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Black Money – Do we need a new Law ?

Generation of black money, stashing it abroad in tax havens and recovering such illicit wealth secreted in these accounts was one of the dominant issue in the run up to the 2014 General elections. In fact on assuming office one of the first decision of Narendra Modi led NDA Government was to constitute a Special Investigating Team [SIT] as mandated by the Hon’ble Supreme Court to look into these matters.

While the SIT was operating on a narrow compass the fact remained – much was left to be done by the Government. It is in this background that Budget 2015 has pronounced certain measures to deal with the “generation of black money and its concealment effectively and forcefully.”

This statement of intent has been backed by providing highest priority to investigations into cases of undisclosed foreign assets. This is over and above those investigation conducted by SIT. According to the Hon’ble Finance Minister “major breakthrough” has been made with the Swiss Authorities and certain critical and actionable information obtained from such authorities.

New Legislation
Buoyed by success achieved thus far, Budget 2015 now proposes a new legislation to deal with the black money parked abroad.

Key features of the new law include:

  • Punishment of 10 years Rigorous Imprisonment in case of evasion of tax in relation to foreign assets besides penalty of 300 percent with no recourse to Income-tax Settlement Commission.
  • Non-filing of IT returns with inadequate disclosures to result in 10 years Rigorous Imprisonment.
  • Concealment of income/evasion of income in relation to a foreign asset to be made a predicate offence under the Prevention of Money Laundering Act [and that can attract a separate prison term].
  • Further, Foreign Exchange Management Act is be amended to ensure punishment in such cases too.

In short, illicit foreign asset would attract imprisonment under the new black money law, get taxed at the maximum marginal rates, invite 300 percent penalty besides being prosecuted under PMLA and possibility of assets of equivalent value within India being attached with appropriate amendments to FEMA.

But will all this work?
Let us explore these proposals in greater depth.

The moot question is whether we need a new “comprehensive law to deal with black money parked abroad” as proposed by Budget 2015. Or would existing laws backed by intent suffice?

Needless to emphasize, one class of persons who have stashed illicit wealth abroad are definitely our politicians – technically called politically exposed persons [PEPs, which includes their relatives].

And should the government have any evidence of the same such PEPs are already covered by the provisions of the Prevention of Corruption Act [PCA] relating to disproportionate assets, Income-tax Act, FEMA and of course Prevention of Money Laundering Act. Such disproportionate assets can be seized, and PEPs penalised and even imprisoned under the PCA as the case involving a former Chief Minister of Tamil Nadu demonstrate.

If that be so, why another enactment? That is not all. Why convolute an already difficult situation?

It is in this connection, it may be noted that concerned at the debilitating impact of laundering money at the global level, governments across continents have initiated the Financial Action Task Force [FATF], which is an independent inter-governmental body.

The objective of FATF is to develop and promote policies through precise recommendations to protect the global financial system against money laundering including proceeds of terror, sales of drugs and of course laundering of corrupt proceeds by PEPs.

Based on the recommendations of the FATF, the RBI has come out with the circulars to banks by defining PEPs. Accordingly “Politically exposed persons are individuals who are or have been entrusted with prominent public functions in a foreign country, e.g., Heads of States or of Governments, senior politicians, senior government/judicial/military officers, senior executives of state-owned corporations, important political party officials, etc.”

In other words, not a whisper about domestic PEPs or foreign PEPs in India!

The beginning of course is to direct RBI precisely define domestic PEPs and then take action on wealth stashed by them abroad under the Provisions of PCA. India it may be noted became a full-fledged member of the FATF in 2010. Simultaneously, the FATF carried out an evaluation of India along with Indian authorities. It is in this connection the Mutual Evaluation Report [MER] points to the fatal flaw in the RBI circulars defining PEPs.

According to the FATF the RBI guidelines do not provide any “specific indication of what additional measures should be applied with respect to high risk customers, [PEPs for instance].”  In short, the RBI circulars are vague. Did the UPA Government deliberately do so?

What is worrying is that the MER points out that the RBI Master Circular specifies PEPs as an example of a class of customer that might fall into the highest risk category. Significantly, and as already pointed out, the mutual evaluation report confirms the fact that the RBI circular excludes domestic PEP from its definition.

Of course the MER points out that the Indian banking sector disagreed with this interpretation and pointed out that it tends to apply all these safeguards to domestic PEPs. Surely this interpretation of RBI failed to impress us for the simple reason that under the extant system the Government have not taken any action on any domestic PEP till date.

Some unanswered questions
That takes us to the most important question – do our banks monitor such transactions involving domestic PEPs?

Is it that our PEPs are all saint and do not have any illicit wealth to launder in the first place?

Or have our politicians ensured [as explained above] that the definition of PEPs is tweaked to exclude them in the first place?

What is fascinating to note here is that even after the MER in 2010, till date we have not amended this definition to include domestic PEPs!

Simultaneously, as a means to monitor money laundering through the financial sector, the India Government had also set up the Financial Intelligence Unit [FIU] in 2004 as the nodal agency responsible for receiving, processing, analysing and disseminating information relating to suspect financial transactions.

Consequently, banks are mandated to report on Cash Transaction Reports [CTRs], Suspicious Transaction Reports [STRs] and Counterfeit Currency Reports [CCRs] based on pre-determined parameters.

Now that takes me to the most brazen money laundering attempted by a PEP in India.

Readers may recall that the Kalaignar TV controlled by the first family of DMK is alleged to have received Rs 200 crores as bribes passed off as loans from beneficiaries of 2G spectrum allotment.

Surely, when a company with a paid up capital of Rs 10 crore, as Kalaignar TV was in the instant case borrows Rs 200 core from a company which is not in banking business, surely alarms bells must ring. But did they ring? Or were they systematically muted? Or were the alarm programmed not to ring at all in such cases? Or was it a combination of all of these?

The Kalaignar TV loan transaction, even if genuine, must have received immediate attention of the FIU, first for the reason that it involves PEPs, secondly because of the nature of the transaction [Recall Kalaignar TV never borrowed such huge money and the lenders were not in the business of banking either] and finally because of the gargantuan size of the transaction.

The 2010-11 annual report of the FIU or subsequent one covering the period of this transaction does not mention domestic PEPs even in passing or about this particular suspicious transaction when the entire nation was seized of the 2G scam. In the alternative, did the FIU have information about these transactions and yet failed to act under extraneous pressure?

More importantly, it is to be noted FIU reports directly to the Economic Intelligence Council [EIC] headed by the then FM -viz. Pranab Mukherjee in the instant case.

Did banks not report this transaction to FIU or was it reported further up by FIU and smothered by EIU?

Well, your guess is as good as mine.

It may not be out of place to mention that a workshop on the topic of anti-money laundering was held a few years back in Chennai. An officer from the Reserve Bank of India, during the course of his presentation, waxed eloquent on how systemic checks were put in place to prevent money laundering in India.

During tea-break I did question the officer on what went wrong in the K TV transaction and how the system failed us. Obviously his answer is not for public consumption!

Whatever be it, the fact remains that we have laws, rules and regulations in place.

We do not have men with commitment and integrity in place.

What else would explain how and why the system did not catch K TV transaction real time but left to a CBI investigation to be unearthed?

And surely for lack of integrity within the system we cannot legislate yet another law and hope Switzerland or for that matter any other Tax Haven would come with a list of PEPs from India having illicit wealth in their country.

Isn’t such an idea fallacious?

Isn’t this approach quixotic?

Are we churlish to believe that foreigners would do what Indian establishment would not?

Last modified on Friday, 06 March 2015 08:32

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