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August 14, 2011

Page: 11/29

Home > 2011 Issues > August 14, 2011

Restitution of Indian corruption Loot held in tax havens
By Dr S Kalyanaraman

It will be appropriate to recall the words of Mr Mathias Bachmann, of the Permanent Mission of Switzerland to the United Nations on October 20, 2010

“Corruption poses a serious threat to economic growth and to development. While corruption enriches a limited number of persons, it weakens the fabric of society, the economy and state institutions as a whole.”

The post-independence corruption loot from India has to be restored to the people of India; the issue is presented in the following sections:

1. Restitution of India’s wealth held abroad: imperative of national action

2. Honouring the principle of financial prudence: Know your Client (KYC)

3. Nationalising black money held abroad

4. India lost $462bn in illegal capital flows, says report (November 2010)

5. Abolition of bogus financial derivatives called Participatory Notes

6. Hawala money and terrorism finance

1. Restitution of India’s wealth held abroad: imperative of national action

Recent changes in Swiss laws provide for the restitution of illicit finances. That the Swiss government takes the issue seriously (as it did with the Philippine First Lady Imelda Marcos’ loot, in 1991) is seen from the announcement that Egypt ex-President Mubarak’s illicit finances have been frozen and would be returned to the people of Egypt. Recent international headlines also referred to the freezing of assets by Switzerland banks of a politically exposed person (PEP) like Gaddafi. The headlines screamed: Swiss ban financial transfers to Gaddafi clan. Ordinance for restitution of illicit moneys abroad. On March 5, 2011 Switzerland ratcheted up pressure on Libyan leader Muammar Gaddafi by banning transfers of money that could end up in the hands of his family and associates.

These news reports point to the sense of outrage in international community on the loot and plunder of poor peoples’ wealth by PEPs. This expression of outrage is the basis for the new Swiss law called Restitution of Illicit Assets Act passed on October 1, 2010 and brought into effect from February 2, 2011. See the present status of Swiss law at: Switzerland has not been alone in its moves against Gaddafi. Recently, Austria widened an asset freeze list to include a top official at the Libyan Investment Authority (LIA), Libya’s sovereign wealth fund. Britain also extended a freeze on Gaddafi family assets to a further 20 members of his entourage and impounded around 100 million pounds of Libyan currency.

Similar action is called for in the case of Indian black moneys reported by the experts to have been stashed away in foreign accounts. This action should be swift, forceful and emphatic to act as a deterrent to future looters and plunderers. The experts’ report is titled: Indian Blackmoney Abroad Report (IBAR): article&id=6567:executive-summary-of-indian-black-money-abroad-in-secret-banks-and-tax-havens&catid=68:press-releases&Itemid=494 Mirror:

Now is the time for India to take the lead and make the international community to act decisively to ensure the restitution of illicit wealth of Indians held abroad.

The issue is not anyone’s hurt and anyone else’s regret, not even about double taxation avoidance agreements; these are mere irrelevant diversions and delay tactics, mere suppressio veri, suggestio falsi.

The imperative is about our safeguarding children’s wealth to which we are all trustees. This is our dharma.

It is our responsibility, our dharma, to ensure restitution of India’s national wealth stashed away in foreign accounts and bring the wealth back to the nation’s financial system.

The restitution of India’s wealth held abroad means that the money should be fully deployed with integrity and transparency — as a National Initiative for Transparency and Integrity NITI— within India’s financial system to benefit the poor people, to benefit the present and future generations to whom the wealth belongs.

One particular transaction is well documented and reported in a reputed magazine of Switzerland, Schweizer Illustriete, about 2.5 billion dollars then said to have been kept in the account of ex-PM of India Rajiv Gandhi. Politically exposed persons related to this transaction should be called to question. The money movements of this transaction have to be tracked down and brought back to India. This is the responsibility of Government of India which is accountable to the people of India which ensuring financial propriety, integrity and accountability of politically exposed persons (PEPs) — a term well recognised by all Central banks of the world.

2. Honouring the principle of financial prudence: Know your Client (KYC)

As our Hon’ble PM often repeats: Caesar’s wife should be above suspicion. PEPs should certainly be who should not be allowed to route illicit finances through Participatory Notes which violate the key principle applicable to PEPs — a financial institution’s responsibility with the financial dictum: Know Your Client (KYC).

