Here is the letter written to the Prime Minister, Mr Narendra Modi by senior Aam Aadmi Party leader and Supreme Court lawyer Prashant Bhushan, on the issue of black money illegally stashed abroad. The copies of the letter have also been marked to the chairman of the Supreme Court appointed Special Investigation Team (SIT), Justice MB Shah, vice-chairman Justice Arijit Pasayat and finance minister Mr Arun Jaitley. _______________________________--- Dated: June 23, 2014 To, Shri Narendra Modi Prime Minister of India New Delhi Dear Sir, Sub: Unearthing illicit money I must start by saying that we are all pleased to see the SIT mandated by the Supreme Court to tackle the growing menace of black money in India, has been set under the Chairmanship of Justice Shah. However, as a citizen of this country who is interested in the future well-being of this nation, and as a lawyer who has some experience in dealing with matters of corruption and money laundering, I feel that it is my duty to bring to your notice some facts and suggestions that are crucial for tackling this menace in any sort of meaningful manner. If we are to have any meaningful impact in curtailing or eliminating the scourge of black money, we must first start by understanding why black money has become so all pervasive, and why, by some accounts, the size of the black economy is estimated to be orders of magnitude larger than the regular economy. The primary reason why black money has such a stranglehold on our economy, is because our system not only allows, but in fact encourages the siphoning out of illicit funds abroad, laundering those funds through tax havens, and re-investing the same in India, as legitimate investment through non-transparent instruments such as participatory notes, and anonymous investments through companies registered in tax havens. This allows individuals to first transfer their black money into foreign accounts through Hawala transactions, and then bring it back into the country, usually as investments in their own companies or trusts, by way participatory notes, or anonymous investments by banks or other shell companies situated in tax havens. All of this is unfortunately given legal sanction by the domestic laws of our country, which run counter to several provisions of the UN Convention Against Corruption, as I will show below. The recent disclosure by the Swiss authorities that India is ranked 58th among the countries in the volume of accounts held in Switzerland by citizens of various countries and that this amount is only 2 billion Swiss Francs, shows that most of the Illicit money which may have been deposited in Swiss banks has been moved out and has been brought back and legalised by way of FDIC through non transparent instruments like P notes and investment by companies registered in Tax havens like Mauritius etc. which allow the holders of this money to remain anonymous. The copious amounts of black money that are generated in our country usually come from two sources: 1. Money illegally obtained by way of bribes and gratification by public officials, or private individuals/middlemen, involved in government transactions. 2. Money obtained by sale of property, or services by individuals or corporations and shown on paper as transactions of a much smaller amount. This is reflected as under/over-invoicing of products and services, and allows money to be siphoned out of private corporations illegally by individuals. A classic example of such a practice was the 6,500 crore investment made by a company called Biometrix in four companies fully owned by Mukesh Ambani. This investment was brought to the notice of the Indian authorities by the Singapore High Commission in August 2011, which found the amount of investment suspicious, given the fact that Biometrix had total assets worth only Rs. 35 lakhs. Later Biometrix has said that this money was procured via a loan from ICICI bank, but the question is, why would a bank give such a large loan to a post box company with no known assets and source of income? Given the fact that the CAG report has already indicted Reliance for over-invoicing and siphoning out money from the KG-D6 contract, isn’t it highly likely that the 6,500 crores was in fact money siphoned out of the country by Reliance from the KG-D6 contract, or dealing with the government, and which was being brought back by way of an investment by a shell company? This is exactly the kind of practice that has become rampant in this country, and which needs to be tackled effectively by the SIT. By making a few simple changes to the laws of our country, which are given full sanction by the UN Convention Against Corruption, we can hope to severely curtail the flow of black money in this economy. If we are serious about tacking this problem in an effective manner, then some of the changes required to be made in our current legal framework, are the following: 1. A new law, or an amendment to an existing law (such as the Prevention of Money Laundering Act), requiring all Indian citizens to disclose all their assets and bank accounts in India and abroad needs to be introduced. Such a law would require citizens to annually disclose a full list of their assets and liabilities, including their stakes in companies or trusts registered abroad. 2. Any income or assets that are not disclosed in the required form would be deemed to be “proceeds of crime”, and included as ‘predicate offences’ defined under the UNCAC. This would enable the law enforcement agencies to recover the said assets under provisions of the Prevention of Money Laundering Act, or the provisions of the UNCAC allowing for seizure and confiscation of assets that are proceeds of crime. 