Tag: Switzerland | Vivek Kaul

26 April, 2016

Switzerland is Still the Centre of Global Black Money

An important area of focus of the Narendra Modi government has been trying to get the black money which has left the shores of the country, back to India. Black money is essentially money which has been earned, but which has not been declared for tax purposes.

As the finance minister Arun Jaitley said in his budget speech in February 2016: “Our Government is fully committed to remove black money from the economy.”

The focus of the government has largely been on black money which has left the shores of the country. Promises have been made that this black money will be got back to India. In fact, estimates made by Global Financial Integrity in a December 2015 report suggest that the total amount of black money leaving India between 2004 and 2013 stood at $510.3 billion.

The outflow peaked in 2012 when it reached $92.9 billion. In 2013, the number had stood at $83 billion, which was around 9.7% lower than the previous year.

Year	Amount(in $ billion)
2004	19.5
2005	20.3
2006	27.8
2007	34.5
2008	47.2
2009	29.2
2010	70.3
2011	85.6
2012	92.9
2013	83
Total	510.3

Source: http://www.gfintegrity.org/wp-content/uploads/2015/12/IFF-Update_2015-Final-1.pdf

India is not the only country facing this problem. In fact, when it comes to the total amount of black money leaving a country, India is fourth in the list, behind China, the Russian Federation and Mexico. On this front, India has rapidly caught up with Mexico over the years. The outflow of black money from Mexico between 2004 and 2013 stood at $528.4 billion, just a little more than that from India.

This money has found its way into tax havens all across the world, including Switzerland. As Gabriel Zucman writes in The Hidden Wealth of Nations—The Scourge of Tax Havens: “There has, in fact, never been as much wealth in tax havens as today. On a global scale, 8% of the financial wealth of households is held in tax havens. According to the latest available information, in the spring of 2015 foreign wealth held in Switzerland reached $2.3 trillion.”

The money held in Swiss banks is more than India’s gross domestic product(GDP). In fact, since April 2009, the money held in Swiss banks has increase by 18%. The increase across all tax havens all over the world has been 25%.

In September 2015, the United Nations adopted the Sustainable Development Goals. The Goal 16.4 points out that countries will “by 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime.”

The term illicit financial flows essentially refers to what we call black money in India. The Modi government has also on and off talked about getting back the black money that has left India. The question to ask is how feasible is this?

One argument made against this has been that there are way too many tax havens all around the world. There are around 70 tax havens all over the world and the black money that has left the shores of this country could be stashed almost anywhere.

An estimate made by the International Monetary Fund suggests that around $18 trillion of wealth lies in international tax havens other than Switzerland, beyond the reach of any tax authorities. A 2013 estimate in The Economist pointed out: “Nobody really knows how much money is stashed away: estimates vary from way below to way above $20 trillion.”

Zucman whose book I have quoted earlier in the column, estimates that around 8% of the global financial wealth or $7.6 trillion is held in tax havens. His estimate is a little lower than other estimates. But each of these estimates is a big number, and that is what matters the most.

Getting back to the point I was discussing. How good are the chances of India and other countries getting this money back? In the past I have written that given that there are so many tax havens it is next to impossible to get this money back. But after reading Zucman’s book I have revised my opinion, a little.

While Switzerland was the original tax haven where people who did not want to pay tax in their home countries, took their money to, things have changed since the 1980s. New tax havens like Singapore, the Bahamas, Luxembourg, Hong Kong etc., have emerged over the years.

As Zucman writes: “In all these tax havens, private bankers do the same things as in Geneva: they hold stock and bond portfolios for their foreign customers, collect dividends and interest, provide investment advice as well as other services, such as the possibility of having a current account that earns little or nothing. And, thanks to the limited forms of cooperation with foreign tax authorities, they all offer the same service that is in high demand: the possibility of not paying any taxes on dividends, interest, capital gains, wealth, or inheritances.”

As mentioned earlier the Swiss banks as of spring of 2015, had foreign wealth worth $2.3 trillion. Of this around $1.3 trillion belonged to Europeans. A lot of black money emanating from all over the world has found its way into tax havens other than Switzerland.

