Biggest Users of Tax Heavens Are Not Terrorists, Spies, Celebrities, or the Mafiosi – but Global Banks!
G Ramesh 16 November 2023
Professor R Vaidyanathan is a crusader against black money and more than an academic researcher. He has been writing on this subject for more than a decade and has been trying to sensitise policymakers, bureaucrats and citizens. His interest in this field started way back in 2000, as he mentions in his book Black Money And Tax Havens (Penguin Random House, India, 2023). His interest started “when the then NDA (National Democratic Alliance) government headed by Atal Bihari Vajpayee initiated a treaty with Mauritius, which paved the way for large inflows into the capital market through what popularly became known as the ‘Mauritius Route’” (ix).
The book is a comprehensive treatment on black money, tax havens, and global developments on these. The book is replete with factual positions, statistics like the retail value of transnational crimes (p103), estimations of black money and what is being done to control it globally and nationally. The extent and penetration of black money is mind-boggling. For example, citing the study by the National Institute of Public Finance and Policy (NIPFP) commissioned by United Progressive Alliance (UPA) –II, it says, “for the period 2008 – 09 to 2011 – 12, an estimate that black money could constitute nearly 42% of the total gross domestic product (GDP) or 71.5% of the ‘reported’ GDP has been mentioned in the report” (p28). A conservative estimate seems to be 15% of GDP, which means we are discussing a state within a state with its own economy, operations, and self-regulation. This economy not just runs parallel but interfaces at many levels with huge influence.
The author makes a potent statement when he says, “Domestic black money is an expression of no-confidence in the government of India. Some part of the domestic black money is used in productive activities, such as real estate, trade, construction, mining, transport, restaurants and other businesses.” (p23).
I would say this is a self-fulfilling prophesy, as the parallel system is actually undermining formal systems. Black money hoarders can think of as many reasons as drunkards can rationalise their addiction. His inferences are based on citations and their hard findings. He cites the studies of Kaldor Report, Wanchoo Committee, Rangnekar, Chopra, and NIPFP; and the time periods and regularity of these show all governments have been keen but never serious. The book also traces the institutional and tax reforms that have been undertaken by the government of India over time.
He cites global studies when he discusses global illegal financial flows (IFF). The important ones global financial integrity index (GFI), OECD lists, G20 lists, etc. Asia and developing countries occupy primary position mainly led by China with India being close behind. One estimate indicates about US$21trn (trillion) to US$32trn of private financial wealth located in secrecy jurisdictions, untaxed or lightly taxed, around the world (p77).
According to GFI, “20% of the total trade from developing countries with developed economy is illicit financial flows (IFF)”. There are about 70 tax havens competing among themselves and racing to the bottom.
The London G20 meet classified tax heaven for black listing on the basis of commitment to implementing standards, committed and implementing, and those not even committed (p62-63). In 2015, a financial secrecy index was developed to rank nations. The book discusses the financial action task force (FATF), which has been in the news in recent times. India is an active member of all these.
Apart from the formal trade and banking channel, illegal trade happens in a variety of activities like trafficking of all kinds, illegal mining, counterfeiting, etc (p103). Sadly, MNCs and banks are major players in exploiting tax havens. The author quoting UNCTAD says, “More than 60 per cent of global trade occurs within multinational groups…and “about $100 billion in annual tax revenue is lost due to developing countries in transactions directly linked to offshore funds” (p113). The total “development finance” loss – counting both revenue and reinvested earnings – is estimated in the range of US$250bn (billion) to US$300bn” (p113). The book also discusses leaks of Leichtenstein Bank, Panama papers by ICIJ, the Swiss bank, and investigations by our own SIT, which led to unearthing the involvement of some corporates and names. 
There are some interesting observations like, “traditional thinking has always been that the West is pouring money into Africa”. However, Baker, the President of GFI says, “Africa has been a net creditor to the rest of the world for decades,” if one considers IFF (p128). This is completely counter-intuitive and policy-makers of these nations have to understand this phenomenon.
The OECD and G20 have come up with criteria nations have to adhere to if they want to escape getting blacklisted. These mainly pertain to openness to the exchange of information and adhering to multilateral conventions on administrative assistance in tax matters.
The author, in his enigmatic ways, suggests ways to curb IFF. It reads as ‘do as Americans do’ which means jail a highest-ranking official of an international bank (p141) or bribe some high-ranking banking official. Government can consider adhering to UN regulations and nationalise all funds abroad and appoint a receiver.
Finally, he concludes, “Tax heavens are not exotic, murky sideshows on the fringes of the world economic system. They are, in working reality, as its centre. Half of the world trade flows, at least on paper, through tax heavens. Every multinational corporation uses them routinely.” The author boldly states, “The biggest users of tax heavens by far are not terrorists, spies, celebrities, or the mafiosi – but global banks” (p218).”
This is a must-read for tax administrators and investigators, bankers and global investors, and students of banking and taxation to understand the entirety of black money and global regulations. 
Black Money and Tax Havens: R Vaidyanathan 
Penguin Random House, India (October 2023) 
ISBN: 9780143459446
Length: 208 Pages
Price: Rs399
(G Ramesh is a professor (retd) IIM Bangalore)
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