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Mainstream, VOL LIX No 45, New Delhi, October 23, 2021

Global Financial Architecture Underlies the Illegality of the Rich Who are the New Colonizers | Arun Kumar

Saturday 23 October 2021, by Arun Kumar


The Pandora Papers, published on October 3, once again expose the illegal activities of the rich and the mighty across the world. The investigation into these papers by the International Consortium of Investigative Journalists (ICIJ), is the world’s largest-ever journalistic collaboration. It involved more than 600 journalists from 150 media outlets in 117 countries. They researched and analysed approximately 12 million documents which became available approximately two years back. Their effort has unraveled the functioning of the global financial architecture which helps illicit financial flows (IFF) which in turn enables the rich to throw a cloak over their incomes and activities.

Some of the deft moves in moving funds around may be strictly legal, given the complexity of the tax laws and the loopholes available, but not necessarily morally justified. The ICIJ says that while some of the files date to the 1970s, most of those it reviewed were created between 1996 and 2020. The ICIJ has also said that the “data trove covers more than 330 politicians and 130 Forbes billionaires, as well as celebrities... drug dealers, royal family members and leaders of religious groups around the world”.

History of Leaked Data

Since at least 2008, files indicating the manipulations by the rich have been stolen from financial institutions. In 2017, the Paradise papers leaked out from the more than 100 years old offshore law firm Appleby, which operates from multiple places globally. In 2016, the Panama Papers were obtained by hacking the server of the Panamian financial firm, Mossack Fonseca (MF). In these exposes, British Virgin Island (BVI) figured prominently. The leaked documents from Luxembourg, the “Luxembourg Leaks”, appeared in 2014.

In 2008, an employee of LGT Bank of Liechtenstein sold information about the banks dealings to the German government which passed it on to the other governments. There were Indian names also but the Indian government, after resisting, accepted the data under pressure from the Supreme Court. The same year, Mr. Herve Falciani obtained confidential data on HSBC bank accounts from remote servers and after trying various things ultimately gave the data to Ms. Christiane Lagarde (then French Finance Minister and currently head of the ECB) who passed it on to the various governments, including the Indian government.

In the US, in 2007, the UBS Bank and Mr. Birkenfeld, who was acting as a private banker on its behalf, were prosecuted. They were enabling US citizens to spirit away their income and wealth from the USA. The Swiss government strongly protested and even argued that the whole world financial system could collapse. Finally, UBS agreed to pay a fine of $780 million and reveal the names of 4,500 US citizens who had secret bank accounts with it.

From the papers it is apparent that to a large extent, IFF have a link with New York City (NYC) and London, the biggest financial centres in the world, whose specialty is that they enable financial institutions like, the big banks, to operate with ease. The leaked data reveals that these entities move the funds of the rich and powerful via the tax havens. In fact, Delaware in the US is a tax haven.

The big financial institutions operate globally using these cities as a base and have been prosecuted for committing illegalities. For instance, in 2012, leading banks such as, Barclays Bank, UBS, The Royal Bank of Scotland, Rabobank, Deutsche Bank, JPMorgan, Citigroup, and Bank of America were caught manipulating the London Interbank Offered Rate or LIBOR (crucial for calculating benchmark interest rates) and were fined billions of dollars. Small manipulation of the LIBOR can lead to huge profits given the scale of operations. To enable IFF, these banks operate a large number of subsidiaries in tax havens. Fortis bank, when it failed in 2008, was found to own over 700 subsidiaries.

The Modus Operandi

The leaked papers now and earlier have exposed the global financial architecture and IFF. For instance, Panama Papers revealed the modus operandi of MF of Panama and that is the template used by such companies in tax havens. The Pandora papers once again confirm this pattern.

Tax havens enable the rich to hide the true ownership of assets by using a) trusts, b) shell companies and c) the process of `layering’. Financial firms offer their services to work this out for the rich. They provide readymade shell companies with directors, create trusts and `layer’ the movement of funds. All this is not cheap and only the moneyed can afford these services.

