On 21 August, former Finance Minister P Chidambaram was arrested for allegedly approving overseas funds amounting to Rs 307 crore to INX Media. This amount was over and above permissible foreign direct investment (FDI) limits. While Chidambaram refutes the charges against him, industrialist Robert Vadra is also currently under investigation in light of allegations that he engaged in money laundering money to purchase property in London. The present National Democratic Alliance (NDA) government came to power in 2014 on the promise of recovering black money which was being stored abroad, and had attacked the United Progressive Alliance (UPA) government for the scams that occurred during its tenure. The government’s demonetisation exercise in November 2016 was supposed to be a “surgical strike” on black money, but failed: 99.3% of demonetised money was returned to the Reserve Bank of India (RBI), disproving the government’s claim that fake and unaccounted money would be weeded out of the economy.
More recently, in a bid to tackle the black money crisis, the finance ministry amended the Prevention of Money Laundering Act, 2002, where any person shall be guilty of money laundering if they “have directly or indirectly attempted to indulge or knowingly assisted or knowingly [were] a party or [were] actually involved” in the concealment, possession or use of laundered money. Additionally, the amendment also allows for a suspect’s property and other assets to be searched and seized without a First Information Report (FIR) or chargesheet filed against them.
Can such measures stem the flow of unaccounted money, and return illegal assets that are held abroad? This reading list looks at the flow of black money in India—how it is generated, how it moves across international borders, and if it is at all possible to have it returned to the exchequer.
1) Why Does So Much Money Escape India?
Praful Bidwai writes that historically, India has been an important link in the global money laundering chain. In the 1930s and 1940s, when Indian royalty and industrialists were unsure of what would happen to their wealth in an independent India, they transferred large portions of their wealth abroad. This capital flight was also seen in the late 1960s, when privy purses were abolished and banks were nationalised. Bidwai writes that India’s money laundering problem is exacerbated both by international ignorance of money clandestinely flowing out of the global South, and by India’s own inertia in tackling domestic means to launder money.
Agencies like the Financial Action Task Force—set up in 1989 by the governments of 20 countries—only recognise and focus on money laundering operations pertaining to the narcotics trade and serious crimes including terrorism … This narrow focus flies in the face of what is known about the methods deployed by drug lords and terrorist networks, which is that they use “mainstream” means and conduits, including legitimate banks, trusts and “respectable” tax havens, in addition to informal or crime-lined routes like hawala … The OECD’s preoccupation with links between narcotics and terrorism and money laundering and its exclusion of a clear focus on the theft of national wealth from the global south, is explained both by the fact that the west is the principal destination of southern capital flight, and by the advocacy of capital account convertibility by the international financial institutions, in keeping with their policy dogmas.
Bidwai also argues that the Indian government has, on numerous occasions, been reluctant to investigate informal financial institutions.
There has been no worthwhile investigation or analysis (at least from within the country) of money laundering, which is focused on India. This absence is all the more glaring not only because India has a long history of hawala transactions, “double book-keeping”, mis-reporting of exports and imports and of remittances from the diaspora, all facilitating capital flight, but because India has opened up its economy over the past one-and-a-half decades to an unprecedented extent. This has vastly expanded the scope for spiriting funds out of the country.
2) How Does Money Leave the Country?
Suranjali Tandon writes that trade mis-invoicing is a method to move money in and out of the country. Exports are over-invoiced, and imports are overvalued as a means to bring money into the country. Tandon explains this process using the example of the diamond industry, where synthetic diamonds are clubbed with real ones during import and export, which allows the synthetic diamonds to be passed off as authentic.
Given that such possibilities exist, the stock ascertained at any point is at best only tentative. Money flows subtly and quickly through the trade channel. In fact, the over-declaration of exports and imports are recorded/declared entries that may go unnoticed in case the transaction does not trigger any red flags used to identify money laundering.
Moreover, trade mispricing leads to a regulatory gap, as it is not treated as a criminal offence. Tandon argues in favour of its inclusion in the Prevention of Money Laundering Act (PMLA), which would allow harsher penalties to be imposed upon offenders.
3) Can Black Money Be Brought Back to the Country?
Arun Kumar writes that assets held abroad are uncovered only in cases of exposes, or data being leaked: the Panama papers, the HSBC list, and the Liechtenstein Bank case in 2008 are prime examples. Even if knowledge of black money comes to light, it is often nearly impossible to see any of these funds returned.
If the government cannot catch people generating black incomes with the existing provisions then how would making new laws or floating new schemes help if they do not have the bite? … According to reports, there were 644 declarations and Rs 2,428 crore of tax was collected. Since the amount held abroad may be hundreds of billions of dollars, not even 1% of the illicit funds taken out of the country since 1948 has been disclosed under this scheme. The reason is, people who have funds abroad know that the government has not been able to track them or trace their wealth in the last 60 years and the new bill does not have any provision by which they can be tracked. So, they have little to worry about.
Further, Kumar argues that expecting people to declare their undocumented income is a fruitless exercise, as there is little fear of being caught. Income tax rules are so lax that offenders would not be afraid to run the risk of being pulled up.
Even if the corrupt are raided and in danger of being caught, they have resorted to either the Settlement Commission or to political pressure to escape. If difficulties increase, many have left the country (for example, Vijay Mallya) or become non-resident Indians or NRIs (for example, Lalit Modi) or taken up citizenship of other countries (for example, Winsome promoter, Jatin Mehta). Finally, the Income Tax Department is so understaffed that the percentage of cases it scrutinises is declining and the rich realise they can get away with hiding their incomes. All they have to do is to declare a low income so that the probability of scrutiny becomes negligible.
4) Who is Responsible for Laundering Black Money in India?
In FY 2017–18, the national parties in India received a total of Rs 1,198.75 crore, Rs 1,041.80 crore of which came in the form of "voluntary donations.”
A K Bhattacharya writes that black money is one of the largest sources of election funding, and, in 2012, the National Institute of Public Finance and Policy (NIPFP) had produced the “Study on Unaccounted Incomes in India” laying down significant steps to curb the flow of illegal funds.
The six conditions include maintenance of books of account by the political parties, regular auditing of such accounts, disallowing cash contributions above a specified amount, filing of contributors’ list with the EC, declaration to the effect that all expenses by political parties above ₹20,000 are made through account-payee cheques and filing of income returns within the prescribed time. A few of these recommendations have already been accepted by the government, but many of them are yet to be fully enforced … A separate form for filing income returns should be introduced for political parties and a centralised assessment of all such returns should be arranged. And even cash contributions below the permissible level should be subjected to scrutiny.
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