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Noopur Tiwari: Cracking the secrecy code

Identifying the dodges in the agreements with tax havens is critical if India is to unravel the black money trail

Noopur Tiwari 

A can make people dream of black money flowing back in millions and trillions to the country. But did Mr ever tell anyone how exactly he was planning to make this dream come true if he ever got a chance? What would it really take to get black money back from to India?

The first thing would be to understand one simple thing about tax havens: they are extremely hard to crack. They are not just waiting to hand over information and money; they are doing all in their might to do exactly the opposite.

Take One of the world’s biggest financial centres, it has also been ranked number one on this year’s compiled by the There are rigid laws in that help banks shield account holders from being exposed. The country has a long tradition of bank secrecy since the Middle Ages, of which it is very proud. Since 1934 breaking bank secrecy has been a criminal offence in So no bank can divulge information unless the Swiss government asks. In which case they hand the information to Swiss authorities, who in turn give that information to the country making the request. Tax evasion is not a crime under Swiss law (although tax fraud is), so no one believes in making things easy for countries making requests to nab their tax cheaters.

There is one bright spot though. does provide legal assistance more easily in the case of wealth gained from illicit activity. This covers corruption and kickbacks from weapon deals. But there’s a catch: they will only oblige if they have reason to believe the case is strong enough. They don’t allow room for what they call “fishing expeditions”. You can’t go to them and say, “We think there’s an Indian who has stashed away a lot of money in an account somewhere in your country. So can you tell us where and how much and then just send it back to us?”

So, would signing tax treaties be the solution? The Indian government is in the process of signing treaties with nearly 70 jurisdictions listed as But the question is: are they good treaties? The amendments to the Double Taxation Agreement (DTA) between India and came into force on October 10, 2011. The treaty allows India to make requests for administrative assistance from Swiss tax authorities. If Indian authorities suspect someone of holding undeclared assets in a Swiss account, will have to lift bank secrecy and provide information about the account.

In theory this is perfect for India. And now the catch: Indian authorities need to know the names of individuals and of the banks where the money has been parked. That’s a bummer. It’s like asking Indian authorities to know what they are trying to find out even before they are told anything. If India were to get anything through this route, it would have to have a hyper-efficient Central Bureau of Investigation. One hears through the Swiss grapevine that the requests for legal assistance, specially for some high-profile cases, were so devoid of concrete evidence that they could have been a joke. It’s hard to say whether this was because the investigation was weak or no one in the Indian establishment really wanted the request to go through.

Interestingly, in a unilateral amendment made to the with India on the October 6, it was spelt out that a person under investigation may be identified, if necessary, by means “other than name and address” and the bank connection must be identified only “to the extent known”. This sounds good. But the same paragraph notes that will, in practice, apply the principles of “proportionality” and “practicability”. This means that can still decline any request without a clear indication of which bank exactly is holding the requested information. Confusing, isn’t it?

These amendments to the Indo-Swiss treaty respect the international standards. Even Germany and the UK have the same treaties but they saw these shortcomings when they signed the treaty. So they negotiated another tax deal with soon after the tax treaties came into force. The additional agreements with Germany and the UK consist of two main parts: a withholding tax on undeclared German and British assets from the past and a withholding tax on various kinds of capital income in the future. In both cases, the tax will be raised and transferred to Germany and the UK anonymously. They will also have the right to submit names of possible tax evaders with a plausible suspicion of tax evasion, and will then have to collect and communicate these persons’ Swiss banking connections. This will make it much easier for Germany and the UK to then deposit information request under the recently revised DTAs.

So was this a result of the collective efforts in Europe to fight tax evasion? Since 2008 the Organisation for Economic Co-operation and Development has been able to put enough pressure on to relax banking secrecy to a certain extent. But these German and UK tax deals are going against the collective spirit, says of Alliance Sud, a Swiss NGO group. “seems to have succeeded in bilaterally co-opting Germany and the UK away from the EU’s unified struggle for automatic tax information exchange,” Herkenrath says. “The Swiss strategy was to send the Germans and the British authorities money instead of data but it has been only partially successful since German and UK tax authorities will receive money, but are also promised a framework for receiving some data from Switzerland,” he adds. Herkenrath says India was one of the first countries to request a with Switzerland, which counters the impression that India is not doing anything against tax evasion. On the other hand, in cases involving corruption and money-laundering, India seems to have filed just ten requests for judicial assistance with over the past five years.

In a historical defeat for bank secrecy, in 2009, the US managed to force Switzerland’s largest bank, UBS AG, to reveal the names of US taxpayers. The US had asked for 52,000 names and finally gave 4,400 names and is now considering to amend its US tax treaty to allow for sharing of information without the taxpayers’ names being a prerequisite.

But India doesn’t quite wield the same clout as the US. Some of the biggest Swiss banks operate in the US. There is a lot at stake for them over there. The survival of these banks was threatened when a whistle blower gave information to US authorities. The Swiss government relented and broke bank secrecy.

Even though India is not on a par with the US, UK and Germany, it has something to learn from each of them. And perhaps also from a much smaller player, Kazhakistan, which had threatened to blacklist and impose economic sanctions on if it didn’t sign a tax treaty with them. Simultaneously, the focus should be on preventing capital flight in the first place. India has recently slapped a withholding tax of 30 per cent on companies based in countries listed as non-cooperative jurisdictions. It has also signed tax treaties with more than 65 jurisdictions. But if India is serious about getting black money, it needs to have a more aggressive stance. Enormous political will is a primary requisite. However, if the governing classes are reaping benefits of tax havens, things are not likely to move very fast.

The author is the Europe correspondent for New Delhi Television based in Paris

First Published: Sat, October 22 2011. 00:40 IST
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