The white paper t on black money produced by the ministry of Finance and presented to the parliament during the last session has evoked mixed response—

See [ http://finmin.nic.in/reports/WhitePaper_BackMoney2012.pdf]

 One of the major criticisms is that it has mixed up domestic black money and black or illicit money kept in tax havens by Indians.  These two needs to be dealt in different ways. Some part of  domestic black money is used in productive activities like real estate, trade, construction, mining, transport, restaurant etc businesses . The illicit money kept in tax havens is by and large not used for domestic purposes unless it is –round tripped through share markets or FDI to the domestic operations. In other words domestic black money is a no confidence motion on the government of India while as illicit money kept abroad is a no confidence on India itself—its stability and its people.

Domestic black money primarily dependant on cash economy and tries to  avoid formal transactions like banks etc due to fear of being captured  by electronic systems and tax authorities. So the holding of black money is in the form of cash and also the transactions undertaken is in the form of cash.

5.2.26 As of now there are no legal restrictions to keeping very large amounts of cash with oneself or transporting it from one place to another. One is neither required to report it nor provide any explanation for it. There have been suggestions that the government may consider amending existing laws, including the Coinage Act 2011, The Reserve Bank of India Act 1934, FEMA, and the Indian Penal Code, or enacting an

entirely new statute aimed at regulating the possession and transportation of cash above a particular threshold limit. This may include creating a limitation on cash holdings for private use, as well as provisions for confiscation of cash held beyond such prescribed limits. However, such laws need a broader political consensus to emerge for their acceptance in Parliament.

http://indiatoday.intoday.in/story/it-is-raining-cash-in-andhra-pradesh-bypolls/1/199369.html

http://www.hindu.com/2011/04/06/stories/2011040662440700.htm

http://rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook of Statistics on Indian Economy

http://rbi.org.in/scripts/PublicationsView.aspx?id=13747

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Headquarters of the Liechtensteinische Landesbank bank Reuters

It is common knowledge that billions of dollars of Indian money is in various tax heavens like Antigua, Switzerland, Bahamas, Liechtenstein, Isle of Man, and St Kitts. But all our leaders – be they in  business, politics, films, sports or bureaucracy – are keen on keeping a conspiratorial silence.

The government is not releasing the names obtained from Germany and claims it is due to the double taxation treaty with that country. The data stolen by Germany from its neighbour is nowhere linked to our treaty since it does not pertain to any misdemeanor by Indians vis-vis Germany. But the government is intransigent. Who is it trying to protect?

Illegal money with HSBC: A few months ago, the Indian government got data on nearly a thousand accounts of Indians allegedly holding illegal wealth with HSBC Bank in Switzerland. This data was obtained by France from people who had stolen the data – more than 15,000 accounts – from HSBC’s data files. The French have given the full data set to us. The government of India is not telling the citizens what action it is taking. It does not want to share the names.

When quizzed about it, the finance minister chants the same mantra about double taxation treaties when those treaties take only prospective effect. What is needed is the political will to bring back the illegal funds accumulated abroad. From Bofors to CWG to 2G to Hasan Ali – all illegal money takes us to tax havens. The size of the illegal stash abroad by Indians is estimated anywhere between half a trillion ($500 billion) and one-and-a-half trillion ($1,500 billion).

Why black money held abroad is dangerous for India: The issue of black money held abroad is of paramount importance for four reasons.

Every two-bit expert on the Indian stock markets knows that our markets are moved by external flows – both inflows and outflows. Such flows may be the ill-gotten wealth of Indians kept abroad in tax havens or domestic funds sent out and brought back to facilitate these activities.

In other words, the destabilisation of our stock markets can be done using the black money in tax havens. The movement of the Sensex may not be related to the performance of our economy but to the actions of these black money holders.

The second concern is: are we adequately sterilised in terms of know your customer (KYC)? This is in the context of the concern expressed by our former National Security Advisor (MK Narayanan) regarding the possibility of terror funds coming through the financial markets.

Third, there is a question-mark about our ability to formulate policies without being blackmailed by foreign governments. For instance, many may not know that De La Rue Giori – the owner of more than 90 percent of the world’s currency printing business  in Switzerland – was one of the passengers in the Indian Airlines plane hijacked to Kandahar. (Time magazine, 17 January 2000). It is easy to imagine the type of pressure that could have been applied by the Swiss on our government at the time of the hijack.

If a large number of our elites hold illegal money in foreign countries like Switzerland, then we will be prone to manipulation in terms of policy formulation. It is not clear what role was played by various foreign agencies in the Kandahar hijack. Even now it is not clear if our foreign minister handed over dollars or Swiss currency to the hijackers. The true history may come out some time in the future.

The same is the case with the Bofors funds. The Swedish authorities knew the names of beneficiaries and accounts since the bribe originated there. The Swiss government also knows the identities, since the money went into Swiss banks. The British government also has some idea, since some money was kept with Barclays by Ottavio Quattrochi and defrozen by our government from London.

The fourth issue is about getting arm-twisted in our economic and foreign policy formulations. It is pertinent to note that if the CIA knows about our leaders holding black money in tax havens, then there is a strong possibility that the ISI can also have that data. This is the danger faced by our republic. Our national policies may not be formulated in Delhi, but in Washington or Islamabad – if they have the data and can use it to pressure our leaders.

To protect and  preserve our republic we need to insist on exposing and bringing back this black money. Is there political will among India’s ruling class to put the issue of tax havens on the global agenda and compel other developed countries to facilitate the closure of these accounts? If not, we are doomed to be indirectly ruled by western spy agencies who have enough information to blackmail our policy-makers.

The tiny island absurdities had their place in the sun in the 20^th century. But in the 21^st century, integrity is the motto and transparency the mantra. India should pass a law making all the illegal wealth held abroad as part of a new national trust. We should, along with other emerging markets, arm-twist these tiny islands to give back our money.

India should bring sanity to the global financial markets and joy to millions of pauperised persons in Latin America, Asia and Africa. Let us be proactive and not be ruled by outsiders by cleaning up the global financial system.