cessation of illegal financial flows

NS Pandora LetterPublished on 3 October, once again exposes the illegal activities of the rich and powerful around the world. Pandora Papers Scrutiny “The world’s largest journalism collaboration, involving more than 600 journalists from 150 media outlets in 117 countries”. The International Consortium of Investigative Journalists (ICIJ) has researched and analyzed nearly 12 million documents to uncover the workings of the global financial architecture, which helps illicit financial flows, in turn give the rich a cloak of their income and activities. Enables throwing.

Given the complexity of tax laws and the loopholes available, some clever moves may be strictly legal, but not necessarily morally justified. The ICIJ says that while some of the files date back to the 1970s, most of them were reviewed between 1996 and 2020. The ICIJ also stated that “the data trove includes more than 330 politicians and 130 Forbes billionaires, as well as celebrities … drug dealers, members of the royal family and leaders of religious groups around the world”.

Leaked data history

Since at least 2008, files indicating manipulation by the wealthy have been stolen from financial institutions. In 2017, Paradise Papers Most were leaked from Appleby, an over 100-year-old offshore law firm that operates globally. In 2016, Panama Papers The servers of the Panamanian financial firm Mossack Fonseca were hacked. In these exposures, the British Virgin Islands (BVI) came to the fore. Documents leaked from Luxembourg.Luxembourg Leeks”, appeared in 2014.

In 2008, a former employee of the LGT Bank of Liechtenstein offered the information to the tax authorities. There were Indian names too but the Indian government accepted the data only under pressure from the Supreme Court. In the same year, Hervé Falciani obtained confidential data on HSBC bank accounts from remote servers and passed the data to the then French Finance Minister Christine Lagarde (she later became the head of the International Monetary Fund to move on as President of the European Central Bank). Who handed it over to various governments including India.

In the United States, in the mid-2000s, UBS Bank and Bradley Birkenfeld, acting as a private banker on its behalf, were sued for enabling American citizens to withhold their income and wealth. was run.

A large proportion of illicit financial flows are linked to New York City and London, the world’s largest financial centers that allow financial institutions such as large banks to operate easily. Leaked data suggests that these entities move the wealth of the rich and powerful through tax havens; Delaware is a tax haven in the US. Big financial institutions operating from these cities have been prosecuted for doing illegal things. In 2012, major banks such as Barclays, UBS, Rabobank and the Royal Bank of Scotland were fined for manipulation – an investigation into the London Interbank Offering Rate or LIBOR – crucial in the calculation of interest rates. These banks also operate a large number of subsidiaries in tax havens to help with illegal financial flows.

NS modus operandi

Leaked papers now and in the past have exposed the international financial structure and illegal financial flows. For example, the Panama Papers highlighted the template used in other tax havens. Pandora Papers once again confirms this pattern.

The tax haven enables the wealthy to hide the real ownership of assets by using trusts, shell companies and the process of ‘layering’. Financial firms provide their services to do this work for the rich. They provide directors to ready-made shell companies, create trusts and ‘layer’ the movement of funds. Only those with money can afford these services.

The process of layering involves moving funds from one shell-company in one tax haven to another and liquidating the previous company. In this way, money is routed through multiple tax havens to the final destination. Since the mark gets erased at every step, it becomes difficult for the officials to track the flow of funds.

It appears that most of the world’s rich use such manipulations to reduce their tax liability, even if their income is earned legally. The Panama Papers revealed the names of current and former leaders, politicians and public officials, billionaires, celebrities, sports stars, small and large businesses and professionals globally.

Is it that high tax rates cause the wealthy to shift their wealth to tax havens? Not necessarily. Citizens of countries with low tax rates also use tax havens. Over three decades, tax havens have enabled capital to become highly mobile, forcing countries to lower tax rates to attract capital. This has given rise to ‘race to the bottom’, as a result of which governments lack resources to provide public goods etc., which in turn is adversely affecting the poor.

Specification of letters

The Pandora Papers, unlike the previous cases mentioned above, are not from any one tax haven; They are leaking records of 14 offshore service firms. The data pertains to an estimated 29,000 beneficiaries. 2.94 terabytes of data has exposed the financial secrets of more than 330 politicians and public officials from more than 90 countries and territories. These include 35 current and former leaders of the country. Singer Shakira and former Indian cricket captain Sachin Tendulkar are among the celebrities and sports stars named in the investigation. Others include the King of Jordan, the Presidents of Ukraine, Kenya and Ecuador, the Prime Minister of the Czech Republic, former British Prime Minister Tony Blair and Russian President Vladimir Putin. There are surprisingly few names from the United States, even though it has the largest number of billionaires.

The very powerful who need to curb illicit financial flows (as the Organization for Economic Co-operation and Development, or OECD is trying) are the beneficiaries of this system and do not want a foolproof system to be established. Check this. With the current global financial structure, black income generation cannot be checked.

The disclosures show that the funds are moved outside national jurisdictions to keep them out of the reach of creditors, not just governments. Many fraudsters are in jail, but they have not paid their creditors despite having money abroad.

Strictly speaking, not all activity being uncovered by the Pandora Papers may be illegal due to tax evasion or concealment of crime proceeds. The authorities will have to prove whether the law of the land has been violated. Each country will have to conduct its own investigation and prove what part of the activity has broken any of their laws. In the United Kingdom, laws regarding financial transactions are very favorable to the wealthy and their manipulators. It is no surprise that in recent times, many Indian fraudsters have fled to London to evade Indian law. A large number of wealthy Indians have bought property in the UK. Thousands of foreigners buy or rent property in the UK as no questions are asked about the sources of wealth; It has enriched the UK by $100 billion.

India’s investigation

Many Indians have become non-resident Indians or have made a relative NRI who can operate shell companies and trusts outside the purview of Indian tax authorities. This is why it has been difficult to prosecute earlier cases of data leaks from tax havens. The Supreme Court has not been able to crack down on the Special Investigation Team (SIT) set up under India’s watch in 2014. The government’s focus on the unorganized sector as a source of black income is also wrong as statistics show that it is the organized sector that has been the real culprit and pulls out a part of its black income.

An interesting recent development (October 8) has been the agreement between around 140 countries to impose a 15% minimum tax rate on corporates. While this is a long shot, it could lead to a breach in the international financial structure. Other steps needed to tackle the scourge of illicit financial flows are the abolition of banking secrecy and the Tobin tax on transactions; None of these OECD countries are likely to agree.

Arun Kumar is the Malcolm Adisheya Chair Professor, Institute of Social Sciences and author of black economy in india