How different are these tax havens from Switzerland? As Zucman writes: “To view Swiss banks in opposition to the new banking centers [i.e. tax havens] in Asia and the Caribbean doesn’t make much sense. A large number of the banks domiciled in Singapore or in the Cayman Islands are nothing but branches of Swiss establishments that have opened there to attract new customers.”

And this is one of the well kept secrets of international tax havens—Switzerland is still at the heart of it all. As Zucman writes: “In the past, Swiss bankers provided all services: carrying out the investment strategy, keeping securities under custody, hiding the true identity of owners by the way of famous numbered accounts. Today only securities custody really remains in their purview. The rest has been moved offsite to other tax havens—Luxembourg, the Virgin Islands, or Panama—all of which function in symbiosis. This is the great organization of international wealth management.”

Given this, India alone cannot deal with the issue. Combined international pressure needs to be applied on Switzerland in order to get anywhere with the idea of bringing black money that has left the shores of the country, back.

The column originally appeared on the Vivek Kaul Diary on April 26, 2016

11 May, 2015

Black money in our backyard

Getting black money from abroad has been one of the pet issues of the Narendra Modi government. Black money is essentially money on which taxes have not been paid.
Estimates made by Global Financial Integrity in a report titled Illicit Financial Flows from Developing Countries: 2003-2012, suggest that around $439.6 billion of black money left the Indian shores, between 2003 and 2012.
India is ranked number fourth (behind China, Russia and Mexico) when it comes to the total amount of black money leaving a developing country. The interesting thing nonetheless is that the quantum of money leaving India has increased dramatically during the Congress led UPA years.
In 2003, around $10.18 billion left the country. By 2012, this had jumped by more than 9 times to $94.8 billion. Interestingly, the number in 2009 was at $29 billion. This clearly tells us that the second term of the Congress led UPA which started in May 2009 was fairly corrupt.
Also, the amount of money leaving China grew by 3.9 times between 2003 and 2012. In case of Russia the increase was 3 times, whereas in case of Mexico the increase was 1.6 times. Hence, the jump in the Indian case was clearly the most.
The $439.6 billion that has left the country works out to around 23% of the Indian GDP of $1.88 trillion in 2013. Given this, it is a large amount of money and hence, the Modi government’s interest in getting this money back, seems justified.
While things may always be possible, what we need to look at is whether they are probable. And the answer in this case is no. Conventional wisdom has it that all this money is lying in Swiss banks. But that is an incorrect assumption to make.
There are around 70 tax havens all around the world. Given this, the money that has left Indian shores could be anywhere. Tax havens are unlikely to cooperate with the Indian government in helping it get back the black money stashed abroad. The economies of many tax havens run on black money.
So does that mean the government should give up on its pursuit of black money? Of course not. It should concentrate on the black money that is stashed in India.
There are no clear estimates of the total amount of black money in India. As per a confidential report submitted to the government by the National Institute of Public Finance and Policy (NIPFP) in December 2013, the black money economy could be three fourths the size of the Indian economy. This report was accessed by The Hindu in August 2014.
There are other estimates which are not so big. Nevertheless, what we know for sure is that only around 2.9% of Indians pay income tax. In fact, former finance minister P Chidambaram in his February 2013 budget speech had said that India had only 42,800 people with a taxable income of Rs 1 crore or more.
Now compare this with the fact that around 30,000 luxury cars are sold in India every year. Both Audi and Mercedes sold more than 10,000 cars in India in 2014. A February 2015 report brought by business lobby FICCI makes a similar point.
The report estimates that the number of dollar millionaires(i.e. with assets of Rs 6 crore or more) in India in 2014 stood at around 2.27 lakhs, up from 2.14 lakh in 2013. But the number of taxpayers with a taxable income of more than a crore is less than 50,000.
What this tells us clearly is that there is widespread tax evasion in the country. This tax evasion continues to generate a lot of black money, a major part of which continues to remain country. This is the black money that the government should be going after.
Information technology can play a huge part in this. In fact it already is. As the FICCI report cited earlier points out: “The Integrated Taxpayer Data Management System is a data mining tool implemented by the I-T department that is used for detection of potential cases of tax evasion. The tool assists in generating a 360-degree profile of the high net-worth assesses.” The government should work towards making this tool even more robust by building in more data into it, in the days to come.
Further, it has to get cracking on the real estate sector where the maximum amount of black money is invested. This black money generates more black money. Going after the biggest property dealers of the National Capital Region, where most black money changes hands, might be a good starting point.
The question is will this government (or for that matter any government) go after domestic black money, given that it finances almost every political party in the country. Now that is something worth thinking about.

