The revelations in the Pandora Papers made by the International Consortium of Investigative Journalists, or ICIJ, should be both surprising and worrying. Surprising because similar reports of illegal wealth stashed in tax havens were published in Offshore Leaks (2013), Panama Papers (2016) and Paradise Papers (2017). All these exposés resulted in naming and shaming some of the rich and wealthy, including politicians. After the Panama Papers leaks, at least two of them lost their power not to speak of reputation.
The Panama Papers had its own share of death threats and suspicious murders. Journalist Daphne Caruana Galizia, who led the Panama Papers investigation into corruption in Malta, was killed when her car was destroyed by a powerful explosive device. Incidentally, Caruana Galizia’s son, Matthew, is a journalist and programmer who works for the ICIJ, an investigative journalism platform that has now put out 2.94 TB data called Pandora Papers, and involves more than 600 journalists from about 150 news organisations around the world.
Following the Panama Papers, a number of countries introduced financial reforms targeting illegal wealth and introduced strict penalties and punishment for the offenders. Ironically, like terrorism, ‘offshore financial centers’ (shell companies) and ‘tax havens’ do not have a globally accepted definition. They are described as a system or location where non-residents are allowed to park funds without having to reveal their full identity or the source of the wealth.
Also read: Anil Ambani, Tendulkar among Indians who parked funds in offshore firms, ‘Pandora Papers’ reveal
The fault in the system
The funds and wealth transferred to such tax havens are the result of certain transactions that may or may not be legal. Many of those whose names have appeared in these lists have claimed that they have not committed any illegal act and aren’t guilty of any wrongdoing. There are legitimate business deals where money is generated through normal business transactions and is receipted. Such wealth does not become illegal in the hands of the receiver. But the moment it leaves the country of origin, it amounts to evasion of tax. Many times, laws allow avoidance of tax but evasion of tax becomes an offence. Another source of wealth is receipts that are proceeds of crime, drug money, terror funding, illegitimate transactions or income derived out of activities clearly declared as unlawful. Such wealth and assets should not have been there in the first place.
Besides illegal funds, the offshore deposits also include profit shifting by transnational corporations from higher tax jurisdictions to lower tax destinations. Such funds also are said to include bribe money and amounts accumulated through tax abuse schemes. While such wealth robs a country of tax revenue, they usually find their way back into the economies through stock trading, FDI and investments in high interest yielding instruments. The complex network of offshore trusts, banks and financial institutions are used by super rich business tycoons, multinational entities and corrupt politicians to park their ill-gotten wealth. Given their political clout and power equations with the ruling elites, it becomes very difficult to investigate these people and penalise them.
Interestingly, the Pandora Papers has revealed that South Dakota, Nevada and about half-a-dozen more states in the United States have emerged as the most favoured destinations for stashing illegal wealth. How and why these states have become leaders in peddlers of illegal wealth is a matter of investigation. Besides attracting new customers, these states are said to have benefitted from the amounts transferred out of existing tax havens like the Bahamas and the Cayman Islands. It should be a subject of special interest for President Joe Biden who had promised to bring transparency to the global financial system. The G20, EU and the OECD debated the issues raised by the Panama Papers and even proposed to blacklist defaulting countries. Will the new blacklist include these US states?
Also read: ‘Pandora Papers’ reveal how world’s rich & powerful hid wealth in offshore firms
Will Pandora change anything?
Like the previous revelations, this time too there will be stern warnings and pious resolutions to crack down on defaulters. There will be calls for greater international cooperation and information sharing. Banking regulations and financial laws will be made more stringent. After the Panama Papers, the Indian government took a number of corrective steps to set things right. The Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 provided the government with sufficient ground to track and penalise tax offenders who had stashed their wealth outside India. This law enabled the government to detect undisclosed income of about Rs 11,000 crore revealed by the ICIJ and undisclosed assets of about Rs 20,000 crore as informed by the Panama Papers and about Rs 246 crore mentioned in the Paradise Papers leaks.
The black money law also amended the Prevention of Money Laundering Act, 2002 (PMLA) and made it a Scheduled Offence to conceal foreign assets and income and evade tax. The government also increased its engagement with other countries to collect and analyse information gathered under the Double Taxation Avoidance Agreements, Tax Information Exchange Agreements and other bilateral conventions. The Benami Transactions (Prohibition) Act, 1988, which was amended in 2011, was again amended in 2016 with more stringent provisions. Yet there is a loophole wherein a transfer of property to a family member of the transferor is not considered a benami transfer. This could be the reason for some of the names appearing in the Panama Papers being repeated in the Pandora Papers as well.
Successive revelations like Pandora Papers highlight the fact that stringent laws and penal actions alone do not deter repeat offenders from indulging in financial jugglery. The government will have to come up with out-of-the-box ideas such as drastic reduction in income tax slabs and corporate taxation, and facilitate easy and hassle-free reinvestment of profit in business. Such schemes may encourage capital formation and stop capital flight.
The author is the former editor of ‘Organiser’. He tweets @seshadrichari. Views are personal.
(Edited by Prashant)