Suppress illicit financial flows
The Pandora Papers only underscored the need for concerted action to change the global financial architecture
The Pandora Papers, published on October 3, once again denounce the illegal activities of the rich and powerful around the world. The Pandora Papers investigation is “the largest journalistic collaboration in the world, involving more than 600 journalists from 150 media outlets in 117 countries.” The International Consortium of Investigative Journalists (ICIJ) researched and analyzed the estimated 12 million documents in order to unravel the workings of the global financial architecture that aids illicit financial flows, thus allowing the rich to disguise their income and activities. .
Given the complexity of tax laws and the loopholes available, some of the clever moves may be strictly legal, but not necessarily morally justified. The ICIJ says that while some of the files date from the 1970s, most of the ones it reviewed were created between 1996 and 2020. The ICIJ also said that âthe data mine covers over 330 politicians and 130 Forbes billionaires, as well as celebrities. … drug traffickers, members of the royal family and leaders of religious groups around the world â.
History of data leaks
Since at least 2008, files showing manipulation by the rich have been stolen from financial institutions. In 2017, the Paradise Papers were disclosed primarily by the more than 100-year-old offshore law firm Appleby, which operates worldwide. In 2016, the Panama Papers were obtained by hacking into the server of the Panamanian financial company Mossack Fonseca. In these presentations, the British Virgin Islands (BVI) featured prominently. The documents leaked from Luxembourg, the âLuxembourg Leaksâ, appeared in 2014.
In 2008, a former employee of the LGT Bank of Liechtenstein provided information to the tax authorities. There were also Indian names, but the Indian government only accepted the data under pressure from the Supreme Court. In the same year, HervÃ© Falciani obtained confidential data on HSBC bank accounts from remote servers and passed the data on to then-French finance minister Christine Lagarde (she later became director of the Monetary Fund international and then became President of the European Central Bank) which passed it on to the various governments, including that of India.
In the United States in the mid-2000s, UBS Bank and Bradley Birkenfeld, who acted as a private banker on their behalf, were sued for allowing American citizens to steal their income and wealth.
Much of the illicit financial flow is linked to New York and London, the world’s largest financial centers that allow financial institutions such as the big banks to operate with ease. The leaked data shows that these entities move the funds of the rich and powerful through tax havens; Delaware in the United States is a tax haven. Large financial entities operating from these cities have been prosecuted for committing illegalities. In 2012, an investigation into the London Interbank Offered Rate or LIBOR – crucial in calculating interest rates – led to the fine of major banks such as Barclays, UBS, Rabobank and the Royal Bank of Scotland for manipulation. These banks also operate a large number of subsidiaries in tax havens to aid illicit financial flows.
The operating mode
Documents leaked now and even earlier exposed the international financial architecture and illicit financial flows. For example, the Panama Papers highlighted the model used in other tax havens. The Pandora Papers once again confirm this pattern.
Tax havens allow the rich to hide the true ownership of assets using: trusts, shell companies and the “layering” process. Financial companies are offering their services to solve this problem for the rich. They provide ready-made shell companies with directors, create trusts, and âstackâ the movement of funds. Only those who have the money can afford these services.
The overlay process involves the transfer of funds from one shell company in one tax haven to another in another tax haven and the liquidation of the previous company. In this way, the money passes through several tax havens to its final destination. The trail being cleared at each step, it becomes difficult for the authorities to follow the flow of funds.
It seems that most of the rich in the world are using such manipulations to reduce their tax liability even though their income is legally earned. The Panama Papers have revealed the names of current and former leaders, politicians and officials, billionaires, celebrities, sports stars, small and large businesses, and professionals around the world.
Are the rich moving their funds to tax havens because of the high tax rates? Not really. Even citizens of countries with low tax rates use tax havens. Over the past three decades, tax havens have allowed capital to become highly mobile, forcing countries to lower tax rates to attract capital. This has led to a ‘race to the bottom’ resulting in a shortage of resources with governments to provide public goods etc. which in turn has a negative impact on the poor.
The specificity of Papers
The Pandora Papers, unlike the previous cases mentioned above, do not come from any tax haven; these are documents disclosed by 14 offshore service companies. The data relate to approximately 29,000 beneficiaries. The 2.94 terabytes of data revealed the financial secrets of more than 330 politicians and public officials from more than 90 countries and territories. These include 35 current and former leaders of countries. Singer Shakira and former Indian cricket captain Sachin Tendulkar are among the celebrities and sports stars named in the survey. Others include the King of Jordan, the Presidents of Ukraine, Kenya and Ecuador, the Prime Minister of the Czech Republic, former British Prime Minister Tony Blair and Russian President Vladimir Putin. Surprisingly, there are few names in the United States, even though it has the most billionaires.
The very powerful who need to be on board to curb illicit financial flows (as the Organization for Economic Co-operation and Development, or the OECD tries) are the beneficiaries of the system and would not want a foolproof system. be set up to verify that. With the current global financial architecture, black income generation cannot be controlled.
The revelations suggest that funds are being moved out of national jurisdiction away from the reach of creditors, not just governments. Many fraudsters are in jail but have not paid their creditors even though they have funds abroad.
Strictly speaking, not all of the activities exposed by the Pandora Papers may be illegal due to tax evasion or concealment of the proceeds of crime. Authorities will have to prove whether the country’s law has been violated. Each country will have to conduct its investigations and prove which part of the activity violated one of its laws. In the United Kingdom, the laws on financial transactions are very favorable to the rich and their manipulation. It is not surprising, in the recent past, that several Indian fraudsters have thus fled to London to escape Indian law. Large numbers of wealthy Indians have bought property in UK Thousands of foreigners are buying or renting property in UK because no questions are asked about sources of finance; it enriched the UK by $ 100 billion.
Many Indians have become non-resident Indians or made a relative an NRI who can operate shell companies and trusts outside the jurisdiction of Indian tax authorities. This is why prosecution has been difficult in previous cases of data leaks from tax havens. The Special Investigation Team (SIT) overseen by the Supreme Court of India established in 2014 was unable to make a dent. The government’s focus on the unorganized sector as a source of income generation for blacks is also misplaced, as data indicates that it is the organized sector that has been the real culprit and is also pulling part of his income from blacks.
A recent and interesting development (October 8) has been the agreement between nearly 140 countries to levy a minimum corporate tax rate of 15%. Even if it is a long plan, it can undermine the international financial architecture. Other measures needed to tackle the curse of illicit financial flows are an end to bank secrecy and a Tobin tax on transactions; neither is likely to be accepted by OECD countries.
Arun Kumar is Malcolm Adiseshiah Professor, Institute of Social Sciences and author of âBlack Economy in Indiaâ