From womb to tomb, you have to pay bribes

From womb to tomb, you have to pay bribes:

By R Vaidyanathan

Interview with Mr. Praveen Bose,  November 01, 2014 Last Updated at 21:42 IST

Link —

R Vaidyanathan, professor, Capital Market Studies, Indian Institute of Management-Bangalore and the author of several studies on black money talks to Praveen Bose about the problem. Vaidyanathan says that corruption generates black money. But not all black money is bad. Edited excerpts:

A basic question: what’s black money? Why is it bad and why should we worry about it?

Income that’s illegally obtained or not declared for tax purposes is black money. Corruption generates black money. But not all black money is bad. For instance, during a consultation with a doctor, if his fees is paid in cash and he puts it in his pocket, it’s black money. In such small services, the black money generated is innocent black money.

Innocent because it is accounted for, as it is captured in income estimates. A lot of this kind of black money may be captured by gross domestic product (GDP) estimates. Of course, there’s a possibility of it not being adequately captured by the GDP numbers. But that’s a separate problem. But corruption invariably generates black money. From womb to tomb, you have to pay bribes.

When is black money a serious problem?

There’s a domestic and international component to it. Domestic black money is a statement of no-confidence in the Government of India. But black money kept abroad is a vote of no-confidence in the country. I equate it with treason. By keeping it outside, you are showing that you don’t trust your fellow citizens. It’s treason.

I categorise black money into vegetarian and non-vegetarian black money.

Vegetarian black money would include under-invoicing or mispricing. These are harmless crimes and can be dealt with. But non-vegetarian black money harms the country. This could include pay-offs from corruption in defence contracts; or drug money; or money earned from money laundering, human trafficking, terrorism and so on.

The current debate is focussed on tax. We are obsessed with double taxation avoidance agreements (DTAAs). We have so many treaties. The DTAA is only the vegetarian portion.

And the DTAA is not like the Ten Commandments. We can tell other (countries) we will modify the DTAAs we have signed with them. We have more clout because we have a huge market. We have to use market access as the leverage: tell investing countries that if they want to invest in real estate, insurance, retail, defence or any other sector, then they must give us the names.

Walmart is interested in setting up shop here. It is not setting up a charity: it is eyeing market access. Hillary Clinton was on the Walmart board. Market access can be a weapon for everything. We are not using it enough.

What is the extent of the problem?

All countries put together, the estimated black money is about $20 trillion. In 2010-11, Switzerland had deposits amounting to $3 trillion . Of that, $1 trillion is most likely illicit and half of it would be from India.

Just to understand how many Indians deal with Swiss banks: Zurich’s trams carry instructions in Hindi. About 70,000 to 90,000 Indians are known to have accounts abroad.

What is weighing down on black money today?

One, public pressure, both domestic and global. Two, there’s social media, which can have enormous clout. Three, western countries such as Germany and France are trying to shut down tax havens, forcing them to lift the veil of secrecy. Four, the global financial architecture is being rewritten.

How should we deal with tax havens?

There are numerous tax havens. Many are small, just tiny island nations. They are only a conduit. We can go to the Cayman Islands and tell them to reveal all, or we will close the tap. India is the largest market for them. Most countries will relent. There are serious moves now to close down tax havens. Germany and France are at the forefront of this move. We should join them. Five years ago, when the financial crisis began to hit western economies, they got serious about where their citizens have stashed away illicit money. The countries were in dire need of money.

About 70 per cent of foreign investments in India are through tax havens. The global financial architecture is being rewritten. OECD (Organisation for Economic Co-operation and Development) has prepared a black list, a grey list and a white list…

How has the status of tax havens changed over time?

Till about 10 years ago, they were known as innovative financial centres, or offshore financial centres. Today, they are “secretive financial jurisdictions”. In 2002, at a conference in Salzburg, when I spoke of the evil of this, I was thrown out.

When you come face to face with an emergency, you try to find out where the money is. The German intelligence agency got it from stolen data. The Germans said the list was available to anyone who wanted it. India did not approach them. When I approached them, I was told they could give it only to sovereign countries. At that time, L K Advani was the Leader of the Opposition and he took it up after I spoke to a few leaders. Ram Jethmalani then took it up. He made me “exhibit 1” in the case. He even mentioned the initial R, as belonging to a senior minister in the United Progressive Alliance (UPA) government. The government then said there’s no money abroad.

In 2009, Pratibha Patil became president and she promised in her address to the joint session of Parliament that the government would take steps to bring back illicit money. Then, when we put pressure, we got the data under the terms of the DTAA from Germany so that there was no double taxation. But Liechtenstein said Germany had stolen the data.

How widespread is black money salted away abroad by Indians?

There are a lot of Indian names. How did they get there? Suitcase banking has been going on for a very long time. Media people, artists and musicians are on the list too.

One issue is should these names also come out? If that happens, social cohesion will be destroyed. Many icons will be affected. Social leaders should take a call on this. There are people who don’t even know where their money has been invested. Some CA (chartered accountant) would have advised them and got a huge commission. Some people are currently in Indian jails precisely for this.

Why did this become a cause for worry for the West?

As long as the going was good, no one bothered. Once the tide turned, the western countries began asking themselves if they could continue giving up claims on taxes.

What would be the best way to deal with black money when it’s stashed abroad?

We need to have better leverage with other countries. Hence, we need to merge the ministries of commerce and external affairs.

Market access is very important for Western countries. For instance, we must tell the Swiss government that either you give the data or the Indian government will unleash the inspectors from dozens of departments on Swiss companies doing business here. Hundreds of such officials can go to these companies. The companies will then have to shut down their operations.

Also, a country like the US changes its foreign policies based on the access its firms get abroad. Take the case of China. After many of the major US businesses like Walmart entered China, no one talks about human rights issues there.

So, what about the trade agreements India has signed over the years?

Trade agreements are not permanent. We make it appear as if Switzerland is God. They only look at the P/E (price-earnings) ratio and ROI (return on investment). We can renegotiate the preferential trade agreements (PTAs). The Vajpayee government signed 16 of them.

After the UPA took charge, it has remained the same. That’s because each government photocopies the previous government’s rules and laws. Most bureaucrats, too, don’t change.

The current prime minister has an advantage since there are no cases of corruption against him. Public perception is the key and Modi scores on that count. He won’t like to damage his credibility. So, I am hopeful something will happen on this score in this government.



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