Switzerland is Still the Centre of Global Black Money

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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.

YearAmount(in $ billion)
200419.5
200520.3
200627.8
200734.5
200847.2
200929.2
201070.3
201185.6
201292.9
201383
Total510.3

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

Black money in our backyard

narendra_modi
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

Recover black money from India first, Modi. Instead of making noises about what lies in Swiss banks

Vivek Kaul

Narendra Modi and his government have had quite a fascination for the black money that leaves the country. Black money is essentially money that has been earned, but on which a tax has not been paid.
During the electoral campaign for the 2014 Lok Sabha polls, Modi promised that all the black money that had left Indian shores would be recovered and Rs 15 lakh deposited in the bank accounts of every Indian. Later Amit Shah, the president of the BJP, dismissed this as a chunavi jumla.
In the budget presented in February 2015, the finance minister Arun Jaitley focussed on black money and said: “The problems of poverty and inequity cannot be eliminated unless generation of black money and its concealment is dealt with effectively and forcefully.”
At the same time Jaitley unleashed a series of measures to counter the menace of black money leaving the shores of this country. “Concealment of income and assets and evasion of tax in relation to foreign assets will be prosecutable with punishment of rigorous imprisonment upto 10 years,” was one of the measures that Jaitley spoke about during the course of his speech.
Recently, the Income Tax department issued new income tax forms which asked for a plethora of information from individuals travelling abroad. This was again seen as a step to curb black money. These forms had to be withdrawn after a wave of public protests.
As per the Global Financial Integrity report titled Illicit Financial Flows from Developing Countries: 2003-2012, around $439 billion of black money left the Indian shores, between 2003 and 2012. What is interesting is that in 2003 the total amount of black money leaving India had stood at $10.1 billion. By 2012, this had jumped more than nine times to around $94.8 billion. In comparison, the money leaving China during the same period grew by less than four times during this period.
Given this, one really can’t blame the government for being overtly worried about the black money leaving the country. Also, black money that remains in the country has some benefits. Cambridge University economist Ha-Joon Chang explains this in his book Bad Samaritans—The Guilty Secrets of Rich Nations and the Threat to Global Prosperity, in the context of a minister taking a bribe (which is also black money, given that the minister is not going to declare the bribe as an income).
As he writes: “A bribe is a transfer of wealth from one person to another. It does not necessarily have negative effects on economic efficiency and growth.” If the minister taking the bribe decides to spend/invest that money in the country, it has a positive impact on economic growth, as the spending creates economic demand and the investment creates jobs. At least in theory, the idea seems to make sense.
In comparison, the black money leaving the country is a total waste. As Chang writes: “A critical issue…is whether the dirty money stays in the country. If the bribe is deposited in a Swiss bank, it cannot contribute to creating further income and jobs through investment—which is one way odious money can partially ‘redeem’ itself.”
Once we take this factor into account Modi government’s crackdown on black money leaving the shores of the country starts to make immense sense. But the question is how good are the chances of recovering the money that has already left the shores?
There is a great belief in India that all the black money is lying with banks in Switzerland. But this belief is incorrect. As Chang writes: “Switzerland is not a country living off black money deposited in its secretive banks…It is, in fact, literally the most industrialized country in the world.”
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 in 2013. In 2006, the total amount had stood at Rs 41,000 crore.
The reason for this fall 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. The economies of many tax havens 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.
Long story short—it would be next to impossible to get back any of this black money.
Now let’s get back to domestic black money. As per Chang this money if invested properly can create jobs as well as economic growth. In the Indian case a lot of this money gets invested into gold and real estate. Money going into gold does not create any jobs. And money that goes into real estate has driven up home prices in particular, all over the country, to extremely high levels. Most middle class Indians cannot afford to buy a home now.
Given this, it makes tremendous sense for the government to crack down on domestic black money, instead of making noises about recovering black money that has already left the shores of this country. Further, focus should be on ensuring that the number of people paying income tax goes up in the years to come.
In short, the black money menace first needs to be tackled domestically.

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

The column originally appeared on DailyO on Apr 27,2015