This could be a major step if the Indian government is serious about taking on the issue of corruption and recovering stolen assets parked abroad

As on date, we as people living in a law-abiding country otherwise considered to be a world class example in democratic rule with transparency as one of the pillars. We are not aware about who really owns amongst our biggest private airlines, shipping lines, airports, seaports, real estate companies, telecom operators, media houses, payment processors, processed food companies and other such beneficiaries. This is in the era of market forces and liberalisation, which are thrust on us in the last couple of decades. Start digging, and beyond the front-facing directors and CEOs, you come up against a wall of secrecy—which starts and then goes no further. All secrets hidden and well and truly locked away in what are known as “tax havens”, where lie billions of dollars and euros worth of assets. The assets are sometimes stolen or illegal, and are waiting to be re-invested in India as the famous ‘FDI’ or “Foreign Direct Investment”.

Broadly speaking, this situation came about and then exploded in the last 10-15 years, because the rich—sudden wealth—class first stole blatantly to the best of their abilities. Nothing was sacred, narcotics, counterfeit currency, illegal mining, fodder, the works especially, public works. They were able to ‘persuade’ the law-makers who also increasingly are part of the same sudden wealth class, to make tax laws accordingly. This worked well for a while, since a trickle down effect took the aspiring middle class along, too.  But now with huge inflation and increase in cost of living staring the same middle class in the face, it is time to place some correctives to get the stolen assets back. It is time to fix the larger issues, in particular, the thefts in the first case.

One of the most important events, out of the many steps, proposed to be taken at the Group of Twenty (G20) meet in Cannes, France, therefore, has to do with the way the Indian prime minister Manmohan Singh spoke strongly in favour of addressing, as well as resolving, the issue of tax havens. This is, without doubt, a major step, if the Indian government is serious about taking on the issue of corruption and recovering stolen assets parked abroad. How much support they get from within the Indian system as well as the rest of the world remains to be seen. But the official Indian position has now been declared in no uncertain terms, and on a local Indian front. We can certainly expect more raids and investigations on people and corporates with funds parked in secret accounts abroad in the near term. On an international front, as one of the largest client countries for tax havens, a declared position of this sort will certainly cause more than a few flutters.

The Central Board of Direct Taxes (CBDT) now has a separate directorate under it to look further into this issue and that amongst the earliest investigations involve about 800 such accounts held by Indians in tax havens abroad through just one branch of HSBC Bank. It is obvious that there is much more that will be revealed in the coming days. That the Government of India may be using professional help for the same bunch of ‘consultants’ who set up the secret accounts in these tax havens in the first case makes it all the more interesting. This writer knows more than a few people who are aware of this situation. Set a crook to catch a crook, great, has been done before too, but for sure, there are more than a few very rich people in India taking a closer look at their investment consultants. These are the sort who helped them set up those ‘secret’ accounts in tax havens in the first case.

That’s when you learn Rule # 1 of dealing with tax havens—their biggest source of income is usually from funds that have been ‘frozen’, for one reason or the other.
But what is a tax haven, how do they work, and which are the biggest tax havens in the world?

For decades now, popular lore and repetitive shallow media reports have placed Switzerland as the end all and be all of secret tax free accounts. No doubt, Switzerland does have a long track record of going back centuries in this business, but over the last few decades it has been losing its prominence and credibility. As on date, there are over 25 tax havens available for people who wish to park their funds in secret accounts. Almost all of them have representatives and ‘consultants’ in India, who will assist in setting them up, without leaving the country if so desired. But Switzerland is no longer in the dominant position it used to be in.  One reason, of course, is competition from different ‘parent’ countries. People are comfortable with tax jurisdictions where their parent countries have ‘agreements’ made by rich law-makers for rich people. An example in this case is Mauritius with India. Similar examples include Macau and Hong Kong for China, Delaware for the US, Multiple Commonwealth islands like Isle of Man, Caymans, Monaco and Luxembourg for the Europeans. Even Mongolia is joining up through an office in Singapore. In otherwise open economies like Holland and Belgium, there are helpful tax jurisdictions within the system itself, for those who need them.

Another reason for Switzerland losing its prime position is the growing sense of mistrust. Delayed or non-return of secret funds parked in Switzerland, before and during World War II, to the descendants and heirs of millions of Jews ,and others who died during the Holocaust, or fled after WW-II, is one highly publicised cause for concern. The recent disclosure of details otherwise considered top-secret by WikiLeaks, has shaken the gnomes, as well as, their clients. Since real numbers for this sort of business are impossible to come by, even a guess can not be hazarded on who are the biggest. But the fact that more and more jurisdictions are getting into the business can only mean there is not just room for more.

(This is first part of a two-part series)

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• A Perspective on tax havens for Indians