The process of layering involves moving funds from one shell-company in one tax haven to another in another tax haven and liquidating the previous company. This way money is moved through several tax havens to the ultimate destination. Since the trail is erased at each step, it becomes difficult for the authorities to track the flow of funds.

It appears that most of the rich in the world use such manipulations to lower their tax liability even if their income is legally earned. The Panama papers revealed names globally of 12 current and ex-leaders, 128 politicians and public officials, billionaires, celebrities, sports stars, small and big businesses and professionals. They used MF to escape national scrutiny by authorities.

Is it that the rich move their funds to tax havens because of high tax rates? Not really. Even citizens of countries with low tax rates use tax havens. Actually, over the last three decades, tax havens have enabled capital to become highly mobile, forcing nations to lower tax rates to attract capital. This has led to the `race to the bottom’, resulting in shortage of resources with the governments to provide public goods, etc., and this adversely impacts the poor.

Finally, on October 8 agreement has been reached among 140 countries to levy a 15% minimum tax rate on corporates. Though a long shot, this may dent the international financial architecture. Other steps needed to tackle the curse of IFF are ending banking secrecy and levying a Tobin tax on transactions; neither of which the OECD countries are likely to agree to.

Pandora Papers Specificity

Pandora papers, unlike the previous cases mentioned above, are not from any one tax haven - they are the leaked records from 14 offshore services firms like, Trident Trust, Asia Citi Trust and ALCOGAL (Aleman, Cordero, Galindo & Lee). The data pertains to 29,000 offshore trusts and companies used by their clients. The 2.94 terabyte of data has exposed the financial secrets of 35 current and former world leaders, many politicians and public officials from 91 countries and territories. The list of celebrities and sport stars named in the investigation includes India’s Sachin Tendulkar, model Claudia Schiffer and pop star Shakira.

Former British Prime Minister Tony Blair, the presidents of Kenya, Ecuador and Ukraine, the prime minister of the Czech Republic and the King of Jordan are named in the documents. 130 billionaires from Turkey, Russia, India, etc., are mentioned in the lists. Surprisingly there are few names from the United States, even though it has the largest number of billionaires.

The very powerful who need to be onboard to curb IFF (as OECD is trying) are the beneficiaries of the system and would not want a foolproof system to be put in place to check it. The corollary is that if the global financial architecture persists, black income generation which underlies IFF cannot be checked.

Revelations suggest that funds are moved out of national jurisdiction to spirit them away from the reach of creditors and not just governments. For instance, Mr. Anil Ambani declared bankruptcy when he was required to pay his creditors. Journalists looking into the Pandora papers found that he had a $1.3 billion web of off shore firms incorporated in 2007-08. Mr. Ambani’s lawyers claim that he is compliant with the law.

Many of the fraudsters are in jail but have not paid their creditors even though they have funds abroad. For instance, former owners of Ranbaxy have been in jail for fraud. Pandora papers suggest that after selling their company, the brothers had opened 2 off shore firms in BVI. Their murky affairs also exposed the name of one of the internationally renowned gurus, a relative of theirs. There were accusations and counter accusations as to who had created the mess. They must still own a lot of money otherwise how could the wife of one of them have paid a fraudster Rs. 200 crores to have her husband released from jail. This was revealed in a complaint of cheating she lodged with the police.

Only the Rich can Afford Tax Havens

Strictly speaking, not all the activity being exposed by the Pandora papers maybe illegal or due to tax evasion or hiding of proceeds of crime. The authorities will have to prove which law of the land has been violated. Each country will have to investigate and prove what part of the activity broke any of their laws. In UK, the laws regarding financial dealings are very favourable to the rich and their manipulations. No wonder, in the recent past, several Indian fraudsters fled to London to escape the Indian law. Large number of the rich Indians have bought property in UK. In March 2021, Mr. Poonawallah of Serum Institute was reported to have rented the most expensive property in London. Thousands of foreigners buy or rent property in UK because no questions are asked about the source of funds; this has enriched the UK by $100 billion.

