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Saionton Basu
Saionton Basu

Saionton Basu is Partner & Co-Head India Group, Penningtons Solicitors LLP, London and Global Chair, Multilaw India Practice Group

Black money debate: Law is an enabler if applied

The “clean chits” can be issued easily as long as the foreign account holders can demonstrate to the FIU that money was remitted through banking channels after paying taxes.

bfuscation perhaps is the word that best describes the raging debate on the issue of black money in India. A lot has been written, even more has been said, but what I wish to focus on in this article are a few hard questions and attempt some answers on the regulatory system in India and Switzerland governing this area, which has largely been glossed amidst the dust and smoke, deliberate or otherwise spawned by this politically delicate hot potato.

For the sake of clarity and brevity, I would like to confine this article to tackling questions centred on "black money" in Swiss bank accounts. Since "black money" has no easily identifiable legal definition in India, it is best to confine the same for the purposes of this article to incomes which are taxable in India but not reported adequately and in full to the tax authorities in India. This would also include incomes which are a result of illegal gratification and/or a result of the desire to evade some statutory compliance procedure. Once the above process of non-compliance with tax and a host of other regulations has been performed with panache given the orderly operations of the "black economy" unhindered by the shackles of red tape, the attempt then to project it as "untainted" (among other methods, by placing such proceeds within the banking system, whether in India or overseas) is then squarely covered by the money laundering regulations in India.

Having set that out, there is only one question that requires further scrutiny: assuming for the purposes of the present debate, if the aforementioned laundered sums do find their way into a Swiss bank account, what are the steps that regulatory authorities in India need to initiate to deal with them as per Indian law?

The Financial Intelligence Unit (FIU) within the Ministry of Finance in India has been empowered under the money laundering regulations to investigate such matters. The starting point for money laundering investigations globally are usually confidential tip-offs or whistle-blowers within organisations, which generally places a large amount of otherwise classified data into the public domain. Given the large amounts of such data publicly available together with whistle-blowers, there is a just cause for investigations to be commenced by the FIU. To take the example of the recent and not so recent "disclosures" of Swiss account holders in the media in India, the dividing line between legitimate and illegitimate accounts is very clear, with legitimate account holders possessing the necessary copies of returns filed with income tax authorities for taxes paid and the authorised dealers for monies being remitted outside through normal banking channels.

Usually such data can be accessed at the click of the button by the director's office of the FIU. Where the link is fuzzy on account of absences from India or income earned abroad legitimately, the real grey area lies. Here, there is a political case, if not a watertight legal case not to launch an investigation into these matters in the guise of causing undue harassment. However, the law clearly empowers the FIU to exercise its discretion in such a matter independently to probe such matters. Further, the money laundering laws in India absolutely places the burden of proof on the accused to prove that he holds untainted property. Furthermore, any bank involved in such operation can be compelled to disclose such information. Accordingly, let it never be said, that laws in this respect are feeble in India. If a systematic investigation is carried out into say all of the information in the public domain, the proverbial "clean chits" can be issued almost instantaneously as long as the foreign account holders can demonstrate to the FIU that such money was remitted through banking channels after paying taxes and complying with exchange control regulations.

Now, we come to the more vexed area where such data is not made available to the FIU and co-operation from Swiss authorities is necessitated. The designated Swiss authority in this respect is the Money Laundering Reporting Office Switzerland (MROS) within the Federal Office of Police (FEDPOL), which serves as the nodal agency for processing requests for information from foreign governments. It is important to assess the framework of co-operation under the Indo-Swiss double tax agreement (DTA), which allows for exchange of information on this front. A probe being formally lodged in India under money laundering regulations is critical under the scheme of the DTA, since that is the first step which is required under the accord to request further information from the Swiss agencies for cases under investigation by the FIU. It is no one's case that a fishing expedition should be encouraged, but where an Indian account holder is unable to furnish the pieces of paper outlined above by way of income tax and authorised dealer returns, it makes for a fit case to launch an investigation given the surrounding circumstances of information available in the public domain. The DTA requires evidence of evasion to be supplied to the Swiss authorities and once again under Indian law, not being able to furnish the aforementioned pieces of paper will certainly meet that threshold on account of the burden of proof being on the accused.

Therefore, the law is clearly an enabler, both in India and Switzerland. If applied conscientiously there is nothing that can prevent a fair investigation and repatriation of laundered sums. The smokescreen surrounding "black money" stockpiled in overseas accounts largely stems from confusing the legal regime as well as the multiplicity of regulators in India including the Enforcement Directorate, Directorate of Income Tax Investigations, Reserve Bank of India and the Securities and Exchange Board of India. Hopefully, this article presents a single pronged approach under the money laundering regulations which must be pursued by the FIU to: (a) speedily quell public doubts about legitimate foreign account holders by verifying their tax and remittance returns where germane; and (b) swiftly obtain information where needed and prosecute illegitimate foreign account holders.

Ultimately there are two stark facts that remain in this entire debate: (1) India has lost more than $460 billion in illegal capital flight since 1947, according to the US-based Global Financial Integrity; and (2) India has filed ten requests for judicial assistance with Switzerland over the past five years, meaning only ten cases have been pursued within the above framework. The first fact can be controverted, the second cannot. The burden of proof thus shifts to the regulators in India.

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