Both the government and the Opposition, as well as financial sentinels like the RBI and SEBI, seem reluctant to enforce rules that can prevent corporate money laundering,

Selling the country in black

Both the government and the Opposition, as well as financial sentinels like the RBI and SEBI, seem reluctant to enforce rules that can prevent corporate money laundering, writes Sankar Ray





For developing nations, the black markets induced by a recession are a bigger menace than the recession itself. The illicit global economy is a hydra-headed monster, affecting the 'peripheral economies' (smaller economies on the border of global trade) the most.
In fact, between 2000 and 2008, the outflow of illicit capital from India was estimated at $104 billion. In Sense, Sensex And Sensibilities, MR Venkatesh, a chartered accountant and commentator on trade and economic affairs, holds the Indian ruling class responsible for the rampant money laundering that has flourished in India since the onset of liberalisation and privatisation. The Securities scam of 1992, the Ketan Parekh scam of 2001, and the 2G and CWG scams of 2011 are some of the infamous examples.
A study by the Global Financial Integrity, a Washington-based organisation that aims to curtail illicit financial flow, estimates that in 2006, developing economies lost $1 trillion due to black money. MR Venkatesh has done a creditable job of compiling extensive data on the 'volatile' black market, and interpreting it financially and legally.
Take participatory notes (PNs) for example: PNs are non-transparent derivative instruments used by investors who are not registered with the SEBI (Securities and Exchange Board of India) to invest in Indian securities. PNs are instruments that derive their value from an underlying financial instrument such as an equity share. The SEBI permitted foreign institutional investors (FIIs) to register and participate in the Indian stock market in 1992. India-based brokerages buy India-based securities, and issue PNs to foreign investors. Dividends from the underlying securities go back to the investors.
Incredible as it may appear, the only national leader who has demanded disclosure of names and whereabouts of PN holders was AIADMK chief J Jayalalithaa, by no means a politician renowned for her integrity. On the other hand, every finance minister — be it of NDA or the UPA regime — has rejected the suggestion. Even the RBI is all for restricting PN transactions, but the SEBI is not. The total value of "underlying investments by the PNs was estimated at Rs67,000 crores", or 26% of cumulative net investments by the FIIs at the end of 2005. And yet, neither SEBI nor the government of India seem concerned about this tradable instrument, or about the identities of the PN holders.
This seems incredible when even the parliamentary committee on finance has conceded that a "legislative framework alone is not enough, because tax-evaders keep shifting their operations". The loss to the national exchequer went up from Rs72,881 crore in 2009-10 to Rs88,263 crore in 2010-11, thanks to the bonanza offered to corporates.
Complex structures, such as legal entities operated by intermediaries working in secrecy jurisdictions (mechanisms used to facilitate illicit financial flows), mostly help the black market. For India, the offshore trust created in Mauritius is a catalyst for tax evasion. Offshore companies are often registered in tax havens such as the Isle of Man and Mauritius. Beneficiaries of this structure (nominee directors and shareholders) are apparently disassociated from the original trust. These tax havens are aggressively marketed by financial intermediaries to potential clients through mainstream publications such as The Economist, with advertisements openly inviting illicit funds. Amusingly, capital is almost completely mobile, befooling the police in cross-border black-money transfers, and the judiciary is toothless here.
The chapters on 'plunder', 'money laundering', 'sleeping watchdogs' and 'deliberately weak statutes' contain clinical scans of how illicit capital is siphoned out of India via the hawala route, and then redirected back into the country as foreign investment. The collusive roles of national elites and international commercial and criminal interests in this vicious cycle are exposed, suggesting that the national laws and regulations are but a cruel joke.
Governments and multilateral agencies relate dirty money with narco-terrorism, but only casually. The World Bank and the IMF, too, are strangely uninterested in investigating or quantifying illicit financial flows and tax evasion.
But the corruption debate has to expand beyond dishonest politicians and government officials. Financial intermediaries engaged in transacting illicit cross-border financial flow via offshore centres into the mainstream banking system should be nabbed without delay.
There are discreet legal instruments used by MNCs and plutocrats for tax evasion. Their links with criminal activities — such as market rigging, insider trading, payment of political donations, embezzlement, fraud, and bribery — are a threat to democratic politics.
Sense, Sensex And Sensibilities is an insightful and informative narrative on how informal economies are weakening the official economy. Venkatesh believes that things can be remedied if the government and statutory bodies decide to stick to the rule book. For instance, the SEBI and the RBI have the power and ability to "get at the root of the PN conundrum", and the government should unearth illicit deposits abroad such as those stashed in the LGT Bank. But then, this is likely to remain just wishful thinking, given that India is controlled by an oligarchic nexus of politicians and businessmen that has no state and no social commitment.