UN convention to boost anti-corruption measures

Last week, India ratified the UN convention against corruption; the ratification comes almost six years after India signed the convention in 2005. The convention, a supplement to transnational organised crime, recognises the need to enhance cross-border cooperation in battling corruption introducing a slew of administrative and legislative measures (for countries) to strengthen domestic legal and regulatory regime. It enumerates application of code of conduct for public servants to promote transparency and accountability in the management of public finances by way of stringent auditing standards. Measures to prevent money-laundering and securing the independence of investigative agencies & judiciary are other aspects that have been dealt with.

 

In the Indian context, the signing is a landmark development in the backdrop of public outcry on corruption & financial impropriators which has lead to judicial activism and role of multiplicity of investigative agencies and legislative arms of the government.

UN Convention & Indian parallels
The Convention (Article 4) elaborates that member states shall carry out its stated objectives in their respective jurisdictions, in a manner consistent with the principles of sovereignty. It rightly does not permit one member state to interfere with the domestic legal system or territorial integrity of the other unless there is bilateral treaty permitting cooperation between two sovereign states. Hence, an effective implementation will require each member to legislate and maintain coordinated anti-corruption law in accordance with its fundamental principles and constitutional framework. The Convention encourages international collaboration for developing domestic anti-corruption legislation and safeguards.

Further, Article 9 specifically deals with regulatory regime for banking and non-financial institutions to enhance transparency standards and promote international cooperation for exchange of information. To deal with cross-border banking secrecy cases of criminal investigations, the Convention recommends states to ensure adequate safeguards in accordance with domestic legal system. This aspect has been an area of worry for foreign governments and citizens including offshore banks to effectively deal with tax investigations by the Revenue. To prevent trafficking in proceeds of offences of corruption and money-laundering, the Convention advocates setting up of financial intelligence unit responsible for monitoring, analysing and disseminating financial transactions data.

India’s ratification underscores an in-principle alignment to the fundamental principles of the Convention i.e. preserving sovereign integrity, respect for international conventions & treaties, and its desire to legislate laws to prevent tax evasion, corrupt practices and money laundering. One can draw parallels with key features of the Convention - India has enacted prevention of corruption & money laundering laws and if the activists have their say, we could witness a landmark legislation by way of Lokpal Bill. Further, government institutions for implementing and raising awareness on corruption particularly, CVC, CBI and information Commission, etc are in place.

To bolster information exchange, the Government setup National Intelligence Grid (NATGRID), brainchild of Home Minister Chidambaram, modeled on the US intelligence Bureau model and expected to compile over 20 diversified databases such as banks, financial intermediaries, telecom service providers, etc. While the turf war on administrative jurisdiction over NATGRID has delayed a much required initiative, once institutionalized, it will promote effective and speedy retrieval of financial and non-financial data by over 10 government agencies (including RAW, Intelligence Bureau, Revenue Intelligence & the Income-tax department).

Clearly, India has the benefit of a well defined domestic institutional framework. Equally important is efficacy of such institutions, its independence – these are our primary challenges not to forget our antiquated laws on rules of evidence, criminal procedure code & delays in court trial. I have no doubt these will evolve and so would banking secrecy laws.

Debate on amnesty to resurface – is over-regulation an answer?
IMF forecast for June 2010 indicate that the aggregate size of global money laundering is between 2- 5% of reported global GDP of USD 60 trillion making it effectively the 3rd largest industry. The size of India’s ‘parallel’ economy is equally disturbing; unconfirmed statistics suggest approximately USD 1.3 to 1.5 trillion stashed in offshore banks in addition to domestic cash dealings; a public interest petition filed in the Apex Court corroborates this estimate. Consistent rap by the Supreme Court on lack of timely action by the investigative agencies is merely suggestive of a long drawn legal process fraught with uncertainty.

Yet, the sheer magnitude of estimates of unaccounted wealth will force India to rush through slew of institutional reforms beyond legislative intent. Importance of bilateral conventions is bound to receive greater attention as crime of corruption & tax evasion spreads beyond national boundaries. No wonder why India is championing the cause of tax information exchange agreements with treaty & non treaty partners including with jurisdictions which have traditionally been classified as tax havens. Such measures are bound to lend legitimacy for investigative agencies to pursue against tax evaders.

An internationally accepted measure for encouraging tax evaders to come forward with a declaration and administration in turn providing an amnesty is well recognised. In the latest such initiative which is presently underway, the United States Internal Revenue Service’s (IRS) has unveiled a program titled ‘2011 Offshore Voluntary Disclosure Initiative’, encouraging US citizens to report undisclosed foreign accounts and sources of unreported income. The program expects delinquent taxpayers to ensure compliance by remitting past taxes to avoid compounded civil penalties and criminal prosecution. Though, this should not force us to rethink amnesty in Indian context, the question is the most effective way to deal with tax evasion.

We have witnessed multiple amnesty schemes encouraging voluntary disclosure in exchange of remission from criminal prosecution. The verdict is that most have failed and were implemented under different economic and political compulsions. An exception being the ‘97 scheme dubbed as successful due to significant tax mop up where tax payers received immunity from prosecution under Foreign Exchange & Company law besides income & wealth tax. The scheme however drew flak from the highest court and was criticised as being unfair towards honest taxpayers .

So should India legislate another amnesty or do we have an alternative strategy?
One of the ways to resolve the stalemate could be encourage reporting of un accounted foreign income by providing an incentivized tax remission similar to the US scheme. Not that philosophically such a scheme would not go against the interest of law abiding citizens. The scheme could have limited applicability to deal with private citizens only. There are some interesting amendments in the Finance Act of 2011 dubbed by some as shape of things to emerge. Declaration of cross border transactions with notified jurisdictions and subjecting them to onerous documentation compliance is suggestive of ‘fair play’ measure in the scheme of domestic laws.

My feeling is that jurisdictions would be notified after Ministry of Finance takes stock of countries that don’t cooperate with India on tax information exchange treaties.

Further, amendment to tax dividends declared by foreign subsidiaries of Indian corporate at a fixed rate of 15 percent (against 30 ) is viewed as a move to encourage integration of (legitimate I hope !) offshore earnings with the economy. It is also a pre cursor to Direct taxes code provision to tax offshore income under CFC legislation. To call such measures as limited amnesty is far-fetched, nevertheless, they are indicators!

The author is Partner with BMR Legal. Views are entirely personal.