Many Indians have become NRIs (like, Mr. Harish Salve) or have made some relative into an NRI who can operate shell companies and trusts outside the purview of Indian tax authorities. That is why prosecution has been difficult in the earlier cases of data leakage from tax havens. The SC monitored SIT set up in 2014 has not been able to make a dent. The government’s focus on the unorganized sector as the source of black income generation is also misplaced since data indicates that it is the organized sector that has been the real culprit and also spirits out a part of its black incomes.

What do the Pandora Paper, reveal about how the rich view their country? Their commitment to the nation is marginal even though they have gained the most. Tax havens are not the place where the poor or the middle classes can stash their wealth to escape paying taxes. The poor and most of the middle classes are not in the taxable range and have little of savings. This is also true of the middle classes who are in the taxable range of above Rs 5 lakh of income - they also save too little to be able to keep their money in tax havens.

It is not cheap to keep funds in tax havens. The accountants and legal firms abroad who help set up the trusts and companies to move the funds around, to escape government scrutiny, charge neat sums of money as fees/service charges. So, unless one is moving tens of lakhs of rupees annually it is not worth it. Clearly, anyone whose name appears on the stolen lists is not using the services of these worthies just for the heck of it; there has to be serious intent to move funds. Given the costs, only the top one per cent in the income ladder in India can afford these strategems for moving and keeping their savings abroad.

Categories of Users of Tax Havens

When the names of crooks and murderers appear in the list of people using tax havens to take their money abroad, one is not surprised. Their commitment to society is expected to be low. When names of businessmen and corporates crop up then also one is not too surprised since their primary concern is profits and post-tax incomes. They are also habituated to committing illegality to generate black incomes as a means of earning more than what they can earn legally. So, they are in it for themselves and one more illegality hardly matters.

When one sees the names of politicians, the surprise is greater since they have committed to serve the public. They are supposed to be working for the wider good of the country. But, one is now so used to hearing of their illegalities that even their names are not a surprise. However, it is a tad more disappointing since the public has reposed faith in their elected representatives, even if mistakenly so.

The real disappointment for the public maybe when the names of national icons like, Sachin Tendulkar and Amitabh Bacchan crop up. The name of the former has appeared in the Pandora Papers while that of the latter came up in the earlier Panama and Paradise papers. Aishwarya Rai Bacchan’s name also appeared in the Panama Papers. The nation has given much to them – adulation and money. People look up to them since there are few others they can look up to in the present times. They earn in a day what possibly 100 poor families earn in a year. As a saying goes, their wealth would be enough that their next 7 generations need not work.

The rich keep funds abroad to take care of the risk of a government which may be hostile to them. So, many of the rich when they are about to be arrested have skipped the country in recent years. There is also diversification of investment when assets are held abroad. So, the rich have invested in companies abroad or set up new companies there. The funds abroad also come in handy for children’s education and health issues. But, with the LRS (Liberalized Remittance Scheme) most of these reasons are no more justified. Actually, this scheme has given the rich an alibi to claim that they have legitimately taken their money abroad. But when the rates of interest in advanced countries are close to zero, the funds being taken abroad cannot be for holding the savings abroad to earn a return; there have to be other reasons.

Marketization and Values
In a highly commercialized world, the activities of the icons have become acceptable. They participate in high pressured advertising, promoting consumerism, especially targeted at the young. They advertise products often based on patently false information which the gullible public swallows since they believe in their icons. This is monetization of their reputation much like the companies monetize their brand value. But do they see any higher purpose for themselves than what commercially minded companies see as their raison d’etre. Obviously, when one markets one’s reputation, can there be a higher purpose underlying the action? It is all about accumulation – the pursuit of lucre. This is marketization at its best with its underlying philosophy, `more is better’.

So, should we expect any better from the top 1% in the country’s income ladder who control half the nation’s wealth and the entire corporate sector? Their emotional attachment with the country (if it was ever there) and 99% of its people has ebbed over time. They become NRIs at the drop of a hat and/or station some relatives abroad to manage their funds. They can always claim that they have earned their income abroad from their investments there. The icons can claim that they perform outside and earn money there. Do these pleas justify keeping some of their savings abroad rather than bringing them back to promote development to help the vast majority of their poor countrymen?

