The country has been witness to an emphasized narrative on black money in the past few years. The Indian government defines black money as “any income on which the taxes imposed by government or public authorities have not been paid”. Black money is known as illicit financial flows (IFFs) internationally, which are defined as cross-border movement of funds that have been illegally or unethically earned, transferred or utilised. IFFs are generated through tax evasion or avoidance by multinational corporations and the global elite, misappropriation of state assets or laundering proceeds of crime.
In a recent article, Hon. Minister of Finance and Corporate Affairs, Mr. Arun Jaitley has commented on one of the measures taken by the Government of India towards curbing black money flowing out of the country to Switzerland. While the article speaks of a treaty signed between Switzerland and India to enable “real-time flow of information with regard to Indians” to start in January 2019, it must be reiterated that this treaty is part of an initiative led by G20 countries and designed by the Organisation for Economic Co-operation and Development (OECD), termed Automatic Exchange of Information (AEOI). The AEOI standard was born in the aftermath of the global financial crisis of 2007-08 when public sentiment against tax avoidance was running high throughout the world. National tax authorities of countries which have signed up to this multilateral standard will receive financial information regarding their citizens who have bank accounts in other countries in a periodic manner automatically.
While the AEOI standard has streamlined the process of countries receiving information of their citizens, and is certainly an improvement over previous arrangements to exchange financial information, the design of the standard is flawed. Designed by the OECD and championed by the G20 – both clubs of mostly rich, developed countries – the AEOI standard does not reflect the concerns and priorities of developing countries. Developing countries were simply expected to implement the standard that they had no part in designing. The AEOI standard also has technical loopholes, which may prevent countries like India from receiving meaningful information from other countries.
First, despite the AEOI standard being a multilateral agreement with over 100 countries signing up to the standard, every country has to sign bilateral agreements with partner countries with which it wishes to exchange information. Thus, despite the exchange being open to any country which has signed up to the standard and can navigate the myriad of technical loops, a powerful country like Switzerland can refuse to sign bilateral agreements with small developing countries such as Nepal.
The severity of exclusion of low and middle income countries makes itself felt when the number of agreements signed between these countries and their developed counterparts are analysed. This information barrier means that low and middle income countries will continue to struggle to receive information that could help reduce cross-border tax abuse. This considerably weakens the standard as high-income countries receive most of the information, while the world's poorest nations do not benefit receive none. In this manner, the AEOI standard also ignores the geopolitical reality that poorer countries disproportionately affected by black money and illicit finance. India itself has agreements with only 85 countries under the AEOI standard, which implies that people looking to obscure their illicit wealth can route their money to jurisdictions with which India does not have an agreement.
Second, the AEOI standard is inadequate as it only provides for the exchange of financial account information. Illicit financial flows do not only find their way to banks and other financial institutions. They are instead invested in assets such as real estate, art, yachts, planes and bullion, as well as managed by legal entities such as trusts and corporations through complex ownership networks – which are not reported under the AEOI standard.
Third, for information to be exchanged, both participating countries are required to have data security mechanisms and confidentiality arrangements in place. However, sending countries (such as Switzerland) have the prerogative to assess if receiving countries have robust confidentiality provisions in place. This potentially provides secrecy jurisdictions and tax havens the chance to refuse information on these grounds, especially to developing countries.
Fourth, for a pre-existing account to be ‘reportable’ to the account holder’s home country, the balance in the particular account should be above $2,50,000 on a particular date at the end of calendar year or the end of reporting period defined in the agreement. The account holder can easily abuse this clause by reducing the account balance on that particular date, thereby escaping scrutiny.
Fifth, a few jurisdictions provide certificates of residency in exchange for nominal investment – better known as fake residency certificates. These certificates enable an individual to be registered as a resident of the country providing the certificate instead of their home country. Thus, in case of accounts opened through such a fake residency certificate, the information will be sent to the intermediary country rather than the home country of the individual. The AEOI standard does not take this into account.
Finally, the standard allows the use of information received for tax purposes alone. The information cannot be used by agencies involved in anti-corruption and anti-money laundering investigations.
These weaknesses in the AEOI standard must be fixed before countries like ours can hope to receive meaningful information regarding our citizens from other countries – and maybe, as a leader of the developing world, India should raise these concerns internationally.
(The author works with the Centre for Budget and Governance Accountability (CBGA), New Delhi. She can be reached at firstname.lastname@example.org, and tweets at @neetibiyani. Views are personal.)
Updated Date: Jul 16, 2018 09:02 AM