India can learn from the mistakes of Philippines, Egypt and Libya on recovering illegal money stashed in Tax Havens
How can India retrieve stash from Tax Havens Graphic courtesy WorldPropertyJournal.com
This is Part 8 of our series on #BringBackBillions, the efforts of different countries in bring back money stashed in Tax Havens. Posts 1..7 can be accessed here.
The current government in India, the National Democratic Alliance (NDA) came to power on the basis of 3 promises – (Weed out) Corruption, Good Governance and Hindutva (CGH). One of the first resolutions by the new Government, on its first day of office, was to institute a Special Investigation Team (SIT) to bring back the Black Money stashed away by its citizens in Tax Havens. Thus far, the Government has taken several steps, each increasing in intensity to recover Black Money. The results have been a drop in the bucket. Most high net worth individuals/ entities seem convinced that they can beat the system. Estimates of the amount of Black Money that has been parked outside of India range between Rs.2,00,000 crores ($30 billion) to Rs.10,00,000 crores ($150 billion).
How is the money stashed away?
The illustration given below gives you an idea of how the richest in the world park their money in tax havens:
Any attempt to trace the foreign accounts of a high net worth individual will prove difficult because the title deed(s) can keep moving around (Steps 1, 2, 3 and 4 in the graphic above). It requires a systematic approach to identify the assets. The process can be speeded up if an effective Whistleblower/ Witness Protection program is put in place. The planning of this needs to be elaborate and it takes several individuals/ entities moving concertedly.
Step 1. Choose a tax haven
Thanks to the country which boasted that the sun never set on its empire, there are now close to 70 tax havens where you can park your money with no questions asked. Many of these were or are British colonies and will accept British law as well as Corporate filings. In other words, you can set up all your tax haven structure sitting in London. According to Nicholas Shaxson, author of “Treasure Islands: Tax Havens and the Men Who Stole the World.”, the United Kingdom runs a network of Tax Havens around the world. Despite all its protestations, the UK does have a lot of control over these tax havens and can in fact effect widespread changes to rein them in or even ban them. Now perhaps you can understand why some fly to London for a 2-day trip, ostensibly on business or holiday. There are informative articles that list the merits of each Tax Haven.
Step 2. Create a corporation or entity
You can create a company or trust, with the help of offshore investment advisors who will set up a ready-made firm complete with auditors, directors and accountants who will all do your bidding and allow money to pass through, for a fee. In Panama and other tax havens, an off-the-shelf option can be approved in as little as three days for a nominal fee. The company then can be owned by a Not-for-profit organization, adding another layer of security. This tactic has now resulted in the US looking very closely at every Non-profit entity application to ensure it is not a shell for tax evasion. Collateral damage for the sincere non-profits, who want to serve the society.
Step 3. Create a Secret Identity
This step is taken to ensure complete anonymity of the owner. One or more “nominees” are hired to run the business matters for the trust or company created in Step 2 above. These nominees don’t manage money directly but can act on behalf of the owner. To get a better idea of how this works refer to #RagaSaga – Connecting the Dots.
Step 4. Open a Bank Account
Register the shell company in one country and add a layer of anonymity by opening a bank account for the said shell company in a different country. See how many “benefits” are there, of going to London?!
Step 5. Move the Money
This is where things start getting interesting. Moving amounts over $10,000 usually attracts the attention of the tax man so wiring of money is done in amounts lesser than $10,000. Other novel ways tax cheats move money is to have a bogus offshore company sue them and then settle the case out-of-court for a large amount of money. Sometimes shell companies acquire “other” shell companies for large sums of money. Only when an investigation takes place as to how the buying company valued the acquiring company do the details that perhaps it was a sham transaction emerge.
Step 6. Spend the Money
Spending the ill-gotten wealth is where things get tricky – The Non-profit trusts or corporations typically end up owning Real Estate in first world locations. Some end up re-locating to the tax haven itself – nothing beats a Caribbean former British colony for a balmy, year-round warm weather estate. Some try to have credit cards issued to the shell companies and spend those. However, tax authorities are beginning to crack down on these anonymous cards. It helps sometimes to look backwards from large transactions to trace the ownership rather than starting from Step 1.
How does India go about retrieving the Black Money?
India has to work systematically in deliberate, well thought out steps to recover the loot. The most important attribute needed is the mindset. A glimpse on how this should be approached is detailed in the post Why the Rupee exchange rate should be 30 to a dollar.
More details to follow in the next post.