Illicit Money

Narendra Modi has promised to bring back black money deposited by Indians in foreign countries. Fine! It remains to be seen what he can really do. But what about illegal remittances by big companies, MNCs in particular?

There are three components of illegal remittances. First component is corruption. Politicians and bureaucrats stash their ill-gotten incomes in foreign countries so that it remains outside the reach of the Government of India. Second component is tax evasion. Income from property deals or from sales of goods in No 2 is sent abroad for safe keeping. The focus of present government is on these two sources of remittances. The third component is more sinister. Money is remitted illegally by manipulating the price at which MNCs transfer goods from their sister concerns in other countries. MNCs buy goods from their sister concerns in foreign countries. They pay more for imports than the actual price. Profits of the India arm of the MNC decrease and the Government is deprived of Income Tax on this.

The United Nations has set up a panel of Illicit Financial Flows From Africa under the Chair of Thabo Mbeki, former President of South Africa. Mbeki said that two-thirds of these funds originate from MNCs. About one-third arise from criminal activities, including drugs and human trafficking. Only 5 percent are the result of corruption or bribery. Global Financial Integrity has similarly said: "In the cross-border flow of illicit money, we find that funds generated by this means are about 3 percent of the global total. Criminal proceeds generated through drug trafficking, racketeering, counterfeiting and more are about 30 to 35 percent of the total. The proceeds of commercial tax evasion, mainly through trade mispricing, are by far the largest component, at some 60 to 65 percent of the global total."

The role of MNCs in these illegal remittances from India is confirmed by estimates of outflows. As stated above the illegal remittance from India has increased more than ten times during the last decade. The coming of MNCs and outflows of illegal remittances increased together. There is a huge role of bad governance in this outflow. It reported that outflows from Mexico decreased after liberalization while those from India increased. This happens because bad governance in India makes it easy for MNCs to bleed the country.

Both Indian nationals and MNCs making illegal remittances often establish 'shell' companies in tax havens like the Bahamas. A company is registered there. Names of the owners, however, are kept confidential. The Government of India has no way of knowing the actual owner of the company. This money finally comes back as FDI. MNCs make such shell companies in countries that have low or nil rates of taxes in order to avoid paying taxes.

The task before the Modi-government will be to stem these continuing outflows- especially by MNCs. The amount 'stashed' by Indian nationals in foreign countries is relatively less as indicated by above estimates. The total money stashed over two or three decades would be less than the amount being illegally transferred by MNCs every year. In any event, it is much more difficult to identify and bring back the money that has already leaked. It is much easy to stem the outflow being engaged in on on-going basis by MNCs today.

The G-20 have agreed to share information regarding taxes paid by MNCs amongst themselves. India can push for similar bilateral agreements with G-20 as well as other countries so that it can be ascertained whether MNCs are avoiding taxes in India and paying tax at lesser rates that may be prevalent elsewhere. Also, India can push for bilateral- or global treaty to force the tax havens like the Bahamas to disclose the identity of owners of all companies registered in their country. India can push for inclusion of such a provision in the WTO also.

The major conflict here is with the infatuation with FDI. Let there be no doubt that FDI inflows will be hit as soon as the Government takes these steps. Therefore, stemming illegal remittances and attracting FDI simply cannot go together. Modi will have to choose one of the two. India received FDI of Rs 168k crore in 2013. The outward illegal remittances, on the other hand, were Rs 424k crore in 2011. It is obviously more profitable for India to stem the outflow of Rs 424 crore rather than to attract the FDI of Rs 168k crore.

The hype of bringing back black money stashed abroad is likely to backfire. It will be difficult to track this money, to prove it is illegal, and to bring it back. This will require the cooperation of foreign governments who have no interest in returning these illegal deposits. It will be more effective to stop the illegal remittances being made by MNCs.

Vol. 46, No. 48, Jun 8 - 14, 2014