KYC principle means that India should forthwith ban the use of Participatory Notes (PNs) as a mechanism for financial transfers since the PNs do not identify the rightful owner of the instrument.

What is done by Switzerland should be the norm to be followed by all tax havens which tend to attract illicit monies from foreigners.

There should be an automatic flow of information on financial transfers to a special cell in the Central banks (Reserve Bank of India, in the case of India) so that possible illicit transactions can be identified and remedial measures initiated to ensure restititution of wealth to the countries’ exchequer where such monies should rightfully belong.

India should work with G-20 nations to make this happen by asking appropriate changes to laws regulating banking and financial institutions.

To immediately remedy the rot, India should issue an ordinance and thereafter, pass an Act of Parliament. Nationalise all monies held abroad by Indian nationals and ask the countries’ financial institutions holding such illicit wealth to return it forthwith to the Consolidated Fund of India. If Indian nationals are able to prove that the monies so held are legitimate business or personal transactions, an agency of citizens called National Initiative for Transparency and Integrity can declare such monies to be returned to the rightful owners. Rest of the monies should be used for social welfare and developmental programmes such as the establishment of a National Water Grid, enforcing the Fundamental Right to Education.

3. Nationalising black money held abroad

Government of India should enact an ordinance to nationalise Indians’ black money stashed abroad.

UN Convention Against Corruption (2004) adopted by United Nations Office on Drugs and Crime provides for asset recovery proceedings. Philippines, Peru, Nigeria, Tunisia and Libya had acted in recovering money from abroad, tax havens would be willing to respond if the country demanded.

Kofi Annan, UN Secretary General who says in the Foreword of this Convention document :

Corruption is an insidious plague that has a wide range of corrosive effects on societies.

- It undermines democracy and the rule of law,

- leads to violation of human rights,

- distorts markets,

- erodes the quality of life, and

- allows organised crime, terrorism and other threats to human security to flourish.

The ordinance could also declare that the money held legitimately would be returned to the rightful owners.

Now, under the Swiss law, that country is bound to return the money stashed away illegally. It may be recalled that Philippines got back the money of the Marcos held as illicit wealth in Swiss bank accounts.

India could become corruption-free if the society harmonised material progress with values enshrined in what has been practiced for millennia as shreni dharma, as a trusteeship principle with a mandatory setting apart of corporate wealth for social welfare (abhyudayam).

4. India lost $462bn in illegal capital flows, says report (November 2010)

India has lost more than $460bn since Independence because of companies and the rich illegally funnelling their wealth overseas, a new report says. Global Financial Integrity, which is based in Washington, studies and campaigns against the cross-border flow of illegal money around the world. It said that the “poor state of governance” had been reflected in a growing underground economy in India since Independence in 1947.

Global Financial Integrity director Raymond Baker said the report “puts into stark terms the financial cost of tax evasion, corruption, and other illicit financial practices in India”. Some the main findings of the report are:

m India lost a total of $462bn in illegal capital flows between 1948, a year after Independence, and 2008.

m The flows are more than twice India’s external debt of $230bn.

m Total capital flight out of India represents some 16.6 per cent of its GDP.

m Some 68 per cent of India’s capital loss has happened since the economy opened up in 1991.

m “High net-worth individuals” and private companies were found to be primary drivers of illegal capital flows.

m The share of money Indian companies moved from developed country banks to “offshore financial centres” (OFCs) increased from 36.4 per cent in 1995 to 54.2 per cent in 2009.

The report’s author, Dev Kar, a former International Monetary Fund economist, said that almost three quarters of the illegal money that comprises India’s underground economy ends up outside the country.

India’s underground economy has been estimated to account for 50 per cent of the country’s GDP—$640bn at the end of 2008.

5. Abolition of bogus financial derivatives called Participatory Notes

Participatory notes are instruments used by foreign funds which are not registered to trade in domestic Indian Capital Markets. PNs are derivative instruments issued against an underlying security permitting holders to get a share in the income from the security.

Investors who buy PNs deposit their funds in US or European operations of Foreign Institutional Investors (FII) operating in India. The FII uses its proprietary account to buy stocks.

