Swiss bank skeletons tumbling out of corrupt cupboards

The names of a few top Indian businessmen and corporates are believed to be on a list of Swiss bank account holders handed over recently by the French government. Where will the trail lead?

FP Editors December 20, 2014 05:23:24 IST
Swiss bank skeletons tumbling out of corrupt cupboards

The rattle you hear is of yet more skeletons tumbling out of cupboards. New media revelations have it that just last month, the Indian government received a list of about 700 bank accounts in Switzerland, and is investigating them to establish tax evasion.

The Indian Express reports, citing Finance Ministry officials, that the details in respect of the bank accounts, most of which are with HSBC in Switzerland, were made available by the French government through diplomatic channels. The names of several top Indian businessmen and corporates find mention, the report added.

A former bank employee stole the bank account data in 2008, and passed them on to French authorities, the report noted. The transaction is eerily similar to the case of Indian account holders in LGT Bank in Leichtenstein, which were handed over to Indian authorities by the German government.

Swiss bank skeletons tumbling out of corrupt cupboards

Who are the Indian big fish in the list of Swiss bank account holders delivered recently by the French government? Getty Images

There's one important caveat: it isn't illegal for Indian businessmen and corporates to hold bank accounts in banks in Switzerland. So, the mere fact that bank account details have been unearthed isn't reason to brand the corporates and the businessmen as corrupt. That can be established only if investigations revel that there was tax evasion.

Nevertheless the possibility that some big names in Indian business could come out of this investigation lends the anti-corruption debate in India a sharper edge.

Corruption and Big Business

As Dev Kar, lead economist at the Global Financial Integrity (GFI), a policy advocacy group working to curtail cross-border flow of illegal money, notes, black money isn't generated only from political bribery and kickbacks. It is generated on a rather bigger scale when Big Business, which operates across countries, dodges taxes and transfers profits to low-tax jurisdictions.

GFI defines "illicit flows" as capital that is "illegally earned, transferred, or utilised" - which covers all unrecorded private financial outflows that drive the accumulation of foreign assets by residents in contravention of applicable capital controls and regulatory frameworks.

In other words, illicit flows may involve capital that is earned through legitimate means such as the profits of a legitimate business. What makes the outflows illicit, GFI notes, is the transfer abroad of that profit in violation of applicable laws (such as non-payment of applicable corporate taxes or breaking of exchange control regulations).

More than half of the illicit outflows from developing countries between 2000 and 2008 were accounted for by "trade mispricing" or "transfer pricing", which happens when corporations operating across borders shift profits to jurisdictions where they are taxed at a lower rate (and by shifting costs into high-tax countries), thereby depriving developing country governments of tax revenue on operations on their territory.

How they do it

In June, the International Monetary Fund outlined the modus operandi of this tax dodge measure:

"A company can avoid taxes by establishing an offshoot in a low-tax jurisdiction such as an offshore financial center and having the entity engage in transactions with headquarters. This can shift corporate income-which is usually taxable-into the low-tax jurisdiction.

Tax evaders use tax havens in three ways:

Hiding income: Receiving income in cash or another non-traceable form, and depositing it in an account in a tax haven (or having the payer deposit the money directly into an offshore account), without declaring the income in the home country.

Hiding investment income: Depositing legal money in an offshore account but not declaring the interest or other investment income that is derived from it.

Shifting taxable income: Setting up a company in a tax haven and making payments to this company for nonexistent services or purchases whose price is exaggerated-known as aggressive transfer pricing-to shift taxable income to the tax haven."

Not easy to get back the money

Even if corruption is suspected, the due process of establishing it is a laborious one. For all the fanciful talk in India of "confiscating illegal funds", Kar notes that such unilateral declarations of ownership "will fall ?at because as far as owners of illicit capital are concerned, the government declaration does not bring about a material change in their situation."The funds continue to be illicit as before and owners continue to have access to their illicit funds outside the country in full cooperation of secrecy jurisdictions without any knowledge of the Indian authorities.

In any case, expect more fireworks in the weeks ahead as the skeletons tumble out of cupboards in faraway lands.

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