Unearthing hidden bank accounts

Apathy on the part of the government to crack down on the undeclared assets, especially foreign accounts held in Switzerland and elsewhere, is causing the loss of billions of rupees to the national exchequer. No tax reforms can succeed in Pakistan unless the issue of underground economy is tackled first - urgently and effectively.
Failure of the FBR to nab evaders is bringing more hardship for the common people of Pakistan - the rich and mighty are not paying taxes and tax officials in the frenzy of achieving tax targets are shifting the incidence on the poor and the vulnerable middle-class. Those enjoying invincible money power (generator and protector of the underground economy) conveniently remain outside the ambit of the tax net.
It is high time that the government gives up its policies of appeasement towards the plunderers of the national wealth and tax evaders. Causes of corruption and rent-seeking activities have to be destroyed with full force if we have to survive as a nation. The tax-to-GDP ratio can only be improved (at least 15% of GDP) if the entire informal economy is taxed. Once the State demonstrates by action its determination to crack down on the hidden accounts (both inside and outside the country) and starts spending taxes for the welfare of society, the nation would certainly reciprocate by paying their dues diligently and honestly. This is the only way to fight corruption, promote a tax culture, control and eliminate losses of tax revenue in Pakistan.
Time and again we have written in these columns and elsewhere that our economic survival now lies in collecting taxes from the rich and mighty - our real tax potential is around Rs 8 trillion (see our article A plan for raising revenue, The News, November 13, 2011). Secondly, the taxes collected should be utilised for the betterment of society. All the political parties, it was suggested by us in the Democratising of political parties, The News, July 17, 2011, should first of all make public, the tax and asset declarations of their office holders. We further suggested that:
"For political parties there should be a provision in the Income Tax Ordinance, 2001 making it incumbent on them to file their tax returns. Their income should be exempt from tax, provided they file returns voluntarily and present audited accounts for scrutiny. Such provisions exist in tax laws of all the major democracies. In India not only does this law exists [section 13A of Income Tax Act, 1961] but recently Chief Election Commissioner of India, S Y Qureshi, asked the Indian Central Board of Direct Taxes (CBDT) to scrutinise accounts submitted by the political parties. Earlier, the Central Information Commission of India directed the Income Tax Department to disclose in the public interest the details of the donors given by the political parties in their tax returns. With this information in the public domain, the Commission said, there would be transparency in the funding of both the small and big parties, besides checking the flow of black money in the electoral process".
All major countries of the world are now taking stringent steps to fight the menace of black money and tax evasion. In their last meeting, G20 governments unanimously agreed to a multilateral convention to tackle tax evasion more effectively. The 'Multilateral Convention on Mutual Administrative Assistance in Tax Matters', they agreed, offers a wide range of tools for cross-border tax co-operation. It includes the automatic exchange of information, multilateral simultaneous tax examinations and international assistance in the collection of tax due. At the same time, the Convention imposes safeguards to protect the confidentiality of the information exchanged. The instrument reinforces international co-operation to target tax evasion by both individuals and corporations. "Now that the G20 countries have led by example, we expect other countries to sign the Convention, said Jeffrey Owens, Director of the OECD's Centre for Tax Policy and Administration."As the membership expands, so the effectiveness of the Convention will increase. Over the coming months we will be working with the developing countries so that they will rapidly be in a position to sign the Convention," he added.
It is worthwhile to mention that the international drive against offshore tax havens has so far reaped nearly 14 billion Euros from would-be tax evaders. Some 100,000 taxpayers in the 20 most important economies surveyed by the OECD have revealed previously undetected offshore assets in the last two years, allowing tax authorities to collect the equivalent of nearly $19 billion. "As cash-strapped governments look to pay down their deficits, this will make a substantial contribution to fiscal consolidation," OECD Secretary General Angel Gurria said at the opening of a two-day meeting on tax transparency."Just as important - most of the additional revenue has been secured from citizens trying to evade taxes," he added. "At a time when many governments are forced to ask their citizens to accept higher taxes and reduced public services, everyone must pay their fair share."Italy has so far been the biggest beneficiary of the crackdown. A scheme there to promote voluntary disclosure of offshore assets had helped bring in additional tax revenues of 5.6 billion euros, the OECD said. A similar scheme in the United States helped recover 2.7 billion dollars from more than 30,000 taxpayers. Germany had raised additional tax revenues of 1.8 billion euros from as many as 30,000 taxpayers. The OECD said that the number of requests for tax information from jurisdictions previously considered to be tax havens had surged from nearly zero into the thousands, with Switzerland alone getting hundreds of requests since 2009.