Why do investors use PNs? Reason for using PNs is to keep investor name anonymous, some investors have used them to save transaction and overhead costs.

Tax officials fear that PNs are becoming a favourite with a host of Indian money launderers who use them to first take funds out of country through hawala and then get it back using PNs.

Participatory Notes Crisis of 2007

On October 16, 2007, SEBI (Securities & Exchange Board of India) proposed curbs on participatory notes which accounted for roughly 50 per cent of FII investment in 2007. SEBI was not happy with P Notes because it is not possible to know who owns the underlying securities and hedge funds acting through PNs might therefore cause volatility in the Indian markets.

However, the proposals of SEBI were not clear and this led to a knee-jerk crash when the markets opened on the following day (October 17, 2007). Within a minute of opening trade, the Sensex crashed by 1744 points or about 9 per cent of its value - the biggest intra-day fall in Indian stock-markets in absolute terms. This led to automatic suspension of trade for one hour. Finance Minister P Chidambaram issued clarifications, in the meantime, that the government was not against FIIs and was not immediately banning PNs. After the markets opened at 10:55 am, they staged a remarkable comeback and ended the day at 18715.82, down just 336.04 from Tuesday’s close after tumbling to a day’s low of 17307.90.

This was, however, not the end of the volatility. The next day (October 18, 2007), the Sensex tumbled by 717.43 points—3.83 per cent—to 17998.39, its second biggest fall. The slide continued the next day when the Sensex fell 438.41 points to settle at 17559.98 at the end of the week, after touching the lowest level of that week at 17226.18 during the day.

The SEBI chief, M Damodaran held an hour long conference on the October 22, to clear the air on the proposals to curb PNs where he announced that funds investing through PNs were most welcome to register as FIIs, whose registration process would be made faster and more steamlined. The markets welcomed the clarifications with an 879-point gain—its biggest single-day surge—on October 23, thus signalling the end of the PN crisis. SEBI issued the fresh rules regarding PNs on October 25, 2007 which said that FIIs cannot issue fresh P-Notes and existing exposures were to be wound up within 18 months. The Sensex gave a thumbs up the next day—26 October by re-crossing the 19,000 barrier with a 428 point surge. The coming Monday (October 29, 2007) history was created when the Sensex leaped 734.5 points to cross the hallowed 20,000 mark.

6. Hawala money and terrorism finance Closely linked to Participatory Notes is Hawala money.

Cautioning that the ‘hawala’ money in India is directly linked to terrorist financing, the US has suggested to New Delhi in 2009, to strengthen its anti-money laundering and counter terrorism-finance legislations. While noting that the Indian Parliament passed the Prevention of Money Laundering (Amendment) Bill, recently, a US State Department report has suggested that India should make necessary legislative amendments to bring its anti-money laundering and counter-terrorism finance regime in conformity to FATF.

“Given the number of terrorist attacks in India and the fact that in India hawala is directly linked to terrorist financing, India should prioritise cooperation with international initiatives that provide increased transparency in alternative remittance systems,” said the report in its section on India related to money laundering.

Financial Action Task Force (FATF) led by US Treasury Department made Special Recommendations on Terrorist Financing

Recognising the vital importance of taking action to combat the financing of terrorism, the FATF has agreed these Recommendations, which, when combined with the FATF Forty Recommendations on money laundering, set out the basic framework to detect, prevent and suppress the financing of terrorism and terrorist acts.

I. Ratification and implementation of UN instruments

Each country should take immediate steps to ratify and to implement fully the 1999 United Nations International Convention for the Suppression of the Financing of Terrorism.

Countries should also immediately implement the United Nations resolutions relating to the prevention and suppression of the financing of terrorist acts, particularly United Nations Security Council Resolution 1373.

II. Criminalising the financing of terrorism and associated money laundering

Each country should criminalise the financing of terrorism, terrorist acts and terrorist organisations.

Countries should ensure that such offences are designated as money laundering predicate offences.

III. Freezing and confiscating terrorist assets

Each country should implement measures to freeze without delay funds or other assets of terrorists, those who finance terrorism and terrorist organisations in accordance with the United Nations resolutions relating to the prevention and suppression of the financing of terrorist acts.

