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Money laundering: We are looking at the tip of the iceberg

April 14, 2016 12:44 IST

The Panama law firm

The Panama leaks do not demonstrate that countries have become smarter at detecting and prosecuting money laundering. The international financial system continues to be favourable to those who have the means to hide their money, rues Nigam Nuggehalli

The Panama Papers leak is not representative of the fact that countries have become smarter at detecting money laundering.

The global financial system continues to favour those with the means to hide their money

After the Panama Papers story broke, Finance Minister Arun Jaitley spoke of it as part of a larger narrative concerning a new international financial order in which transparency in property ownership would be the norm rather than the exception.

In the future, any person or company parking their illegitimate money anywhere in the world would be identifiable through publicly accessible records and therefore, vulnerable to criminal prosecution.

Presumably, Jaitley based his remarks on the spate of multilateral and bilateral information exchange agreements signed between countries in the recent past and the steps taken by the major economies of the world (including India) to improve disclosure and transparency in the domestic financial system.

Despite what Jaitley stated, there is little, if any connection, between the Panama Papers story and financial disclosure reforms in the international financial system.

The reforms, despite the rhetoric, are at a nascent stage and there is every chance that any transparency-related improvements in the system will never come to fruition.

Take the case of the exchange of tax information between India and Switzerland.

At present, there is no automatic exchange of information between the two countries. If the Indian tax authorities want to obtain any information on any account held by Indians in Swiss banks, they have to provide a reason for their request.

Therefore, if the Indian authorities do not have information on people holding money acquired illegitimately, they cannot even begin any information retrieval process with respect to Swiss bank accounts.

Switzerland and India have agreed to abide by a multilateral agreement under which countries would be obliged to exchange tax information automatically with each other, without either country needing to provide concrete evidence of tax evasion.

However, Switzerland will not have binding legal obligations under the multilateral treaty until a separate agreement is negotiated and completed with India.

Therefore, India’s aspirations to acquire financial information from Switzerland are hostage to that country’s internal political process which might take a long time, if at all, to be completed.

Further, an automatic information exchange system requires sophisticated technology-enabled information systems at financial institutions, which is not yet the case at many of India’s national banks.

Switzerland might be able to argue that unless Indian financial institutions demonstrate reasonable rigour and credibility in their tax information systems, any reciprocal exchange of information would not take place.

We are probably at least a few years away from a genuine global automatic exchange of information system.

Until then, the only way in which tax information would come out of tax havens is through leaks and whistle-blowers.

The Panama story has another intriguing feature that has not garnered adequate attention.

The leaks have come from a law firm, not a financial institution.

Financial institutions are the kind of places the world has focused on traditionally in its attack on international tax evasion.

However, there are well-known problems with any efforts aimed at disclosure requirements for financial institutions.

Many of the most egregious tax evasion transactions take place through financial institutions set up in tax havens such as the Cayman Islands where there are no rigorous legal requirements that a person depositing money has to provide his or her real identity.

The depositor provides the money through a corporate entity or trust that might well be based in yet another tax haven that has few disclosure requirements.

As scholars on money-laundering laws have pointed out, all that the banks in tax havens are interested in is whether the person putting in the money is the same person withdrawing it.

The real identity of the person is not their concern nor do the tax havens insist on this requirement.

The story changes with the lawyers working in these tax havens.

The banks are happy not knowing the identity of their patrons because they are already in possession of the money deposited by them.

When it comes to the lawyers working on behalf of the patrons, the identity of the latter is important, otherwise there is no proper recourse if the patrons do not pay for the lawyers’ services.

Therefore, there would usually be a paper trail in the lawyers’ offices pointing to the real source of the money in the tax havens.

Normally, this would be a problem for the lawyers’ clients, as almost no one deposits money into tax havens without appointing counsel.

However, the automatic exchange of information systems do not impact any incriminating information with the lawyers, as such information would be protected under attorney-client privilege.

It would be interesting to see how leaked, but privileged, information from a law firm holds up in a court of law in India.

Certainly, any prosecutions based on the Panama leaks will run into more complications than the HSBC leaks a few years ago mainly because of the privileged source of the information.

The Panama leaks are not a demonstration of the fact that countries have become smarter at detecting and prosecuting money laundering.

The international financial system continues to be favourable to those who have the means to hide their money.

Occasionally, a whistle-blower or a hacker releases sensitive financial data that creates a temporary illusion that the world is about to close in on tax dodgers.

Lest it be forgotten, the Panama leaks are about information leaks from one law firm.

Despite the ostensibly large number of names on the Panama list, there is no doubt that we are looking only at the tip of the money-laundering iceberg.

Nigam Nuggehalli is associate professor of law, Azim Premji University, Bengaluru

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Nigam Nuggehalli
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