A few days back, the Indian income tax department in Mumbai conveyed its determination to regularise the income disclosed by Indians named in the list of unreported account holders with the HSBC Bank Geneva, by issuing notices under section 148 of the Income Tax Act, 1961. A notice under Section 148 of the IT Act is usually served when tax department detects income that has escaped the tax net. The tax department of Pakistan is also vested with the same powers to issue notice or amend the completed assessments for the previous five years, if it has reasons to suspect that the taxpayer did not make full disclosure of his income in the returns. However, the FBR is just sleeping over the matter despite many articles by us on this issue during the last many months.
The Indian tax department has already devised a comprehensive strategy to deal with the cases of account holders with the HSBC Bank who failed to declare the same in their tax returns. Till today, it has obtained 17 declarations from Indians having unreported income with the HSBC Geneva. In some cases, the disclosures are to the tune of Indian rupees 30,000 million. All of these disclosures are voluntary declarations made after the tax officials confronted the Indian account holders with the information passed on to it by the French government, which in turn, had got it from a former employee of the bank in Geneva in 2008. In most cases, disclosures were made by revising the returns. The department also gave verbal assurance that the details would not be shared with other agencies.
The Indian tax department maintains that the information obtained from the French government could not be handed over to other enforcement agencies in India in view of the tax treaties between countries which bar transfer of information to other agencies. A similar position exists between Pakistan and France as well as Switzerland. In India, though the talks for exchange of data was initiated through diplomatic channels, the information ultimately came via Double Taxation Avoidance Agreement which stipulates that data passed under the treaty should be used only for the purpose for which it was sought and not made public. A senior tax official of India told the Press that the Supreme Court was now in possession of the details of Indians having accounts with Liechtenstein banks. The tax department had submitted the data after the court sought an explanation for not making the list public. In response, the department shared the list with the apex court along with a copy of a letter from the German government asking the department not to make the data public.
According to The Indian Express, investigators have already mopped up a "massive amount" - running into "hundreds of crores" - as unpaid taxes from among the 700 numbered bank accounts held by Indians in the HSBC Bank in Geneva in the ongoing scrutiny of what is considered a sprawling black money trail. In fact, Rs 400 million has been recovered from the Delhi-based account holders and Rs 600 million from just one account holder in Chennai alone. As reported first by The Indian Express (August 8, 2011), it was in July that the French authorities passed on the details of these accounts to India. Of the total list, 70 account holders were based in Delhi and 18 of them were scrutinised while six account holders volunteered to pay their tax dues.
As we mentioned earlier (Swiss 'Return of Illicit Assets Act': we can get billions back, Business Recorder, October 1, 2010), the Swiss Parliament passed on 1 October 2001 the historic "Return of Illicit Assets Act" (RIAA) - a significant law making it possible for many developing countries, like Pakistan to recover the billions shifted to the Alpine state by unscrupulous individuals and companies. The rent-seekers (especially kickbacks in arms deals and beneficiaries of loan write-offs in Pakistan) have shifted funds worth billions to Switzerland. We can retrieve these untaxed funds if the government, under Article 25(1) of the Avoidance of Double Taxation Treaty with Switzerland, seeks information regarding Pakistanis maintaining accounts in the Alpine state as has been done by USA, UK, Germany, Italy, India and many countries in recent months.
