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cover story
NOVEMBER 02-08, 2014

The Long Way Round

How black money snakes its way out of India, and how it finds its way back

The Outbound
Flight...
THE HAWALA ROUTE: Money

is transferred through an
international network of
brokers without there being any
real movement of funds

OVER-INVOICING EXPORTS:

An export consignment
worth $1 million could be
shown to be worth $1.2
million so as to deliver the extra
$0.2 million to someone located in
importers country

:: Shantanu Nandan Sharma

n February 2008, R Prasad, the

then chairman of the Central
Board of Direct Taxes (CBDT), led
a team of tax sleuths to Port Louis,
the capital city of Mauritius.
Backed by a team from the ministry of external affairs, Prasad
made an attempt to convince
Mauritius officials to re-negotiate
the double tax avoidance agreement (DTAA), which was resulting
in massive tax losses to India.
Prasads attempt was unsuccessful, but what he discovered in the
process was startling: a handful of
persons acted as directors for
about 30,000 companies located
in that island nation. Also, companies there exist only on paper, as
addresses of many of those begin
with a mere post box number.
Mauritius and many other tax
havens act as buffers to bring back
Indias black money as white. And
the challenge before the investigators is to establish the criminality
of those involved in such activities, says Prasad, who retired as
CBDT chairman six years ago.
Now, the Supreme Court-appointed Special Investigation
Team (SIT) on black money wants
such tax treaties to be re-drafted, a
move that will put the government

in a spot. Only this week, a reluctant government had to hand over

to the apex court a complete list of
627 Indians who have accounts in
HSBC Bank, Geneva.
The debate so far has been
what comes first: investment or
tax? Is India ready to sacrifice investments worth billions of dollars
for the sake of some tax gain? So
far as Mauritius is concerned, any
retreat from Indias side will allow
China to woo the island nation,
says a finance ministry official
who did not want to be named, explaining why New Delhi hasnt
been assertive with Mauritius, a
nation where Indian defence forces harbour strategic interests.

In Black and White

While tax havens like Mauritius
will help black money come back
into the country as white, Indians
continue to send illicit money
abroad. This is done through various methods, hawala transactions
where money is transferred
abroad without any real movement of funds being one of
them although, according to a finance ministry white paper on
black money released two years
ago, hawala transactions have ac-

TRUSTS: The trustees are nationals

of that foreign country, but the
beneficiaries are the
relatives of the Indians
who invest the initial corpus

...and the Return

Journey
SHELL COMPANIES: Firms

with insignificant assets

or operations are created
abroad to bring back the money
via tax havens like Mauritius

GDRs: Raising

of capital by
Indian companies with no
tangible business through

global depository receipts is

another way to bring back money

PARTICIPATORY NOTES: They

are instruments issued by FIIs to
overseas investors, to invest in
Indian stocks without
registering with the regulator

tually dwindled over the past decade. In

recent years, after the 9/11 incident in the
US, due to intense scrutiny of banking
transactions, enhanced security checks at
airports and ports and relaxation of exchange controls, transfer of money
through hawala has reduced significantly, says the report. increasing pressure on financial operators and banks to
report cash transactions has also helped
in curbing hawala transactions.
However, there are other methods to siphon black money out of the country, two
of which are manipulation of export invoices and setting up of trusts abroad. Two income-tax officials told ET Magazine that a
large number of the accounts of the 627
names based on data stolen by an employee of HSBC, Geneva, would be
of such trusts. The modus
operandi adopted here
is as follows: black
money moves
abroad through
routes like hawala.
Then a trust is
formed in, lets assume, the Netherlands. The trustees
in this case will be
Dutch nationals, but
The
the beneficiaries
government
will be relatives of
should use a
an Indian back
home who put in carrot-and-stick
the initial corpus.
policy with
But we can initiate
banks which
a probe only when
money gets reflectfacilitated in
ed in the accounts of
opening such
the beneficiaries,
accounts.
The
explains one of the
tax officials.
stick here is a
As the incomehuge penalty,
tax department and
and
the carrot
the Enforcement
amnesty
Directorate (ED)
will now work unR Prasad,
der SIT, one can exformer CBDT chairman
pect more urgency
in the mission to
bring back unaccounted money. Yet, genuine hurdles may come in the way of that
endeavour. The classic example of such a
hurdle is seen in the case of Pune-based
stud farm-owner Hasan Ali Khan, who
was raided by the I-T department seven
years ago. Documents and data in his laptop established that he had a Swiss bank
account with a whopping $8 billion
(roughly `48,000 crore) in deposits. Ali
was sent to jail, but the ED that probes
money laundering cases found out from
the Swiss authorities that Alis accounts
had been emptied.
The multi-billion dollar question then:
how many of the 627 whose names exist
in a sealed cover would have done the
same?