(Vivek Kaul is the author of the Easy Money trilogy. He can be reached at [email protected])

The column originally appeared in the India Today magazine dated May 18, 2015

1 December, 2014

Why governments, politicians and businessmen hate gold

Yesterday Switzerland voted on whether its central bank should be holding more gold as a proportion of its total assets. Gold currently makes up for around 7% of the total assets of Swiss National Bank, the country’s central bank.
The proposal dubbed as “Save Our Swiss Gold” had called for increasing the central bank’s holding of gold to 20% of its total assets. It was more or less rejected unanimously with nearly 78% of the voters having voted against it.
This proposal was backed by the right-wing Swiss People’s Party and came out of the concern that the Swiss National Bank had sold too much of its gold in the years gone by.
Interestingly, Switzerland was on a gold standard till 1999 and was the last country to leave it. In a gold standard the paper money issued by the central bank is backed by a certain amount of gold held in the vaults of the central bank.
What this means is that the central bank and the government cannot issue an unlimited amount of paper money. The total amount of paper money that can be issued is a function of the total amount of gold that the central bank holds in its vaults.
In April 1933, when the Great Depression was on in the United States, the Federal Reserve of the United States had around $2.7 billion in gold reserves, which formed around 25 percent of the monetary gold reserves of the world. At the same time, the ratio of paper money to gold was at a healthy 45 percent, more than the decreed 35–40 percent. (Source: J.W. Angell, “Gold, Banks and the New Deal,” Political Science Quarterly 49, 4(1934): pp 481–505)
That’s how the gold standard worked.
Getting back to the Swiss vote on gold, other than the Swiss People’s Party, the other parties as well as businessmen were opposed to it. As the Wall Street Journal reports “The initiative was widely criticized by Switzerland’s political and business communities.”
This isn’t anything new. The politicians over the last 100 years have not liked the gold standard because it limits their ability to create money out of thin air. And as far as businessmen are concerned they usually tend to go with what the politicians are saying.
As Raghuram Rajan and Luigi Zingales write in Saving Capitalism from the Capitalists: “The First World War and the Great Depression created great dislocation and unemployment… Workers, many of whom had become politically aware in the trenches of World War I, organized to demand for some form of protection against economic adversity. But the reaction really set in during the Great Depression, when they were joined in country after country by others who had lost out—farmers, investors, war veterans, the elderly.”
The politicians could not do much about it given that most of the world was on the gold standard. And given this, they could not print money and flood the financial system with it. “The gold standard … imposed tight budgetary discipline on governments, which made it difficult for them to intervene much in economic affairs… Politicians had to respond, but such a large demand for protection could not be satisfied within the tight constraints imposed by the gold standard. Hence, the world abandoned the straitjacket of the gold standard… With their ability to turn on or turn off finance, governments obtained extraordinary power,” write Rajan and Zingales.
This explains why governments hate gold.
In 2012, I had the pleasure of speaking to the financial historian Russell Napier. And he made a very interesting point about the rise of democracy and paper money having gone hand in hand. As he put it: “The history of the paper currency system, or the fiat currency system is really the history of democracy… Within the metal currency, there was very limited ability for elected governments to manipulate that currency.”
Napier further pointed out that most people don’t have savings. As he explained: “And I know this is why people with savings and people with money like the gold standard. They like it because it reduces the ability of politicians to play around with the quantity of money. But we have to remember that most people don’t have savings. They don’t have capital. And that’s why we got the paper currency in the first place. It was to allow the democracies. Democracy will always turn toward paper currency and unless you see the destruction of democracy in the developed world, and I do not see that, we will stay with paper currencies and not return to metallic currencies or metallic based currencies.”
With paper currencies around, politicians (even honest ones) feel that they have the ability to bring an economy out of a recession, by getting their central banks to print money and flood the financial system with it, so as to maintain low interest rates.
At low interest rates the hope is that people will borrow and spend more. In a gold standard all this wouldn’t have been possible. But that as we have seen over the last few years has led to other problems.
Having said that, the fundamental problem with paper money, that it can be created out of thin air, remains. Or as Ben Bernanke, the former Chairman of the Federal Reserve of United States, put it in 2002: “The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.”
This is what the US government has done with the help of its central bank, the Federal Reserve, over the last few years, largely during the years in which Bernanke was the Chairman.
As on September 17, 2008, two days after the investment bank Lehman Brothers went bust, and the financial crisis well and truly started, the Federal Reserve held US government treasury bonds worth $479.8 billion. Since then, the number has jumped up to $2.46 trillion. Where did the Fed get the money to buy these bonds? It simply printed it. And then it bought bonds to pump that money into the financial system.
In fact, it also printed money to buy bonds other than treasury bonds as well. This was done so as to flood the financial system with money, in the hope of keeping interest rates low, in order to get people to borrow and spend again, and hopefully create economic growth.
While that has happened to a limited extent, financial institutions have borrowed this money at low interest rates and invested this money in large parts of the world chasing returns.
The Fed decided to stop printing money towards the end of October 2014. But now it needs to keep telling the financial markets that it won’t go about withdrawing the trillions of dollars that it has printed and pumped into the financial system, any time soon. We need to see what happens when it decides to start withdrawing all the money it has printed and pumped into the financial system.
To conclude, it is worth remembering what economist Stephen D. King writes in When the Money Runs Out “A central banker who jumps into bed with a finance minister too often ends up with a nasty dose of hyperinflation.”

