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Pandora’s Box

The biggest stumbling block to booking the persons involved in money laundering and large-scale tax evasion is the tedious procedure for exchange of information. Tax havens are understandably reluctant to share information but no country in the world is willing to part with information that has the potential of harming its citizens, so, procedural reasons are routinely cited to deny the request for information from foreign jurisdictions.

DEVENDRA SAKSENA | Kolkata |

The Pandora Papers are the latest in line of whistle blower exposés starting with the Liechtenstein tax affair (2008), Falciani List (2008), Offshore Leaks (2013), Swiss Leaks (2015), Panama Papers (2016), and Paradise Papers (2017). All such exposés listed out prominent individuals from many countries, mainly politicians, bureaucrats, businessmen and showbiz personalities, who had stealthily stashed their wealth in tax havens. Needless to say, almost all money involved was ill-gotten and ‘black’ in the sense that income tax had not been paid on it. The scope of the Pandora Papers is humongous; monetary value of assets secreted away exceeds US $32 trillion (excluding non-monetary valuables such as real estate, art, and jewellery), raising concerns of large-scale money laundering, terror funding, and tax evasion.
More than 600 journalists from 150 media organisations in 117 countries, calling themselves the International Consortium of Investigative Journalists (IICJ), co-operated in the investigation of 14 offshore service providers that had offered professional services to wealthy individuals, in incorporating shell companies, trusts, foundations and other entities in tax havens like the British Virgin Islands, Seychelles, Hong Kong, Belize, Panama, and South Dakota with a view to enable the real owners to conceal their identities from the public as well as enforcement agencies.
The Pandora Papers document the use of such entities to purchase real estate, yachts, jets and such other investments, as also money laundering and tax avoidance ~ all masked by complex financial schemes. The Pandora Papers, while not naming private individuals, list 27,000 companies and 29,000 so-called ultimate beneficial owners including 330 politicians (35 being present and former Heads of State or Government) from more than 90 countries. Russians lead the Pandora pack with 46 oligarchs, and nearly 3,700 companies (having more than 4,400 beneficiaries) figuring in the Pandora Papers, which also name 380 Indians and 700 Pakistanis, including almost the entire Imran Khan cabinet.
The Pandora Papers is the largest leak of dubious financial data till date; the Papers have captured 11.9 million records spread over 2.94 terabytes of data, emanating from 14 corporate service providers. By way of comparison, the Panama Papers investigation was based on 2.6 terabytes of data in 11.5 million documents from a single provider, and the Paradise Papers investigation was based on a leak of 1.4 terabytes in about 13.4 million files from one offshore law firm, one trust, and one corporate service provider.
The long line of exposés like the Pandora Papers had provided headlines for newspapers, grist for rumour mills and low-level politics but when the dust settled down there was little to show by way of tax recoveries or punishment of the guilty. Certainly, it is difficult to understand as to how gigantic amounts of money could be brazenly moved to tax havens despite the presence of numerous enforcement agencies, as also international covenants to discourage such illegal activities. Interestingly, all discoveries of large-scale illicit cross-border financial activities have been made by private individuals or groups of individuals at considerable personal risk rather than by tax or financial authorities; for example, Hervé Daniel Marcel Falciani, the originator of the Falciani List, was hounded and ultimately sentenced to five years’ imprisonment for data theft, by the Swiss Federal court.
Providing dubious financial services and hiding activities of their corporate and non-corporate residents appear to be the mainstay of tax havens like the British Virgin Islands (BVI); BVI had more than 370,000 active companies, about a dozen for each inhabitant. Such tax havens are highly damaging for other countries, according to the International Monetary Fund the use of tax havens costs governments up to US $600 billion in lost taxes each year.
So, what prevents Governments from uniting and teaching a lesson to tax havens? One of the persons involved with the investigation of Pandora Papers bluntly said: “the people that could end the secrecy offshore… are themselves benefiting from it. So, there’s no incentive for them to end it.” Five hundred companies, incorporated in the British Virgin Islands (BVI), named in the Panama Papers reappear in the Pandora Papers, as also 113 companies registered in Panama, showing the failure of the system to punish or reform the guilty.
