Has the government really scored a major victory in the hunt for black money in Swiss banks?

Just when the government was on a roll, earning hosannas for a series of reforms, severe grief visited it in the form of a Supreme Court hearing on ill-gotten, untaxed “black money” held in foreign banks. The change in fortunes was precipitated by its admission in court that the names of Indians (secretly) holding bank accounts abroad cannot be revealed owing to double taxation avoidance treaties with other countries. A public roasting ensued — expectedly.
The BJP when it warmed the opposition benches had consistently attacked the Congress government for its refusal to reveal these names. Now as ruling party, it had taken recourse to the same excuse as its predecessor. The admission in court was also a serious blemish on the BJP’s election promise of bringing back black money (the deadline of 100 days had long passed, remember).

A battered Congress finally had a stick to beat the government with, singling out for special mention prime minister Narendra Modi’s promise of depositing Rs 15 lakh in every citizen’s account after the seizure of illicit billions.

The Evidence

Fortuitously for the government, a team of Indian officials had almost simultaneously rounded off talks with Switzerland, which they believe is the epicentre of black money (never mind that plenty of tax havens have sprouted around the world). The Swiss banking system is steeped in secrecy and Indian attempts to even extract information have always proved futile. The government gave the impression that it had at long last achieved a major breakthrough in Switzerland. Has it really?

Let’s look at the joint statement signed by Indian revenue secretary Shaktikanta Das and Swiss state secretary Jacques de Watteville that describes the talks. The two officials met in Berne as “part of the regular dialogue conducted by Swiss and Indian authorities”. Though this deflates the impression of Indian spooks chasing bad guys, it would be wrong to surmise that nothing good came out of the meeting. There were two gains.

The first was the willingness expressed by Switzerland to examine Indian requests for which investigations have been carried out independently. Indian authorities possess a so-called ‘HSBC list’ that contains names of Indians who have stashed wealth in the Swiss unit of the banking major. But Switzerland had long maintained that there is no international standard to provide assistance based on information illegally obtained and Swiss legislation does not allow cooperation in such cases. The Swiss had finally relented, if only a little.

The second gain was the statement by Adrian Hug, director of the Swiss Federal Tax Administration, that a competent Swiss authority would assist in confirming the genuineness of bank documents. (The Indian Express reported on Thursday that the government is about to send a batch of 50 names to Switzerland to confirm the authenticity of the HSBC list.) The gains end here.

India’s attempt to conclude an automatic exchange of information agreement (AEIA) with Switzerland “after completion of domestic procedures at the earliest” too was bandied about as another triumph. But only a diehard optimist would take solace from ‘domestic procedures’ and ‘at the earliest’.

Switzerland is yet to introduce the new global standard on AEIA in tax matters with partner states — the Swiss parliament will vote on the standard only next year. A statement on October 8 by the Swiss Federal Council says the first exchange of information could take place in 2018 but is subject to parliament and voters approving the necessary laws and agreements.

The referendum has become necessary because, as a recent The New York Times report said, though Swiss authorities have nodded at cooperation with frustrated governments abroad (after pressure from developed countries), “at home, laws on the books since 1934 make violating client confidentiality a crime”. There is no telling how the referendum will swing. But the NYT report said “a backlash is building to protect the vaunted traditions of secrecy”.

Reluctant Partner

Andres Knobel, an analyst for the Tax Justice Network, an advocacy group that promotes transparency in international finance, said Switzerland has proved unwilling to part with information, especially to developing countries.

Switzerland has already expressed that it will require, among other things, reciprocity and confidentiality to exchange information, according to him. The first caveat does not bode well for India because New Delhi is not a tax haven and the chances of Swiss nationals parking money here are remote. As for confidentiality, the double taxation avoidance treaty (DTAA) with Switzerland — the basis of cooperation in tax matters between the two countries — allows disclosure of information to authorities and courts concerned with tax appeals.

However, the DTAA insists on confidentiality until authorities file charges for prosecution. Problem is there is the likelihood, according to media reports, of the names being revealed prematurely. (Anne Césard, a spokeswoman for State Secretariat for International Financial Matters, the nodal Swiss agency on international financial, monetary and tax matters, declined comment on this aspect and revenue secretary Das did not respond to calls and text messages.)

These obstacles apart, there are problems with the government’s singular reliance on DTAA to extract information on black money. As Prof Arun Kumar of Jawaharlal Nehru University noted in an earlier article in ET Magazine, “The government has projected DTAA as a step to tackle the menace (of black money) but it is for getting information about legally held capital abroad. Capital is taken out of the country through layering via different tax havens (of which there are more than 70) so that when it reaches its final destination, it does not appear to be Indian money but say, from Cayman Islands.”

That means Indian tax authorities have plenty of sniffing and chasing to do. But historically, whistle-blower revelations have proved to be the primary sources of information on secret bank accounts. Looks like the flight of `15 lakh into our accounts is going to be delayed.