Panama Papers: Follow the paper trail

The names of the shareholders and directors of these companies are a veritable who’s who of global politicians (including Pakistan Prime Minister Nawaz Sharif, Russian President Vladimir Putin, Iceland PM Sigmundur Davíð Gunnlaugsson, British PM David Cameron’s father, etc), bureaucrats, corporate captains (including DLF chairman K.P. Singh), and celebrities (including Amitabh Bachchan and football star Lionel Messi). In the immediate aftermath, some heads (such as the Iceland PM’s) have rolled, others are promising a full investigation, most are claiming that their accounts are legal, and a few are denying the veracity of the Panama Papers.

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The ICIJ and the media organisations involved (The Indian Express in India) in this investigation for the last several months deserve enormous credit for carefully sifting through such a massive cache of documents, keeping it under wraps for so long, and coming out with a globally coordinated expose.

That just one law firm based in Panama has set up secret companies for so many prominent people in so many countries, including over 500 Indians, shows us the scale of the problem of illicit funds stashed in secret accounts and companies set up in tax havens. Tax havens are defined as countries that have negligible tax on income and assets and provide secrecy to account holders and companies, usually through the law. The secreting of wealth in tax havens is often justified as “legitimate tax planning”. This, along with corruption and crony capitalism, which have become rampant in many countries, including erstwhile communist countries like Russia and China, has led to a situation where 62 of the richest people in the world own more wealth than the poorest three billion.

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Though many of those whose names have appeared are saying that they had legitimately transferred the money to these companies, the question is: Why would someone go through so much trouble to find and pay law firms specialising in setting up companies with layers of secrecy in tax havens if their funds were legitimate? It is possible that some of these funds are legitimate, but in most cases, they would not be. The funds of most of the public servants would be proceeds of kickbacks obtained through government contracts and deals in their countries. The funds of corporate captains are likely to have been siphoned out of their companies through over-invoicing purchases and under-invoicing sales. The Economic and Political Weekly has carried a detailed story this week about the Directorate of Revenue Intelligence having unearthed Rs 29,000 crore of alleged over-invoicing in coal imports alone in the last year. Some of the largest corporates like Reliance, Adani and Essar are allegedly involved in this. And very often, corporates swindle banks from whom they have borrowed money (like Vijay Mallya), apart from their shareholders. In the case of celebrity account holders like actors and soccer stars, the money would most likely be tax-evaded income.

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The illegalities in the source of the funds would be revealed if there is a thorough and credible investigation. But some of the illegalities in the holding of the funds would become clear by checking if they had been declared in income tax returns. For at least the last two years, and especially in the black money act brought into force last year, it has been compulsory to declare foreign income and assets on pain of prosecution. Thus, any of the fund holders who have not declared them so far can straightaway be prosecuted under the act. And they can be forced to disclose the source of the funds and prosecuted separately for that depending on the nature of the illegality found there. One of the companies involved, for example, has acquired the funds by way of commissions in defence deals in India, where commission agents had been barred.

However, the track record of this and previous governments in dealing with such crimes is not inspiring. The names of account holders in HSBC, Geneva, and the Bank of Liechtenstein were offered to our government many years ago by the French and the German governments. After much reluctance and only when this came out in the public domain did our government accept this offer. For many years thereafter, there was no tangible action on this. After much delay and the formation of the special investigation team on black money on the orders of the Supreme Court, some penalties appear to have been imposed. But there has been no public disclosure of either the account holders or the action taken against them. And, till now, no one seems to have been jailed for these accounts. Now in the black money act (also called the “fair and lovely scheme”) an amnesty from prosecution was given to those who declared their ill-gotten funds and payed 60 per cent tax-cum-penalty. Even this netted a pittance of Rs 3,700 crore.

Finance Minister Arun Jaitley has promised that no one will be spared. If the government wants to inspire credibility, it must begin by disclosing which of these account holders had declared the companies/ assets owned by them to the authorities and when. If the declaration had not been made, they must be swiftly prosecuted. The action of the government must be publicly disclosed for it to be credible. For too long, the people of the country have been taken for a ride by telling them that public disclosure of this information (as also information on those who have vanished with bank loans) cannot be made as this will violate the privacy of the defaulters and violators of the law. Privacy has always been held to be (as also in the RTI Act) a weak right to be overridden by public interest. When huge amounts of public money are swindled in this manner, public interest requires such disclosure. This must be followed by a credible and transparent investigation into the source of the funds and follow-up action on the illegalities involved. The UN Convention Against Corruption provides the necessary tools to compel tax havens to disclose this information to India.

PM Narendra Modi had promised to bring back black money, which he said could put Rs 15 lakh in each of our pockets. If he wants to repair his damaged credibility in this regard, we need to see swift and visible action on the Panama Papers. Also, to get rid of this menace, India needs to lend its voice to the global clamour to shut down tax havens in the world. Unless the government wants to “Make in India” using such laundered funds.