The article appeared originally on www.equitymaster.com on Dec 1, 2014

6 November, 2014

Busting a few myths about black money

Vivek Kaul

Growing up in erstwhile Bihar in the late 80s and early 90s, one of the first economic terms that I came across was “black money”. Those were pre Android phones, pre Google, pre internet, pre mobile phones and in large cases even pre landline phone days.
So, what did one do when one had a doubt like this and wanted to know what black money really was? One asked. Parents. Friends. Friends of friends(Okay, these were real friends of friends, not the Facebook variety that we have these days). Neighbourhood uncles and aunts. Bhaiyyas and Didis preparing for the UPSC or the state public service exam. And hopefully an economist.
Ranchi was a small town during those days. My social studies text book even called it a “hill station”. And the chances of finding an economist there, were next to none (not that the chances have gone up now).
So, what you got were vague explanations like, black money was black money. People looked at you and probably wondered, why is the fellow even asking this.
And so the doubt remained. As time went by, as happens in such small towns, everyone who could leave the place, got up and left, including me. Of course, over the years, I figured out what black money was. Black money was black money, one of the few economic terms which are a definition in themselves.
In April 2009, the newspaper I worked for back then, asked me to interview Proffesor R Vaidyanathan of the Indian Institute of Management at Bangalore. The professor put a number to the entire black money debate, which thanks to the Bhartiya Janata Party (BJP) was just about erupting then.
He said that around $1.4 trillion of Indian black money was stashed away abroad. This money, he elaborated could be in Switzerland and various British/US islands which are tax havens.
His estimate was based on a report titled Illicit Financial Flows from Developing Countries: 2002—2006, brought out by Global Financial Integrity(GFI), a Washington based non profit organization.
The 2013 report of GFI said that nearly $343 billion of black money left India during 2002-2011. This amounted to around 3% of India’s economic output during the period. The number was particularly high in 2011, when around $84 billion may have left the country, the report suggested.
The GFI’s estimate does not take into account criminal activities as well as corporate tax evasion. These are massive sources of black money. Nevertheless, this is the most comprehensive study of black money which leaves emerging markets like India and hence, does give us a good idea of the amount of black money leaving the country.
In the recent past, prime minister Narendra Modi has taken up the issue of bringing back black money that has left India. In his latest radio broadcast over the weekend he told the country that “As far as black money is concerned, you should have faith on this ‘pradhan sevak’. For me, it is an article of faith. Every penny of the money of poor people in this country, which has gone out, should return. This is my commitment.”
While this is a good stand to take in public, getting back all the ‘black money’ that has gone out, back to India, is not a feasible proposition. The simple reason is that all this money is not lying around at one place.
There is a great belief that all this black money is lying around in Switzerland. This isn’t true. Data released by the Swiss National Bank, the central bank of Switzerland, suggests that Indian money in Swiss banks was at around Rs 14,000 crore (2.03 billion Swiss francs). India was at the 58th position when it came to foreign money in Swiss banks. The total amount had stood at Rs 41,400 crore in 2006.
The reason for this is simple. Over the last few years as black money and Switzerland have come into focus, it would be stupid for individuals or companies sending black money out of India, to keep sending it to Switzerland.
There are around 70 tax havens all over the world. And so this money could be anywhere. Getting all this money back would involve a lot of international diplomacy and cooperation. Also, the question is why would tax havens return this money. Their economies run because of this black money and no one undoes a business model that is working.
