Published in Financial Express, Sunday, 20th September 2009

New Delhi: Reports of $500 billion to $1.4 trillion Indian money being parked in safe havens abroad, especially in Swiss banks, have triggered a debate in the country. The government has faced much criticism from the Opposition parties for not "properly" pursuing efforts to unearth the illegal money stashed away in Switzerland.

Even as finance minister Pranab Mukherjee has assured that the government is working on specific information to deal with the Swiss banks to get details, experts are blaming inadequate controls for this vital capital flight, especially making the developing economies vulnerable.

"The gaps in a national anti-money laundering system are exploited by launderers, who tend to move their networks to countries and financial systems with weak or ineffective counter measures," said N K Jain, Secretary & CEO, the Institute of Company Secretaries of India. "As with the damaged integrity of an individual financial institution, there is a damping effect on FDI when a country‟s commercial and financial sectors are perceived to be subject to the control and influence of organised crime. The economic and political influence of criminal organisations can weaken the social fabric, ethical standards and the democratic institutions of society."

Experts say increasing transparency in the global flow of money is a necessity in the present times. Dr. D. R. Agarwal, Director, Institute of International Trade, Kolkata, says opacity in the current financial system is highly detrimental to the growth of the global economy. The shadow financial system comprising tax havens, secrecy jurisdictions, disguised corporations and anonymous trusts prevent the accurate appraisal of the economic condition of the globe. Measures to increase transparency would help in curtailing illicit capital flights out of developing countries.

"Steps to curtail such illicit capital transfers would include automatic cross-border exchange of tax information on personal and business accounts, country-by- country accounting of sales, profits, and taxes paid by multinational corporations, confirmation of beneficial ownership in all banking and securities accounts, and curtailment of mispricing in trade, imports and exports among others."

Given that the proceeds of commercial tax evasion is the prime motive for capital flight, experts say the roadblocks are lack of government initiatives. Sudhir Kapadia, tax partner, E&Y, affirmed, "Future success in nailing tax evasion will depend upon how strong a „deterrent‟ Indian tax administration can project by taking stern action against detected wrong doers."

Source: Financial Express