G 20 Promise

G 20 attracts bouquets and brickbats equally. This time in London it promised to unearth black money stocked in advanced countries. If the promise turns into a reality, G 20 future is bright.

N. Ravi writes in The Hindu, 27 April 2009,

The London G20 summit may not quite have been another Bretton Woods that brought the World Bank and the International Monetary Fund into being in the 1940s, as some billed it. Nor did it go so far as to provide a new moral compass for the world economy in which the excesses of the financial system were seen as the precursors of the recession. Yet, its final declaration and the sentiment that came through the discussions showed a sensitivity to the issues of equity both within countries and in the international economy as a whole that was unprecedented.

From the standpoint of the developing countries, three of the outcomes were particularly significant and constitute a favourable environment in which the new government that is to take office in New Delhi can pursue some of India’s longstanding goals. The first was the recognition that the developing countries have been the worst hit and are paying the price for their linkages with the global economy. Recovery in the industrial markets would be most helpful but to manage the crisis the G20 has promised the infusion of $1.1 trillion into the global economy.

The second issue of longstanding concern for India is the restructuring the institutions that manage the global economy where there are now signs that the traditional resistance of the industrial nations to give up their dominance is wearing out. The expansion of the forum for the discussion of global issues from the G7 industrial nations to the G20 reflects the recognition of the new weight of the emerging economies in the global economy. In addition, the demand that the IMF and the World Bank be restructured to reflect the changed situation was accepted in theory at the London summit which declared that “emerging and developing economies, including the poorest, must have greater voice and representation.”

The third relates to tax havens and illicit money flows from criminal activity, tax evasion, corruption and embezzlement of public funds and was the focus of much media attention before the London summit. In 1998 the then IMF Managing Director Michel Camdessus estimated that the scale of money laundering activities at “almost beyond imagination” at 2 to 5 per cent of the global economy — which would give a figure of $800 billion to $2 trillion in current dollars. A more recent (2005) estimate by Raymond Baker quoted by the World Bank in a report puts the annual flow of illicit money at a little over $1 trillion, $500 billion coming from criminal activities, $500 billion from tax evasion and $20 to $40 billion from corrupt public officials.

It is uncertain if the same proportion — corruption and embezzlement by public officials accounting for 2 to 4 per cent of the total illicit money flows — would apply to India. The Global Financial Integrity programme of the Washington DC-based Center for International Policy in its report published in December 2008 estimated the average annual flow of illicit money from India between $22.7 billion and $27.3 billion during the period 2002 to 2006. This would place India fifth among 160 countries ranked by the amount of illicit flows after China ($233.5 billion), Saudi Arabia ($54.3 billion), Mexico ($41.7 billion) and Russia ($32 billion). Beyond such figures, there are no reliable estimates of the total amount of money held by Indians in accounts abroad.

Much of the money is held in hard currency in offshore financial centres and tax havens but it also finds its way ultimately into the major financial centres of Europe and North America. Low or nil tax rates, particularly on income earned abroad, banking secrecy, shell companies and trusts operated by lawyers and accountants, a policy of non-cooperation with tax investigators in other countries and a generally non-questioning, permissive atmosphere characterise the functioning of tax havens. To counter illicit flows, three types of international programmes are currently in operation. The first is the anti-money laundering initiative of the Financial Action Task Force (FATF) set up by the G7 and functioning at the Organisation for Economic Cooperation and Development secretariat. This focuses on measures to combat laundering the money from crime including drug running and comprises a set of 40 recommendations on criminalising money laundering, customer due diligence to be exercised by banks, not providing anonymous accounts or accounts in fictitious names, verifying the identity of the beneficiaries and the source of funds and monitoring accounts for suspicious activity, as well as cooperating with investigators in other countries.