The black incomes generated in the country are concentrated in the hands of this elite class. They commit all manner of illegality to earn these extra illegal incomes. And, they apparently believe that such activity is legitimate, so they need not feel guilty about it. It appears like profit maximization which is legitimate since this is what a `rational economic man’ is supposed to do. Feeling guilty is a cost which must be minimized to maximize one’s welfare. In fact, economic theory legitimizes it by characterizing such illegality as enhancing `market efficiency’. This legitimizes illegality and weakens the emotional commitment to the nation which is a variable that does not enter the notion of `efficiency’.

Rich, the New Colonizers

When the rich take capital out of the country through flight of capital they act like the colonial masters who for almost two centuries drained the nation’s wealth through loot, plunder, home charges and the triangular trade. As colonization was ending post Second World War, to continue to extract this free capital, the colonial powers set up tax havens through which they could continue to drain out the wealth of the developing world. They were confident that the wealthy in the developing world would connive in this continuing drain - indeed their assessment was correct about the rich.

The Indian rich have been illegally taking their wealth abroad since independence. Our estimate of the opportunity cost of this flight of capital for the period 1948 to 2012 was $2 trillion. The scale of this drain has grown over time as the economy expanded and the ranks of the well-off swelled. As illegality grew in the economy more capital was drained out. When the New Economic Policies (NEP) in 1991 reduced regulation on businesses, illegality further increased and with that the drain of wealth.

In effect, a poor and capital short country has been exporting capital, thus aggravating the shortage of capital for development and setting back India’s development. The impact of this on the nation’s poor has been clear during the ongoing pandemic. The veil was lifted from the eyes of the well-off that a vast number of Indians live in uncivilized conditions. 90% said that they did not have the savings to buy one week of basic supplies and were starving. This resulted in the unprecedented exodus from urban to rural areas, something not seen in any other major country.

Do the rich, the Tendulkars and the Bacchans feel a sense of responsibility for the state of affairs in the country? Obviously not. Mr. Bacchan living behind high walls and travelling in luxury cars with tinted glasses famously questioned some years back, where is poverty in India? So, if there is no poverty left in the country there is no need to feel responsible for the poor. One can without any qualms advertise pan masala which is addictive, an unproductive asset like, gold jewelry, fast food like maggi noodles and cold drinks which are harmful to the children. Big names have advertised investments and real estate projects which turned out to be fraudulent. Obviously the icons feel little responsibility towards their admirers?

The reason the icons advertise dodgy and shoddy products is also why they should not indulge in such activity. Perhaps they feel it is the normal thing to do since they largely socialize with the rich and powerful who routinely commit illegalities. Their admirers are the masses to whom they wave from a distance – there is little connect with them. If economic theory says, `more is better’ then sacrifice is stupidity. Only a highly conscious individual like Gandhi could overcome the immediate urges, practice renunciation and be a votary of `voluntary poverty’ and `last person first’. This cannot be expected from our icons. Can one ask, at what point is their earning enough for them; do they need to cash in their brand value or keep funds abroad?

Gandhi owned responsibility for his actions and tried to practice what was socially correct in a poor country. He is obviously no role model for the well-off either in India or globally. Raj Kapoor sang ’mera joota hai Japani aur patloon Englistani lekin dil hai Hindustani’ but now this would have to be modified to ’mera joota aur patloon hai Hindustani par dil to ho gaya firangi’.

This article is based on two recent articles. 1) Stolen Tax Havens Papers Reveal the Rich are the New Colonizers. October 18, 2021 and 2) Taking the lid off Illicit Financial Flows. The Hindu. October 13, 2021.

(Author: Prof. Arun Kumar is Malcolm Adiseshiah Chair Professor, Institute of Social Sciences. He is the author of ’The Black Economy in India’. Penguin Random (India) 1999 and Aleph 2017. And ’Indian Economy since Independence: Persisting Colonial Disruption’. 2013. Vision Books.)

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