Each country should also adopt and implement measures, including legislative ones, which would enable the competent authorities to seize and confiscate property that is the proceeds of, or used in, or intended or allocated for use in, the financing of terrorism, terrorist acts or terrorist organisations.

IV. Reporting suspicious transactions related to terrorism

If financial institutions, or other businesses or entities subject to anti-money laundering obligations, suspect or have reasonable grounds to suspect that funds are linked or related to, or are to be used for terrorism, terrorist acts or by terrorist organisations, they should be required to report promptly their suspicions to the competent authorities.

V. International Co-operation

Each country should afford another country, on the basis of a treaty, arrangement or other mechanism for mutual legal assistance or information exchange, the greatest possible measure of assistance in connection with criminal, civil enforcement, and administrative investigations, inquiries and proceedings relating to the financing of terrorism, terrorist acts and terrorist organisations.

Countries should also take all possible measures to ensure that they do not provide safe havens for individuals charged with the financing of terrorism, terrorist acts or terrorist organisations, and should have procedures in place to extradite, where possible, such individuals.

VI. Alternative Remittance

Each country should take measures to ensure that persons or legal entities, including agents, that provide a service for the transmission of money or value, including transmission through an informal money or value transfer system or network, should be licensed or registered and subject to all the FATF Recommendations that apply to banks and non-bank financial institutions. Each country should ensure that persons or legal entities that carry out this service illegally are subject to administrative, civil or criminal sanctions.

VII. Wire transfers

Countries should take measures to require financial institutions, including money remitters, to include accurate and meaningful originator information (name, address and account number) on funds transfers and related messages that are sent, and the information should remain with the transfer or related message through the payment chain.

Countries should take measures to ensure that financial institutions, including money remitters, conduct enhanced scrutiny of and monitor for suspicious activity funds transfers which do not contain complete originator information (name, address and account number).

VIII. Non-profit organisations

Countries should review the adequacy of laws and regulations that relate to entities that can be abused for the financing of terrorism. Non-profit organisations are particularly vulnerable, and countries should ensure that they cannot be misused:

(i) by terrorist organisations posing as legitimate entities;

(ii) to exploit legitimate entities as conduits for terrorist financing, including for the purpose of escaping asset freezing measures; and

(iii) to conceal or obscure the clandestine diversion of funds intended for legitimate purposes to terrorist organisations.

IX. Cash Couriers

Countries should have measures in place to detect the physical cross-border transportation of currency and bearer negotiable instruments, including a declaration system or other disclosure obligation.

Countries should ensure that their competent authorities have the legal authority to stop or restrain currency or bearer negotiable instruments that are suspected to be related to terrorist financing or money laundering, or that are falsely declared or disclosed.

Countries should ensure that effective, proportionate and dissuasive sanctions are available to deal with persons who make false declaration(s) or disclosure(s). In cases where the currency or bearer negotiable instruments are related to terrorist financing or money laundering, countries should also adopt measures, including legislative ones consistent with Recommendation 3 and Special Recommendation III, which would enable the confiscation of such currency or instruments

India, that is Bharat, should continue to be a nation governed by dharma. Such governance calls for resolute action to bring back the nations’ wealth held in tax havens abroad, to be used for the benefit of present and future generations of India. Failure to act will be adharma and a denial of responsibility of elders to the youngest nation on the globe, with an unsurpassed civilisational heritage of millennia.


On July 20, 2011, a shocking report attributed to National Investigative Agency (NIA) notes Pakistan’s direct involvement in the counterfeit currency racket in India, by printing fake Indian currency notes in a state-owned printing facility in Pakistan and circulating such notes in India. This should be declared by the Indian Parliament as an act of war. Reserve Bank of India should immediately recommend to Govt. of India to demonetise 500 and 1000 Indian rupee currency notes to counter 1 the act of financial treason to destabilise the economy and cause inflation and 2. use of counterfeit notes by politicos during elections. Even if 0.001 per cent of 48.9 billion pieces (2005) of genuine currency are fake notes, the devastating effect on Indian economy would be an effective devaluation of the currency leading the nation to uncontrolled inflation and further impoverishment of 27 per cent of the population below poverty line (2007).

(The writer is former Sr Exec, Asian Development Bank)

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