Ever since reports emerged of Indians having accounts in tax havens like Liechtenstein and elsewhere, New Delhi has been working zealously to retrieve the funds from the Swiss banks. But our government has shown no interest till today. India has signed a fresh treaty with Switzerland, aimed at taking the tax evaders to task. Earlier, Rajya Sabha MP, Ram Jethmalani, testified before Indian Supreme Court that the government could not claim immunity from disclosing documents related to black money in Swiss banks.
According to Mark V. Vlasic, an adjunct professor of law at Georgetown University and partner at Ward & Ward PLLC, who worked on the Haiti/Duvalier asset recovery team, "over the last 20 years, the Swiss government returned more than $1.5 billion in assets of criminal origin-including assets from some of the most famous kleptocrats in history such as Sani Abacha of Nigeria, Ferdinand Marcos of the Philippines and Carlos Salinas of Mexico. Despite these recoveries, the process of recovery has been complex and tedious - marred with international treaties and complex local laws. To overcome these difficulties, Switzerland has now enacted RIAA, which is designed for cases involving assets frozen in Switzerland. These assets, allegedly acquired unlawfully, previously could not be returned using traditional international mutual legal assistance channels, especially where any claim of immunity by a head of sovereign states is involved. However, under the RIAA, there is a paradigm shift vis-à-vis the "burden of proof" principle.
In money laundering cases, according to Mark V. Vlasic, the RIAA envisages that the Swiss government would only have to show that the funds held in Switzerland by an alleged corrupt official are significantly larger than what someone could have credibly earned in office, and that the country from which the funds originate was known to be corrupt. Then the burden of proving that the money came from legal sources would lie with the allegedly corrupt official, rather than the Swiss state. If the official could not prove a legitimate origin of his or her Swiss assets, they would be confiscated by the Swiss state. According to the World Bank's Stolen Asset Recovery initiative estimates, the cross-border flow of proceeds from criminal activities, corruption and tax evasion between $1 trillion and $1.6 trillion per year, about half of which came from the developing and transitional economies.
Since 1997, Swiss banks have been publicly accused of accepting money from dictators like Sani Abacha (Nigerian dictator), Mobutu (President of Congo), Lansana Conte (President of Guinea), Gnassingbe Eyadema (President of Togo), Arap Moi (President of Kenya), Omar Bongo (President of Gabon), Obiang Nguema (President of Equitorial Guinea), Blaise Compaore (President of Burkina Faso), Denis Sassou Nguesso (President of Congo-Brazzaville), Eduardo dos Santos (sitting President of Angola), Sadam Hussein (hanged Iraqi President), Jerry Rawling (Ghana's dictator), Ferdinand Marcos (Philippines), Baby Doc Duvalier (dictator of Haiti), Raul Salinas (Mexico), Hosni Mubarak (Egypt), Yoweri Museveni (President of Uganda), Augusto Pinochet (late Chilean dictator), late Moammar Qadhafi (Libya) and Ibrahim Babangida (Nigerian military ruler) without due diligence and without questioning the source of their wealth.
According to a press report: "After five years of foot dragging, Nigeria got back $700 million of its plundered wealth back from Switzerland and Philippines recovered its $684 million looted by Ferdinand Marcos. After 18 years of litigation with the Swiss authorities, the Filipino authorities had finally managed to get their money back. Furthermore, between August 2001 and 2004, Peru recovered nearly over $180 million stolen by its former spy chief, Vladimiro Montesinos from several jurisdictions, including Switzerland, Cayman Islands and the United States.
In May 2007, an agreement between the governments of the United States, Switzerland and Kazakhstan allowed for the repatriation of $84 million denied for many years. While it took Mexico some 12 years to witness the repatriation of $74 million of the $110 million stolen by its ruler Raul Salinas, the governments of Mali and Argentina have also recently received $2.5 million and $4.5 million respectively from Switzerland".
