Relocating black stash: From Swiss banks to Caribbean & other havens

Every year pots of black money are transferred to foreign locations. At one time the major destination for such tax-evaded wealth used to be the Swiss banks, famous for laundering slush funds from across the world. Now the destination has mostly changed to newer and more manipulated tax havens in places like Panama, St. Kitts and other exotic locations.

A real indication of this is that Indian money transferred to Swiss banks has been declining since 2006, when it increased to reach a record Rs 23,000 crores. Since then, the money transferred by known Indian people or companies fell to Rs 4,300 crores in 2016 before rising to Rs 6,900 crores in 2017. The official figures released by Switzerland’s central bank, the Switzerland National Bank, does not include the money that Indians, NRIs or others might have in Swiss banks in the names of entities from different countries. Even today, it is pretty simple to set up complex corporate structures where the beneficial owner is not known.

Though Indian money in Swiss has declined after a global crackdown against Swiss secrecy practices, it is likely to have shifted to financial hubs like Singapore, Hong Kong, Dubai and others. To have an idea of the kind of money transfers involved, we could make a rough guestimate of the black income generated and how much of this will be transferred abroad.

Eminent economist Arun Kumar, in his book The Black Economy in India, goes into the causes for the generation, the sectors where it is most likely to come from, and goes on to make a rough estimate of its effect on the economy and the extent to which it operates. Dr Kumar estimates that black income as a percentage of GDP increased from 15 per cent in 1980-81 to 40 per cent in 1995-96. The area of highest generation were imports and exports, and the tertiary sector (banks, retail, software, etc).

Even if we assume that the ratio of the black economy has not risen, since 1995 the GDP has gone up four times and 40 per cent of a $2.1 trillion economy is around $800 billion. If even 10 per cent of this is spirited off to foreign shores, it will mean something like $80 billion is laundered abroad. Some of this is brought back to be invested in the stock market or to be shown as foreign direct investment. Much of what remains in India is used to buy land or gold or be spent lavishly.

Seen in this context, what was deposited in Swiss banks was just around $1 billion. This was in all probability by people taking out the $200,000 they are allowed under Indian law, and who don’t yet fully understand the intricacies of the international money transfer system. A large portion of the money would go through other locations like Dubai, Singapore or Hong Kong, or to places like Panama or the Channel Islands. This is not an insignificant route.

Once tax-evaded money or funds obtained through criminal means gets to havens abroad, there is little that the Indian government can do. Rudolf M. Elmer, a Swiss whistleblower, who has been fighting a long legal battle against the old traditions of Swiss banking secrecy, was interviewed by an Indian website and had some suggestions. The options available to the United States and India are not the same.

“The Americans were able to sanction Switzerland due to their monopoly of the US dollar. As a Swiss bank, you must have an US dollar correspondent bank domiciled in the United States. If the US authorities do not allow you to use this US bank, the Swiss bank is like a dead fish in the water. So the Americans applied pressure in 2009, and the Swiss, they knew about it,” he said,

On India, he says: “Primarily, I believe, it is an issue of sanctions. India, for instance, could put pressure on Swiss industry or even the Swiss government. Not only on the banking industry but also on big companies. Pressure on Nestle, Roche, Novartis, etc, for example, by threatening not to allow their business in India any more if there is no reasonable cooperation on tax matters, and particularly by the Swiss financial industry. Politically, India can put pressure.”

While Switzerland has lost its leading role as a haven for transferred money, India has similar options open on the other money havens, particularly Hong Kong, Singapore and Dubai. It could have a strategy to apply pressure to each one of these locations. While the bank transfer channels might have an element of legality to them and would contribute a substantial sum to these economies, pressure from the government (if it is serious about it) will imply an ability to cause economic damage greater than the gains made by these economies from such banking transactions.

This is a radical step, and would imply considerable opinion in India on the need for it. This doesn’t look likely in the present environment. In other money transfer havens such as Panama, the Channel Islands, Mauritius or the Bahamas, shadow banking plays an important part in their economies and is too powerful locally to control.

The lists of those holding money overseas floating around the Internet are often too incredible to be believed, and range from politicians now in the Opposition to leading businessmen. Yet, illegal money transfers to foreign banks can only properly be handled by reducing the generation of black money. This would imply a look at the way the economy is going, and the opportunities for bending the law that it offers.