3. Instruments such as participatory notes and anonymous investments by funds or shell companies need to be disallowed with immediate effect. Every time a company invests in stocks or other financial instruments in the Indian Stock Exchange or elsewhere, the relevant authority must be able to determine the exact ownership of the investment, ending in the final individuals who hold the money that is being invested. In the case of investments made in the name of a company or a trust, the major stakeholders of the company, or the trustees of the trust, must be determined and duly recorded, before the investment is allowed. The changes that are suggested above may need to be reinforced by corresponding changes to any bilateral treaties or double taxation treaties that India has signed with individual countries, since those would normally take precedence over the provisions of the UNCAC. However, it is encouraging to note that the UNCAC, to which most significant countries, along with India are signatories, already contains several provision which would pave the way for the changes suggested above. The UN Convention Against Corruption mandates the signatories to the convention to take several steps to help eradicate the problem of money laundering from the global economy. Article 14 of the UNCAC states: 1. Each State Party shall: (a) Institute a comprehensive domestic regulatory and supervisory regime for banks and non-bank financial institutions, including natural or legal persons that provide formal or informal services for the transmission of money or value and, where appropriate, other bodies particularly susceptible to moneylaundering, within its competence, in order to deter and detect all forms of money-laundering, which regime shall emphasize requirements for customer and, where appropriate, beneficial owner identification, record-keeping and the reporting of suspicious transactions 2. States Parties shall consider implementing feasible measures to detect and monitor the movement of cash and appropriate negotiable instruments across their borders, subject to safeguards to ensure proper use of information and without impeding in any way the movement of legitimate capital. Such measures may include a requirement that individuals and businesses report the cross-border transfer of substantial quantities of cash and appropriate negotiable instruments. 3. States Parties shall consider implementing appropriate and feasible measures to require financial institutions, including money remitters: (a) To include on forms for the electronic transfer of funds and related messages accurate and meaningful information on the originator. b) To maintain such information throughout the payment chain; and c) To apply enhanced scrutiny to transfers of funds that do not contain complete information on the originator. Further, Article 23 (Laundering of proceeds of crime) states: 1. Each State Party shall adopt, in accordance with fundamental principles of its domestic law, such legislative and other measures as may be necessary to establish as criminal offences, when committed intentionally. a) (i) The conversion or transfer of property, knowing that such property is the proceeds of crime, for the purpose of concealing or disguising the illicit origin of the property or of helping any person who is involved in the commission of the predicate offence to evade the legal consequences of his or her action; (ii) The concealment or disguise of the true nature, source, location, disposition, movement or ownership of or rights with respect to property, knowing that such property is the proceeds of crime; (b)Subject to the basic concepts of its legal system: (i) The acquisition, possession or use of property, knowing, at the time of receipt, that such property is the proceeds of crime; ii) Participation in, association with or conspiracy to commit, attempts to commit and aiding, abetting, facilitating and counselling the commission of any of the offences established in accordance with this article. 2. For purposes of implementing or applying paragraph 1 of this article: (a) Each State Party shall seek to apply paragraph 1 of this article to the widest range of predicate offences; (b) Each State Party shall include as predicate offences at a minimum a comprehensive range of criminal offences established in accordance with this Convention. One of the prime instruments that has been used over the years to frustrate efforts of the Indian law enforcement agencies to bring individuals indulging in money laundering to book, has been the notion of ‘bank secrecy laws’ that were instituted in Switzerland and other tax havens, to protect racketeers from being exposed. I personally saw the harmful effect of these bank secrecy laws when I was working on the Bofors case in the early 1980s, and since then, these laws have been used to obstruct the natural and rational course of justice in innumerable cases. Thankfully, the UNCAC recognizes the impediments that such laws may place in the way of law enforcement, and has, in several places, mandated that global public interest must override any such domestic bank secrecy laws. Article 31 of the UNCAC, dealing with ‘Freezing, seizure and confiscation’, states that: 1. Each State Party shall take, to the greatest extent possible within its domestic legal system, such measures as may be necessary to enable confiscation of: (a)Proceeds of crime derived from offences established in accordance with this Convention or property the value of which corresponds to that of such proceeds; (b)Property, equipment or other instrumentalities used in or destined for use in offences established in accordance with this Convention. 2. Each State Party shall take such measures as may be necessary to enable the identification, tracing, freezing or seizure of any item referred to in paragraph 1 of this article for the purpose of eventual confiscation. 3. Each State Party shall adopt, in accordance with its domestic law, such legislative and other measures as may be necessary to regulate the administration by the competent authorities of frozen, seized or confiscated property covered in paragraphs 1 and 2 of this article. Most importantly, Paragraph 7 and 8 of the same Article state: 7. For the purpose of this article and article 55 of this Convention, each State Party shall empower its courts or other competent authorities to order that bank, financial or commercial records be made available or seized. A State Party shall not decline to act under the provisions of this paragraph on the ground of bank secrecy. 