On October 1, the Swiss Parliament passed the historic "Return of Illicit Assets Act" (RIAA)-a significant law that will make it possible for many developing countries, like Pakistan to recover the billions of dollars shifted to the Alpine state by unscrupulous individuals and companies.
The rent-seekers and beneficiaries of loan write-offs in Pakistan have shifted funds worth billions of dollars to Switzerland. It is now possible to retrieve the looted 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 many countries in recent months.
Near home, the Indian government has already taken steps to recover hidden, ill-gotten wealth of its citizens in Swiss banks. Ever-since reports emerged of Indians having accounts in tax havens like Liechtenstein and the success of governments like the US in accessing these accounts, New Delhi has been working zealously to retrieve the funds from the Swiss banks.
A new treaty has been signed between India and Switzerland, aimed at fighting tax fraud. According to Swiss Foreign Minister, Calmy-Rey, deposits of Indians are close to $1.4 trillion in Swiss banks. 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, quantum of which is not less than $1,500 billion.
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 has 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 "burden of shift" 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 come 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), Muammar Gaddafi (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 the footsteps of their counterparts in 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 global offshore wealth. European assets make up about 50 percent 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 were 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. The Germans, however, are not comfortable with any such deal that allow tax cheats to get scot free by just paying a few millions.
According to the 2010 Private Banking Survey by consultancy McKinsey, Switzerland last year experienced net outflows worth 1 percent 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, who are mostly 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 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 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 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 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 (AFN) 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 money lying in Swiss banks of Pakistanis is to the tune of US $200 billion, which appears plausible as parallel economy 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 Zurich, Dubai, 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 taken as true, then the annual national tax loss for fiscal year 2009-2010 was not less than Rs 500 billion-half of which is 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 of 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 the worst financial crisis of its history, 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 rehabilitations of the afectees. Revenue has to be collected from the rich and mighty. Money looted by them-parked 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-huge chunk of which is lying in the Swiss banks. It is now time to seek information from Swiss government as has been done by India, the US, EU countries and many other governments in Asia and Africa. 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 leads to self-annihilation.
(The writers, tax lawyers, are adjunct professors at Lahore University of Management Sciences.)