In 2009, Europe and the United States forced Switzerland to give up its age-old bank secrecy. They extracted promises from the placid Alpine nation to help fight tax evasion. That, together with a bitter US tax fraud probe into wealth management giant UBS, opened cracks into the rock-solid reputation of the $2 trillion Swiss wealth management industry. UBS paid a hefty $780 million fine to settle the US tax fraud charges in February 2009 and agreed, in accordance with the Swiss government, later that year to disclose Swiss bank data belonging to around 4,500 of its US clients. The FBR tax officials, till today, have not followed in the footsteps of their counterparts in the IRS.
In the wake of pressure from all sides, Berne swiftly devised a strategy to keep Switzerland on the global financial map. It negotiated deals with large European neighbours allowing them access to hidden money in Switzerland of their citizens. According to some estimates, in 2009 alone "the Swiss banks held $722.4 billion of undeclared European assets." According to Boston Consulting Group, Switzerland singularly manages nearly one third of the global offshore wealth. European assets make up about 50% of foreign assets held in Switzerland. A large portion of undeclared money, known as "schwarzgeld" or black money, originated from Germany and Italy and was smuggled into the country starting in the 1960s after income tax rates started rising in Europe. Italy having an endemic tax evasion problem acted wisely recently by offering its citizens a generous tax amnesty - it brought nearly 100 billion Euros back home.
Swiss bank Credit Suisse has already begun informing American clients suspected of tax evasion that it would soon be passing their details on to the US Internal Revenue Service (IRS). In a notification letter, the bank told clients that it had recently received a formal request for help from the IRS, "which believes that thousands of wealthy Americans are evading taxes by placing their money in Swiss banks". The IRS is seeking information with regard to accounts of certain US persons owned through a domiciliary company (as beneficial owners) that have been maintained with Credit Suisse AG," said the November 2, 2011 letter, a copy of which was obtained by Reuters recently. It is not clear how many clients have received the letter, which offers them two options. They can either agree to let the Swiss tax authorities have their account information and pass it on the IRS, or they can hire a lawyer in Switzerland and fight the process. Switzerland is currently trying to strike a deal with the US to cover its banking sector.
Possible tax agreement between Switzerland and Greece is in the pipeline similar to the ones Switzerland signed a few months back with Germany and the United Kingdom. The aim is to regularise assets held by Greek taxpayers in Swiss bank accounts in the past as well as to introduce a tax at source on future investment income. Switzerland would forward the tax revenue to the Greek authorities on an anonymous basis. In addition, mutual market access for financial services should be improved. Some estimates have put the total amount of Greek assets in Switzerland at SFr 24.2 billion (euros 19.7 billion), with all but SFr 200 million being undeclared. However, other estimates have put the sum at nearly ten times this amount.
According to the 2010 Private Banking Survey by consultancy McKinsey, Switzerland last year experienced net outflows worth 1% of its private banking assets. Those were mainly attributable to transfers by scared European clients. Switzerland continued to enjoy inflows from Asia, Latin America, Russia and Eastern Europe, confirming its global attraction as a wealth management centre, McKinsey said. Some of Switzerland's oldest private banks date back to more than 200 years ago and its polyglot private bankers are used to trading in any currency and any product.
The influential and rich Pakistanis - mostly the crook, corrupt and tax evaders - have hidden accounts in Switzerland. The enormous money looted by indomitable civil-military bureaucracy and greedy businessmen-cum-politicians is also parked in mainly Swiss banks. If advantage of the RIAA is taken, they will not be able to hide their untaxed Swiss bank accounts any more. Pakistani tax authorities can be directed by the apex court to seek information under Avoidance of Double Taxation and Exchange of Tax Information with the Swiss government. After passage of the RIAA, Switzerland cannot restrict its administrative assistance to cases of presumed tax fraud (which involves the falsification of documents). It is legally bound to provide information where tax evasion is suspected - in other words, where money not declared to national tax authorities has been deposited in a Swiss bank.