8. States Parties may consider the possibility of requiring that an offender demonstrate the lawful origin of such alleged proceeds of crime or other property liable to confiscation, to the extent that such a requirement is consistent with the fundamental principles of their domestic law and with the nature of judicial and other proceedings. Further, Article 40 squarely deals with the impediment that bank secrecy laws may pose, and states: Each State Party shall ensure that, in the case of domestic criminal investigations of offences established in accordance with this Convention, there are appropriate mechanisms available within its domestic legal system to overcome obstacles that may arise out of the application of bank secrecy laws. The mechanism for seeking mutual legal assistance, that has been laid out in Article 46 of the UNCAC, also provides several instruments that can be used to overcome the barriers that have been used in recent times, to frustrate the process of recovery of illegally begotten wealth, and taxpayers money stashed in foreign accounts. If the abovementioned changes are introduced by the Indian government, Article 24 of the UNCAC would enable the government to ask governments of tax havens such as Switzerland, Mauritius, Cayman Islands, etc, to disclose all bank accounts and assets held by individuals, either directly, or through shell companies or trusts, other than the ones that they would voluntarily disclose under the new laws. Article 46 (Mutual legal assistance) of the UNCAC states: 1. States Parties shall afford one another the widest measure of mutual legal assistance in investigations, prosecutions and judicial proceedings in relation to the offences covered by this Convention. Paragraph 8 of the same Article again reinforces the need to remove all obstacles posed by bank secrecy laws: 8. States Parties shall not decline to render mutual legal assistance pursuant to this article on the ground of bank secrecy. Paragraph 15 of Article 46 lays down the procedure for requesting legal assistance, and clearly contemplates cases where the names of individuals allegedly involved in money laundering or other illegal activities are not known: 15. A request for mutual legal assistance shall contain: (a) The identity of the authority making the request; b) The subject matter and nature of the investigation, prosecution or judicial proceeding to which the request relates and the name and functions of the authority conducting the investigation, prosecution or judicial proceeding; c) A summary of the relevant facts, except in relation to requests for the purpose of service of judicial documents; d) A description of the assistance sought and details of any particular procedure that the requesting State Party wishes to be followed. e) Where possible, the identity, location and nationality of any person concerned; and f) The purpose for which the evidence, information or action is sought. The provisions of Article 36 make it clear that the SIT that has been formed would be well within their rights to ask Swiss authorities, or authorities of any other country, to disclose assets held by all Indian citizens, which are in excess of the assets that they have disclosed under the relevant India laws. The deeming provision suggested above, declaring all undisclosed assets and income to be ‘proceeds of crime’, as well as provisions to increase transparency and require full disclosure of ownership of investments and saving held in different accounts, is already required under the UNCAC, which also states: Article 52.Prevention and detection of transfers of proceeds of crime 1. Without prejudice to article 14 of this Convention, each State Party shall take such measures as may be necessary, in accordance with its domestic law, to require financial institutions within its jurisdiction to verify the identity of customers, to take reasonable steps to determine the identity of beneficial owners of funds deposited into high-value accounts and to conduct enhanced scrutiny of accounts sought or maintained by or on behalf of individuals who are, or have been, entrusted with prominent public functions and their family members and close associates. Such enhanced scrutiny shall be reasonably designed to detect suspicious transactions for the purpose of reporting to competent authorities and should not be so construed as to discourage or prohibit financial institutions from doing business with any legitimate customer. Paragraph 3 of the same Article further states: 3. Each State Party shall implement measures to ensure that its financial institutions maintain adequate records, over an appropriate period of time, of accounts and transactions involving the persons mentioned in paragraph 1 of this article, which should, as a minimum, contain information relating to the identity of the customer as well as, as far as possible, of the beneficial owner. Although many self-styled economists would argue that the measures suggested above will discourage foreign investments into our economy, one must remember that most individuals and companies want a transparent and clean environment to do business, and are least likely to be deterred by measures that seek to improve the level of transparency and to promote a clean business environment. In a growing economy and a democracy such as India, the investors and shareholders of private companies have a right to know how their company is making investments, and improving transparency will only boost investor confidence. More importantly, these steps are necessary to tackle the growing problem of black money, before it threatens the very survival of our democratic institutions. I hope and trust that you will take my suggestions on board, and proceed in a manner that safeguards the future of our economy, as well as our democratic institutions. Yours sincerely, Prashant Bhushan Copy to: 1. Justice m.b. Shah Chairperson, Sit on black money 2. Justice Arijit Pasayat Vice chairman, SIT 3. Arun Jaitley Finance Minister Government of India
Posted on: Tue, 24 Jun 2014 04:08:17 +0000
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