While elsewhere the governments are seriously fighting the twin menace of black money and tax evasion, our rulers - civil and military alike - have provided legal ways and means for money laundering to the criminal gangs. For example, section 111(4) of the Income Tax Ordinance, 2001 ensures that no question about the source would be asked if any amount of money is remitted into Pakistan "through normal banking channels".
Unscrupulous elements - tax evaders, smugglers, in fact all sorts of criminals - just go to a money exchanger and he facilitates this process at a nominal premium-no wonder our inward remittances have crossed the mark of US $11 billion this year. About capital flight, the government and State Bank have no data as entire business is conducted "outside normal banking channels."
According to reports, the Swiss whistleblower, Rudolf Elmer, before his arrest, shared with a few, many names that hold secret bank accounts in Julius Baer Bank & Trust Company Ltd, Cayman Islands, where he was employed. Elmer shared account details and the modus operandi, revealing how these accounts were opened and money was laundered across continents without the knowledge of the government. The news channel Headline Today scanned through each and every folder of a compact disk handed over to it by Elmer to dig out the Indian and Pakistan connection to the Swiss money trail. These names are now available on internet.
The Enforcement Directorate (ED) also started working on the information provided by Headlines Today on Swiss bank accounts held by Indians and Pakistanis .The ED had sought the information available with the news channel after Headlines Today aired a report about Indian account holders in Swiss banks.
According to investigations so far, the world's wealthy entrust around $16.5 trillion to private bankers. According to estimates, the share of Pakistanis is to the tune of US $200 billion and Indians have a mind-boggling figure of US $1.3 trillion. According to the World Bank's Stolen Asset Recovery initiative estimates, the cross-border flow of proceeds from criminal activities, corruption and tax evasion is between $1 trillion and $1.6 trillion per year, about half of which comes from the developing and transitional economies.
On 1 October 2010, the Swiss Parliament passed "Return of Illicit Assets Act" (RIAA) - a historic law making it possible for developing countries to recover the billions of dollars shifted to the Alpine state by unscrupulous individuals and companies. It is now possible for Pakistan to retrieve untaxed funds lying in Switzerland if the government so desires but till today, no information has been sought under Article 25(1) of the Avoidance of Double Taxation Treaty with Switzerland that was ratified by both the countries on 24 November 2008, regarding Pakistanis maintaining Swiss accounts.
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. After 5 years, Nigeria got back $700 million of its plundered wealth back from Switzerland and Philippines recovered its $684 million looted by Ferdinand Marcos.
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.
On 27 October 2010, Switzerland signed a very significant accord with Germany that contains provisions for a withholding tax on interest, dividends and capital gains earned by Germans with accounts in Swiss banks, as well as an upfront lump-sum payment of SFr2 billion ($2.8 billion) from these banks to the German government. This amount covers the lost revenue from Swiss accounts held by Germans who have not paid tax on this income for the last 10 years.
In 2009, Europe and the United States forced Switzerland to give up its age-old bank secrecy position. 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, 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 IRS.
Berne so far has negotiated deals with its European neighbours allowing them access to their citizens hidden money in Switzerland. 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% of foreign assets held in Switzerland. A large portion of black money, originated from Germany. Italy having an endemic tax evasion problem recently offered its citizens a generous tax amnesty, which brought nearly 100 billion euros back home.
Pakistan is also facing a grim challenge of measuring and countering enormous black money - its size is estimated to be five 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) to constitute a joint task force to unearth and counter outflow and inflow of dirty money.
Pakistani policy-makers must realise that a sound development strategy seeks to reduce the size of the informal economy and bring out 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. FBR has miserably failed to tap untaxed money despite borrowing a whopping US $100 million for Tax Administration Reforms Programme (TARP) - every year billions are transferred from Pakistan to Zurich, Dubai, Johannesburg and elsewhere.
Successive governments, instead of dealing with this issue with an iron hand, have been pardoning the corrupt and appeasing the tax evaders through various laws and amnesty schemes. The result is obvious. There is an ever-growing informal economy undermining national growth and promoting lack of transparency in all spheres of life. Political culture is fraught with favours to those having money power and control over economic resources - both, anti-thesis of a true democratic set up.
All steps and schemes taken in the past to document informal economy have miserably failed forcing black economy to grow relentlessly rather than showing any sign of decline. The present monstrous size of underground economy is symptomatic of a malignant illness of the system where the corrupt rule and the honest suffer, the rich thrive and the poor strive yet starve.
The corrupt, occupying top positions in State institutions, are giving blanket protection to offenders and plunderers of national wealth. In other civilised societies such anti-State elements are tried for treason, their ill-gotten money and assets are seized. In Pakistan on the contrary these criminals are rewarded by frequently announced tax amnesty schemes.
The last tax amnesty schemes, introduced by the Federal Board of Revenue (FBR) under various the names eg 'Tax Investment Scheme', were yet another attempt to protect tax evaders asking them to pay just a fraction of their untaxed incomes and assets with no questions asked about their sources. Even these schemes failed miserably as in the past.
It was a wrong move: "persuading with helplessness" the corrupt to pay tax without realising that it is they who now control the State and are least pushed to whiten their colossal money and wealth lying outside Pakistan. These schemes further shatter the confidence of law-abiding citizens in the system of governance, besides adding to prevailing illusions that even the so-called elected representatives in Parliament are tempted to pass such erratic laws to protect criminals.
One of the worst consequences of black money is its pernicious effect on the general moral fabric of society. It puts integrity at a discount and places a premium on vulgar and ostentatious display of wealth. This crushes the faith of the common man in the concept of dignity of honest labour and virtuous living.
It is, therefore, no exaggeration to say that ill-gotten wealth is like a cancerous growth in the country's economy, which if not checked in time, is certain to culminate in its doom. It is high time that the government constitutes a National Commission to determine the size of black money and suggest concrete ways to bring it back to formal economy.
(The writers, tax lawyers, are Adjunct Professors at Lahore University of Management Sciences)