The second coordinated effort is to counter tax evasion and the OECD is at the forefront of this initiative. It has formulated a code for exchange of tax information and Article 26 of its Model Tax Convention on Income and Capital which is the gold standard for tax treaties requires all countries to lift banking secrecy and “exchange such information as is foreseeably relevant” to the enforcement of tax laws of another country. It adopted a policy of naming and shaming countries that do not comply with this requirement, and many former tax havens and financial centres that were for long reluctant to help in investigations of tax evasion committed themselves to the OECD standard, among them Switzerland, Austria, Luxembourg, Hong Kong and Singapore. At the end of the London summit, the OECD published three lists: the first included countries that had substantially implemented the tax information standard, the second that had committed but had not yet implemented it and the third group included countries that had not committed themselves to the standard. Four non-cooperative jurisdictions, Costa Rica, Malaysia (Labuan), Philippines and Uruguay, formed the third group but subsequent to the London summit they declared their commitment to the OECD standard and were removed from the black list that is now empty.

The third area of international action that is of particular relevance to the debate in India is the recovery of the proceeds of corruption. Under the FATF guidelines, banks to avoid risk to their own reputation are required to look out for “politically exposed persons”, that is political office holders, bureaucrats and managers of public enterprises, keep a close watch on their accounts, check their genuineness and the source of funds. A more interesting programme is the Stolen Assets Recovery (StAR) initiative of the United Nations Office of Drugs and Crime and the World Bank that provides the framework and even legal assistance for recovery of the money secreted abroad. Estimates of money stashed away by dictators and heads of governments vary widely but the World Bank report drawing from the “extremely approximate” estimates of Transparency International attributed chiefly to journalistic sources lists Suharto of Indonesia ($15 to 35 billion), Ferdinand Marcos of Philippines ($5 to 10 billion), Mobutu Seso Seko of Zaire ($5 billion), Sani Abacha of Nigeria ( $2 to 5 billion) and Slobodon Milosevic of Serbia ($1 billion) as heading the list of kleptocrats. It took Philippines 18 years to finally recover (in February, 2004) $624 million of Marcos’s money from banks in Switzerland while Nigeria recovered $500.5 million of Abacha’s money in early 2006 after a five year battle in the Swiss courts.

The most important multilateral agreement that provides the framework for combating corruption and recovering stolen money is the United Nations Convention Against Corruption that came into force in December, 2005. There are 140 signatories to the convention of whom 115 have also ratified it; India which signed the convention in December 2005 is yet to ratify it. The UNCAC calls for transparency and better governance practices, criminalising of a wide range of activities including trading in influence and obstruction of justice, and international cooperation, waiving banking secrecy, in the investigation of corruption and in the recovery of assets.

After the G20 London summit, the international environment has turned much less permissive to the holding of criminal or tax evaded money or money stolen from the public coffers. Yet, going after it is no easy task and involves three major challenges for any new government. First, it needs to summon the political will to go after all kinds of money that has been illicitly taken out — and this includes the funds stashed away by politicians from corrupt deals, by businessmen through trade mispricing and transfers of unaccounted money and by major criminals. Secondly, the new government needs to pursue the task of unearthing the money hidden abroad aggressively with other governments. It must ratify the UNCAC without further delay and enter into OECD-type tax conventions for the removal of banking secrecy for tax investigations with all the major financial centres.

Thirdly, the domestic investigative and legal framework needs to be strengthened to gather credible evidence and lead on to the quick conclusion of trials and forfeiture of property. The evidence gathered domestically has to form the basis for any request for assistance from other countries that will not entertain general or fishing enquiries. The names of the account holders in the LGT Bank in Liechtenstein bought by the German government from a former employee of the bank or the list of American account holders given over to the United States by the UBS of Switzerland to settle charges of violating Securities and Exchange Commission regulations are exceptional events that do not change the general rule that there must be a substantiated request naming a specific person and the bank. It is no doubt a long and hard road that is ahead but the scale is so vast and the rewards are so huge that the task needs to be attempted with seriousness and resolve.

there should not be any further delay in the making the black money public.