annual revenue loss to the USA at a minimum of $70 billion.

Tax haven service providers and their clients know their actions are veiled from tax authorities by banking and commercial secrecy laws and by lack of tax treaties or tax information exchange agreements. They create paper entities to disguise the real parties to the transactions, and many are willing to create false documents to disguise the real nature of transactions.

At least forty countries aggressively market themselves as tax havens. Some have gone so far as to offer asylum or immunity to criminals who invest sufficient funds. They permit the formation of companies without any proof of identity, perhaps even by remote computer connections.

Generally, though, such extremes are found in emerging nations where the stability and security of the financial, legal and political systems are questionable. The largest concentrations of assets are attracted to the stable secure environments of the established tax havens — those that have existed a number of years and enjoy the diplomatic protection of former colonial powers.”

There are in fact more than 70 tax havens, but as the IRS discussion reveals, around 40 of them market themselves aggressively. The popular ones are Switzerland, Luxemburg, Liechtenstein, the Channel Islands, and the Bahamas.

The Liechtenstein affair
Recently, one of the tax havens, namely Liechtenstein, has been in the news. Germany’s intelligence agency seems to have paid an unnamed informer more than $6 million for confidential and secret data about clients of LGT Group, a bank owned by the prince’s family. The revelations have already led to the resignation of the head of Deutsche Post — the former German mail service — which is currently the world’s largest logistics company in the world. Liechtenstein’s leaders are furious and have focussed all their ire at the theft of the data rather than on the facts of the case.

The German government has announced that it will share information on accounts held in the tax haven with any government that wants it, without charging any fees for the information. Finland, Sweden, and Norway have expressed interest in the data obtained by the Berlin agency.

But our government has been lukewarm on this issue. It should have immediately despatched senior officials to get the names. But after much hesitation, the government did ask for that free information (curiously under our double taxation treaty with Germany) and recently it did agree in the Supreme Court in response to a petition by Ram Jethmalani and others that “18 Indians have put Rs43.83 crore in a Liechtenstein bank.”

Interestingly, in the well-known case of Hasan Ali,a horse-breeder from Pune who was found to have Swiss accounts, the response of the Union government in the Supreme Court indicates that tax demands of Rs71,848 crore have been raised against the said person, his wife and other associates. If this is the tax demand, then the income on which this would have been raised may be more than Rs1.5 lakh crore, taking into account compounding, penalty etc.

Terror funds
Also some of the terror funds might use the tax haven route. The context is the concern expressed by our own National Security Advisor, MK Narayanan, regarding the possibility of terror funds coming through financial markets. There is also a concern that in case some foreign agency knows about the illegal funds kept abroad by our leaders, then they could be blackmailed and policy-making compromised.

The debate regarding the existence of such illegal money abroad is settled. It is no more about the maths but about the mechanics of bringing it back. The total amount of funds in all tax havens is estimated in excess of $18 trillion. Switzerland itself may have more than $1 trillion.

Nearly one-third of Swiss money is black, says Konrad Hummler, chairman of the Swiss private bankers association

Under pressure from federal authorities, the Swiss bank UBS is now closing the hidden off-shore accounts of its well-heeled American clients, potentially allowing their secrets to spill out into the open. In a step that would have once been unthinkable in the rarefied world of Swiss banking, UBS will shut about 19,000 accounts that prosecutors suspect have gone undeclared to the US Internal Revenue Service.

The clients now face stark choices: they can cash their checks, and thereby alert the authorities to any potential wrongdoing, or not cash them, effectively losing their money. Now the US state department is compelling the bank to disclose about 52,000 American accounts. The original charges are that the UBS off-shore accounts have helped Americans to hide $18 billion in 19,000 accounts. As of now, the settlement is that anyone opening an off-shore account has to do it through US regulatory bodies. Opinion against secrecy in banks and tax havens has grown rapidly in the West and today the Western establishment sees the Swiss banking model as virtually an evil.

What can India do?
If India joins the move by the OECD, G20 nations, the US and UK, to get a convention signed by the G20 with the different tax havens, particularly Switzerland, then the recovery process can be much shorter and successful on a large scale.

Also India can initiate the following specific steps to inform the world that it is serious in this.
1. Let both houses of Parliament in a joint sitting pass a resolution that all illegal wealth stashed abroad belongs to the Sovereign Republic of India (similar to the resolution adopted about Pakistan Occupied Kashmir in the nineties).

2. When Indian leaders die without informing their kith and kin about these illegal funds, the banks abroad swallow it after 7/10 years declaring that it is inoperative without any legal claims. We should declare that even those funds are ours.

3. Let our elected representatives and appointed authorities like CVC, CBI director, etc., clearly indicate at the time of oath-takingor appointment, by an affidavit, that they do not have accounts abroad. Of course, many are not going to declare their ill-gotten wealth, but the column may come in handy in future to formulate charges of submission of false affidavits.

4. The prime minister should provide information about the travels of his cabinet ministers, particularly to tax havens, since these travels are documented by either reports to him or by stamps on passports.

5. Let the government of India reveal the names of the illegal wealth hoarders in Liechtenstein banks about whom information has been passed on by the German government

6.Fully investigate the cases of Hasan Ali and Bofors — both of which are in the public domain.

7. India as a responsible member of world forums can and should demand transparency from these tax heavens to provide information regarding illicit wealth and its source. Therefore, India should raise the issue at the G-20, WTO, IMF, and the UN and also as a member of the Egmont Group, which is an international body to stimulate cooperation amongst Financial Intelligence Units (FIUs) across the globe. More than 100 countries are its members.

The main issue is to get the funds back and penalise the persons involved. The funds can be ‘sterilised’ and used for infrastructure development. It will be a national disgrace if at some point of time the names of some of our icons and idols are revealed as having illegal money in foreign countries. We owe it to our next generation to clean this up.


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