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Here's What PM Modi Can And Cannot Do About Offshore Black Money

15/06/2016 8:42 AM IST | Updated 15/07/2016 8:27 AM IST
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Denis Balibouse / Reuters
Indian Prime Minister Narendra Modi arrives for a meeting with Swiss President Johann Schneider-Ammann in Geneva, Switzerland, June 6, 2016. REUTERS/Denis Balibouse

Prime Minister Modi had quite literally gone to the source with last week's visit to Switzerland. Since the HSBC Swiss leaks last year, there's been a growing scrutiny of the role of financial secrecy in aiding tax evasion, so it's no surprise that Prime Minister Modi's focus during his visit included the subject of Indians with hidden Swiss bank accounts. Unfortunately, the issue of cross-border movement of black money is complex and governments around the world are limited in what they can do on their own to persuade jurisdictions like Switzerland to cooperate.

1. It is not just about "bringing the money back"

The debate on black money is incorrectly focused entirely on "bringing the money back". The issue of black money flows is more complex than a pot of gold sitting in Swiss bank accounts. Some of the money could have already been invested back into India as legitimate investments via tax havens such as Mauritius and Singapore, for example. Black money can also be moved around the world quite easily using anonymous shell companies, across multiple jurisdictions, and invested in buying property or yachts in rich countries.

The issue of black money flows is more complex than a pot of gold sitting in Swiss bank accounts.

This layering, exploiting both financial secrecy and anonymous companies worldwide, makes it impossible for authorities to track whose money it is and where it finally ends up. The focus should instead be on discouraging the outflow of money in the first place. While addressing the problem of secrecy jurisdictions like Switzerland is an element of that solution, it should be as part of a comprehensive strategy that also targets sectors that generate black money domestically, such as real estate, education, jewellery etc.

2. Prime Minister Modi cannot just ask Switzerland for information

The focus of this government on curbing black money is important. The problem is not that Switzerland is waiting for a strong diplomatic message from the Prime Minister (to be fair, the earlier government tried that too). The issue is that information exchange on bank accounts is bound by global standards put together by the OECD (Organisation for Economic Cooperation and Development), a club of 34 mostly advanced economies. Countries are expected to follow these standards by signing treaties and respecting confidentiality clauses in them. Until recently, these information exchange standards were particularly weak, and barely made a difference. But thanks to some improvements in the system, countries will be able to receive information on an automatic basis; in the past, a government had to submit a request each time they wanted information from another country.

[T]he process of choosing which countries will ultimately share data is a bit like a dating agency -- not all countries that sign up to this system will automatically share information.

But even with these improvements, the standard still has plenty of loopholes; information can only be shared between tax authorities and not with law enforcement or anti-corruption agencies, meaning that this vast trove of new data won't be used in the fight against corruption, but just to track down tax evaders. And the process of choosing which countries will ultimately share data is a bit like a dating agency -- not all countries that sign up to this system will automatically share information. Only where the interest to share information between two countries "matches", the exchange takes place. In other words, if India chooses Switzerland, but Switzerland (or any other secrecy jurisdiction) doesn't choose India, there is no exchange.

The review process that would follow such a situation is still unclear. If the process followed for the earlier standard is any indication, then the review would be painfully slow and bureaucratic. Since none of this comes with the threat of sanctions, a country such as the USA gets away with not even signing up to this standard. They instead follow their own system, FATCA (Foreign Account Tax Compliance Act), by which they get information from India (and the rest of the world) but are not obliged to share the same information back with Indian authorities.

3. Bank account information cannot be made public

The issue of public accountability in this system is important but there are legitimate concerns about keeping personal bank account information confidential. Accountability could be addressed to some extent if countries collected and published aggregate data regarding deposits by non-residents, which will not compromise taxpayer confidentiality. Australia has already agreed to publish such information and India should do the same.

Addressing cross-border flows requires the government to show leadership in working collectively with other countries, especially BRICS and other developing nations...

If countries cooperate to institutionalize this globally, it would allow citizens to see what jurisdictions are preferred for offshore banking (although it doesn't necessarily mean it's illegal). Effective use of this data will also help monitor the impact and effectiveness of the automatic exchange system globally and allow low-capacity countries to focus on the riskiest jurisdictions.

4. The international institutional architecture needs to change

At the Financing for Development conference in Addis Ababa, Minister of State for Finance Mr. Jayant Sinha strongly supported the decade-long fight by developing countries to upgrade the current UN Tax Committee to an intergovernmental commission with resources and political backing to decide such international tax standards. The government has rightly been supportive of this proposal. OECD is doing important work, but is limited in its ability to ensure global consensus and effectiveness: it isn't neutral, negotiations happen behind closed doors (as opposed to in the UN where citizens and journalists can follow country positions and hold them accountable nationally), and it isn't democratic, because developing countries are excluded from the decision-making process.

India, enjoying the leverage it has in the G20, should continue to pursue this proposal with BRICS and allies, possibly resulting in further political work in the UN General Assembly. The decisions made currently in the OECD and G20 have important implications for public revenue, but exclusive clubs that do not represent developing countries are hardly the institutions that can deliver the sort of cooperation needed to address these global challenges.

This government can pursue many things at the national level to address illicit money, particularly to reform vulnerable sectors generating black money. But addressing cross-border flows requires the government to also show leadership in working collectively with other countries, especially BRICS and other developing nations, to ensure the global financial system works for all countries.

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