Pakistani corrupt businessmen, officials and politicians have been transferring huge amounts of money to Swiss banks. This money, generated through illegal activities by avaricious politicians, corrupt bureaucrats, Jihadi-terrorist-drug-for-arms networks and greedy businessmen, was never disclosed to the tax department. Pakistan is facing a grim challenge of measuring and countering enormous revenue leakages and black money - its size estimated to be three times the regular economy. Till today, no effort appears to have been made by the National Accountability Bureau (NAB), Federal Board of Revenue (FBR), Federal Investigating Agency (FIA), Anti-Narcotics Force (ANF) or Narcotics Control Board to conduct an in-depth study to quantify the magnitude of black money and amounts shifted to Swiss banks. According to an estimate, it is not less than 200 billion dollars - four times the external debt of Pakistan.
According to an estimate, the parallel economy in Pakistan is growing at an alarming rate of 20% per annum. Every fifth rupee transacted in Pakistan is black. The volume of black money generated in the year 2008-09 alone was not less than US $40 billion. This is still not final. It does not account for kickbacks in arms deals, foreign trade, smuggling and foreign exchange racketeering, apart from trade in narcotics and other criminal activities by terrorist Jihadi outfits. According to various studies, the underground money generated through smuggling in goods and narcotics trade alone is estimated at US $50 billion. Pakistani policy-makers must realise that a sound development strategy seeks to reduce the size of the informal economy and bring into the open resources that lie in the form of black money. Apart from such mechanisms as foreign exchange and tax amnesties; and exercises such as demonetisations, taxation is used as a tool to tap the resources inherent in these areas. According to a conservative estimate, tax evaders in Pakistan annually deprive the country of revenue of over US $10 billion - but the government, instead of putting them behind bars, encourages their unlawful activities. Our politicians, policy-makers and tax managers during the last many years have miserably failed to tap untaxed money despite borrowing a whopping US $100 million for Tax Administration Reforms Programme (TARP) - every year billions of rupees are transferred from Pakistan to Dubai, Kuala Lumpur, Zurich, Johannesburg and elsewhere.
A survey carried out by a reputed Lahore-based academic institution a few years back, as a part of tax reformation drive, concluded that out of every Rs 100 taxable amount, the highest amount of Rs 38, of course, goes to the taxpayer, a typical Pakistani businessman. The taxman, an officer in income tax department, gets Rs 16 for his services to the taxpayer in helping him to conceal his real income. The middleman, who is a tax practitioner, advisor or a lawyer, gets Rs 10. If these estimates are correct, then the annual national tax loss for fiscal year 2009-2010 was not less than Rs 500 billion - half of which was reportedly transferred to Swiss banks.
It is not possible to determine the precise amount of revenue loss and size of black money or shifting of money abroad. Revenue loss on account of smuggling through Afghan transit trade alone, as estimated by the World Bank, amounted to US $35 billion. Apart from direct monetary costs of corruption, both Pakistani and international literature pinpoint many other costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment.
When the presence of black money is so apparent, its criminal accumulation and generation are not revealed and the offenders punished, is a question which continues to baffle honest citizens. They ask, whether it is on account of lack of political will, or rampant corruption, or collusion of tax dodgers and corrupt tax administrators, or the weak political system, or the ineffectiveness together with defectiveness of laws, or the pervasive stubborn indifference of the citizens towards their duties?
The ugliest face of black money emerges in the corridors of power, political as well as administrative. Pakistan is passing through its worst financial crisis, ie, the crisis of resources manifested in the huge budgetary deficits. After mass devastation caused by unprecedented floods, we need extra revenues of Rs 500 billion for rehabilitation of the flood-affected people. Revenue has to be collected from the rich and mighty. Money looted by them - parked in offshore banks and in Swiss banks - should be brought back using the unique nature of the RIAA.
The government, therefore, needs to introduce asset-seizure legislation to confiscate the mammoth reservoir of the untaxed black money - a huge chunk of which is lying in the Swiss banks. It is now time to seek information from the Swiss government as has been done by many other countries. In case swift action is not taken to seize money and property arising out of corruption, tax evasion, narco-arms-trade and other unlawful activities, the day is not far when our tolerance towards ill-gotten wealth will lead to self-annihilation.
(The writers, tax lawyers, are Adjunct Professors at Lahore University of Management Sciences)