An expert on tax havens is summoned to Dubai to offer investment advice to an Indian group located in the United Arab Emirates (UAE). He is shown a warehouse where a large quantum of funds is stored as cash (in rupees). The expert is asked to inject the cash into secret Swiss bank accounts.

In normal course the advisor’s task would have been easy. But, given the extraordinary changes in Swiss banks after the whittling away of confidentiality-cum-secrecy practices, the banking expert refused.

The Paris-based OECD (Organisation for Economic Cooperation and Development), the club of rich countries, and the US have forced large-scale changes in the Alpine banks, including making them share information.

The Swiss government has now relaxed “confidentiality" provisions, allowing sharing of information about illegal or unauthorized deposits with other countries, including India, subject to certain conditions. Basically, in any case that is not based on a “fishing expedition"—i.e., searching for information without knowing whether such information exists—the Swiss government has said that it will cooperate.

Consequently, the world of illegal and unaccounted cash has moved to new destinations. Dubai, for example, has become a major magnet. So have other centres such as the Cayman Islands, the British Virgin Islands, Seychelles, Hong Kong and Luxembourg, among others, competing for unaccounted funds.

It is not clear how much of the world’s illegal funds handled by Panamanian law firm and corporate service provider Mossack Fonseca found its way to Dubai or other centres. Several big banks—HSBC Holdings Plc., Credit Suisse Group AG, UBS AG, Société Générale SA and Commerzbank AG—are known to have worked hand in glove with the firm over the years to set up thousands of offshore companies.

The Panama Papers also brought to light the names of hundreds of Indians, including celebrities, corporate entities and even some politicians. The subtle mechanics of the $7 trillion of funds held offshore by elites came into the open thanks to German news daily Süddeutsche Zeitung which, in turn, shared all the details with the International Consortium of Investigative Journalists (ICIJ).

The ICIJ mounted an unprecedented effort to share the information with newspapers across the world, including the Indian Express.

The political tremors generated by the 1.1 million documents were swift and damaging. Nobody expected Iceland’s prime minister to resign in less than 48 hours, nor the British prime minister to admit publicly that he was a beneficiary of the hidden wealth earned from an opaque offshore company of his late father.

Indeed, the Panama Papers could not have come a day sooner for the OECD. The Paris-based organization has made tax havens and their transparency-deficit a signal issue. It is now developing a global transparency framework to minimize the threat posed by the dodgy/opaque tax black holes.

Come next year, countries which hitherto maintained secret financial infrastructure will begin sharing data automatically. That would help OECD members levy taxes appropriately, according to Nicholas Shaxson, an authority on tax havens.

While it is relatively easy to force a Switzerland or a Panama to fall in line, it may be next to impossible to bring the US under the OECD framework. It has many firms that play the same role as Mossack Fonseca, said Matt Gardner, executive director of the Institute on Taxation and Economic Policy.

A study by the Tax Justice Network found that the US is the third-biggest offender in the world in terms of facilitating financial secrecy and tax evasion. “Due to lax requirements in Delaware, Nevada and a few other states, for example, it is far easier to set up an anonymous shell company in the US than it is in well-known tax havens such as the Cayman Islands or the British Virgin Islands", according to the Financial Transparency Coalition. However, the US refuses to join the OECD initiative.

Many Indian clients of Mossack Fonseca claimed that they have not violated Reserve Bank of India (RBI) guidelines. But it is too early to get a clear idea about the magnitude of violations committed by the Indian companies after availing RBI schemes.

Bankers in western countries say that much of the illegal money flowing into opaque, tax-evading offshore companies from India stemmed from over-invoicing of imports, under-invoicing of exports and from gold and diamond trade with Dubai. The government has abundant financial intelligence to know where the illegal wealth and funds are accumulating.

The Directorate of Revenue Intelligence (DRI), according to Paranjoy Guha Thakurta and Aman Malik in the Economic and Political Weekly, is probing major coal-based power companies which have apparently siphoned off funds to the tune of 29,000 crore outside the country.

The Panama Papers offer a valuable opportunity to understand how shell companies and trusts usually operate. If the Narendra Modi government is serious about preventing funds from being siphoned off to offshore centres, then it must stop not only the continued practice of over-invoicing of imports but the manner in which funds are recycled back into India.

There are serious allegations about foreign institutional investors making investments through participatory notes (P-notes), which have become a conduit for the movement of illegal funds in different directions. To be sure, P-notes offer investors tax advantages derived from tax treaties India has signed with countries such as Mauritius and Singapore.

Last year, Modi visited the UAE and described it as a valuable partner. “UAE is a valued partner and the extent of our ties indicate the vibrant relations India and UAE enjoy—India is UAE’s second largest trading partner and UAE is India’s third largest partner," Modi said.

It would have been beneficial for India if it confronted the UAE government and others head on about tackling illegal income generated by tax evasion. The Panama Papers include some Indian companies which are prominent operators in Dubai. It is time that New Delhi looked seriously at Dubai and other centres in Asia.

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