While investment in tax havens is not per se illegal, such investments are mostly made to avoid tax liability. However, many of the Indians named in the Pandora Papers had NPAs of Indian banks against their names, suggesting that loans advanced by banks had ended up as undeclared foreign investments.
Before enactment of the Black Money (Undisclosed Foreign Income and Assets and Imposition of Tax) Act 2015, Indians holding undeclared assets were given an opportunity to come clean. However, against the Government’s estimate of Rs.15 lakh of undisclosed foreign assets per person, hardly Rs 15 per person was declared, highlighting the limits of our investigative and deterrent capabilities. After 2015, Indian Income-tax Returns have a column asking for details of foreign investments. Not surprisingly, persons indulging in tax evasion leave the column blank.
Denying their own culpability, many persons named in the Pandora Papers, have accepted the basic facts set out in the report, which would mean that the contents of the Papers are largely correct. However, if past experience is a guide, nothing much would come out of the investigation because the big fish named in the Pandora Papers may prove too nimble for our enforcement agencies.
Prominent law firms with vast experience in framing schemes for hiding assets and tax evasion provide the intellectual input and legal fig leaves for most financial frauds; according to ICIJ, a particular US law firm representing a large number of beneficiaries named in Pandora Papers employs more than 4,700 lawyers in 46 countries and has revenues of US$3.1 billion. Illustrious clients of this law firm include the who’s who of fraudsters and tax evaders. Legal systems find the web of intrigue woven by such experienced operators almost impossible to unravel. The biggest stumbling block to booking the persons involved in money laundering and large-scale tax evasion is the tedious procedure for exchange of information.
Tax havens are understandably reluctant to share information but no country in the world is willing to part with information that has the potential of harming its citizens, so, procedural reasons are routinely cited to deny the request for information from foreign jurisdictions. Then, turf wars amongst local investigative agencies prevent sharing of crucial information. The Central Economic Intelligence Bureau (CEIB), set up as a clearing house of sensitive financial information has failed in its mandate.
Instead of involving a plethora of investigating agencies in cases of large-scale tax evasion, the Government needs to entrust a particular probe exclusively to a particular agency that could take care of questions of jurisdiction, and responsibility. However, even with the best investigative brains, establishing criminal liability for tax evasion is difficult, because the evidence and degree of proof required in a criminal trial is difficult to marshal.
Firstly, the information unearthed by journalists in investigations, like the Pandora Papers, would fall under the head of ‘unsubstantiated allegations,’ as the information was not authenticated by the source from which it was obtained and the information had not been verified in a manner prescribed under the Indian Evidence Act. Secondly, foreign bank officials who facilitated the transfer of money are not likely to appear as witnesses in Indian courts. Thirdly, even the charge of tax evasion would be difficult to prove, given the lack of co-operation by foreign tax jurisdictions. Fourthly, recovery of evaded taxes may prove difficult because the Pandora Papers cover transactions from the year 1996 to 2019, providing sufficient time for black money to evaporate, or for limitations on tax assessments to expire.
The presence of 130 Forbes billionaires and 336 politicians in the Pandora list shows that the wealthy and powerful often lack in honesty ~ proving the truth of Balzac’s oft repeated quote “behind every great fortune is an equally great crime.” The presence of an appreciable number of citizens from countries in the Western world, like the US and UK, shows that even robust and technologically advanced tax systems cannot deter determined fraudsters. Similarly, the presence of a disproportionately large number of politicians from countries like Russia and Pakistan indicates widespread corruption in their political systems.
Finally, we would see many exposés of the Pandora kind till the day the international community unites against financial crimes. We can only hope that day comes soon.