An estimate made by the International Monetary Fund suggests that around $18 trillion of wealth lies in international tax havens other than Switzerland and beyond the reach of any tax authorities. Some of this money must have definitely originated in India.
Further, in the aftermath of the global financial crisis, interest rates in Western economies have crashed. Switzerland is no exception on this front and hence, Swiss banks have been paying very low interest rates over the last few years. Given this it doesn’t make any sense for Indian black money to go to Switzerland, when there are better returns to be made elsewhere.
Indian black money found its way into places like Switzerland when India had limited investment opportunities. But that is not the case now. Hence, chances are that over the last few years, Indian black money has largely stayed in India where it has been invested in areas like real estate or in metals like gold. Further, chances are that a lot of black money is being round-tripped into India through hawala to be invested in physical assets like land, apartments etc.
Hence, it is important that instead of chasing black money stashed all over the world, the government starts looking at transactions which generate black money in India. The two sectors which generate a lot of black money are real estate and education. No real estate deal is complete without paying a certain amount of the deal amount in “cash”. And even school admissions these days lead to money changing hands in the form of a “donation”.
Why can’t the government start local when it comes to unearthing black money? The answer is fairly straightforward. Many real estate companies and education institutes are run by politicians. Try taking a taxi around Mumbai and you will realize that most so called “education institutes” are run by politicians. The way this works is that the education institute is run by a non profit organization but all the assets(like the building in which the education institute is run) are owned by a private limited company and the education institute pays a rent to the private limited company for using all the assets. This is how money is tunnelled out. Why can’t the government look at these transactions?
It is ironical that we don’t even have a decent estimate for the total amount of black money in this country. As a 2012 white paper released by the ministry of finance stated “There are no reliable estimates of black money generation or accumulation, neither is there an accurate well-accepted methodology for making such estimation.”
If the government is serious about tackling the black money menace it first needs a reasonable estimate of the total amount of black money in this country. It needs a comprehensive mechanism to figure out how black money is being generated and how and where it being hidden.
Further, the central idea in unearthing black money should be to bring more and more people under the tax bracket. The situation is abysmal on this front. As the former finance minister P Chidambaram said in his February 2013 budget speech “There are 42,800 persons – let me repeat, only 42,800 persons – who admitted to a taxable income exceeding Rs 1 crore per year.” This is a totally ridiculous number. There are probably more people making that sort of money just in South Delhi.
If the government is serious about the black money issue, it should be going after these people who are hiding their income and not paying taxes. But the question is can it do that? The income tax department is one of the most corrupt institutions in the country and given half an opportunity they are ready to sell themselves out lock, stock and barrel.
Further, it is worth remembering that a lot of black money that is generated is ultimately used by politicians to fight elections. Hence, it is in their interest that the status quo continues. To conclude, black money stashed away in foreign destinations is not the real issue. The real issue is the black money that continues to be generated and hidden in India and the inability of the government to tackle it.

The article originally appeared on www.equitymaster.com on Nov 6, 2014

(Vivek Kaul is the author of the Easy Money trilogy. He tweets @kaul_vivek)