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ECONOMY-INDIA: Foreign Money Transfers Under the Scanner

Paranjoy Guha Thakurta

NEW DELHI, Jun 6 2008 (IPS) - With Indians spending more money abroad and even picking up blue chip firms the government has decided to take a closer look at suspected money laundering activity and dubious international fund transfers.

The cabinet of the ruling, centre-left United Progressive Alliance (UPA) will shortly introduce a bill in parliament to amend the Prevention of Money-Laundering Act making it mandatory for all financial intermediaries to report fund movements to an intelligence unit of the union finance ministry.

On Thursday, soon after the introduction of the bill was approved, senior cabinet minister Priyaranjan Dasmunshi told reporters that it would ‘’enable the government to meet certain domestic needs and international obligations,’’ referring to fund transfers that are likely to be related to criminal activity.

Under the proposed new law, all agencies engaged in money transfers across countries – such as Western Union, Visa and Mastercard – would have to compulsorily report all transactions. Existing law obligates only Indian agents of firms engaged in international transfer of funds through wire services to report transactions.

Covered by the proposed legislation are transactions involving credit cards besides earnings such as those made in casinos. There have been, in recent months, news reports of fund-transfers made through credit cards by persons suspected to have criminal backgrounds or engaging in under-invoicing of export bills.

Most significantly, however, the amendment to the law comes in the wake of widespread concerns that the Indian government is not doing enough to bring back funds illegally taken out of the country and stashed away in secret accounts in banks located in tax havens.

Even as Indian nationals are spending more outside their country and local companies are acquiring firms in different parts of the world, questions are being raised as to whether the money that is being spent is out of funds that have been illegally stashed away in tax havens.

Till the 1990s, the Indian economy used to be a closed one and foreign currency transactions were strictly controlled. As the country’s economy liberalised and as the US dollar weakened, Indians felt less inclined to illegally park their money in foreign bank accounts, outside the scrutiny of government tax authorities. Nevertheless, analysts argue that slush funds continue to flow out of the country.

This issue recently gained prominence in the Indian media after German intelligence agents acquired details of the accounts of nearly 1,400 individuals held in a bank in Liechtenstein, a small landlocked principality tucked in-between Switzerland and Austria that is known as a tax haven.

The information, obtained from a former bank employee, included details of accounts held by 600 German nationals. The German authorities made it known that they would be willing to part with the information relating to the 800 non-German account holders in the Liechtenstein bank called LTG.

Representatives of the governments of several countries, including the United States, Britain, Canada, Italy, Norway, Sweden, Finland and Ireland reportedly approached the German authorities to zero in on their citizens who have evaded taxes and smuggled their wealth to Liechtenstein, said to be the sixth smallest country in the world.

In India, a section of the media alleged that the government in New Delhi was not showing sufficient interest in obtaining information from Germany on how rich and powerful Indians may have stashed away their ill-gotten wealth in the Liechtenstein bank.

On May 21, the Times of India newspaper wrote that Indian citizens “have a right to know who is secreting away public money into personal accounts and the government has a duty to get that information if it can.”

The leader of the opposition in the Indian parliament, L.K. Advani wrote to Prime Minister Manmohan Singh urging him to accept the offer of the German government to part with information relating to the secret accounts of certain wealthy Indians.

But international fund transfers made by Indians are hard notoriously hard to track or police and Advani himself was among a group of top politicians implicated in an 18 million dollar case involving ‘hawala’ agents, caught channeling money to Hizbul Muhideen militants in Kashmir. But the accused were let off in 1997/98 because the diaries and transaction records maintained by the agents were not recognised by the courts as main evidence.

After the latest scandal broke, R.H. Tahiliani, a retired naval admiral who heads the India chapter of Transparency International, the independent body campaigning to reduce corruption worldwide, went on record stating: “It is alleged that this money belongs to rich and powerful politicians, industrialists and stock brokers and that is why the reluctance on the part of the government of India (to obtain information from Germany)…”

He added that the Indian government had “not shown much interest in finding out about those (Indians) who have their lockers on the secret banks of Liechtenstein…” and feared that this money could be used by arms dealers, terrorists and drug dealers.

On May 22, India’s Finance Minister P. Chidambaram formally stated that his ministry had requested the German tax office for information relating to Indian taxpayers and that “the German central tax office replied in March saying they were not in a position to give (information) immediately but will inform us as soon as they get it…”

The Berlin-based managing director of Transparency International Humborg Christian told Outlook magazine: “It has been reported in the media that the CD (compact disc) seized had information not just about the accounts of Germans, but also clients of the bank. There is very high probability that there might be Indian customers on this CD…”

In an interview with IPS, Kamal Nayan Kabra, former professor at the Indian Institute of Public Administration, said there is “considerable indirect evidence to indicate that laundered money is being used to purchase firms outside the country”.

He pointed to a study done by the New Delhi-based Institute for Studies in Industrial Development that documented international corporate mergers and acquisitions by Indian firms involving a sum of over five billion dollars between January 2000 and August 2007. “Only a part of this money is reflected in the accounts of the Reserve Bank of India (the country’s central bank and apex monetary authority,” added Kabra who has authored a book on “black money” in India.

Another academic, Arun Kumar, professor of economics at New Delhi’s prestigious Jawaharlal Nehru University told IPS he apprehended that the Indian government would not act in a proactive manner in obtaining information from Germany because “it is the same set of people – politicians and bureaucrats – who are likely to be involved and whose interests could get hurt.”

Kumar, who is associated with Tax Justice Network, an organization that tracks activities in 77 tax havens in different parts of the world that are used for laundering illegal money, said that even as Indians do not find it lucrative any more to park their money outside the country, illegally obtained funds go out to destinations perceived to be “safer”.

“It could be a politician or a bureaucrat who has accepted bribes; it could be doctor whose practices are unethical or a businessperson who has manipulated invoices to artificially reduce profits and evade taxes – all such people would prefer to keep their illegal money outside India in a tax haven,” he added.

Kumar, who has also written a book on the “black economy” in India, estimates that the total amount of money (with interest) that has been illegally taken out of India over the decades since 1950 would be in the region of 1.5 trillion dollars, a figure he says is corroborated by a recent study done by an association of Swiss bankers.

According to a front-page report in the Economic Times, India’s leading financial daily, illegal money coming into India in the garb of foreign direct investment (FDI) is now being closely watched by the Reserve Bank of India (RBI). The newspaper outlined the modus operandi of such transactions.

Large amounts of money flow in, but only a tiny amount leaves the country. Investments are made in shell companies in tax havens to conceal the true identities of the owners of the funds. These shell companies purchase shares of Indian companies at a hefty premium. The FDI comes in through an “automatic route’ and subsequently, the Indian firm buys out the shell companies at a fraction of the price paid for purchasing its shares.

Apart from the proposed legislation the central Reserve Bank of India has asked all commercial banks (which act as authorised dealers for foreign exchange transactions) to carry out checks on corporate entities investing in the country.

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