India’s Bid to a Permanent Seat at United Nations

Taking the lid off illicit financial flows


From UPSC perspective, the following things are important :

Prelims level : Pandora papers

Mains level : Paper 3- Tax evasion and tax avoidance


The Pandora Papers, published on October 3, once again expose the illegal activities of the rich and the mighty across the world.

About the Pandora Papers investigation

  • It is “the world’s largest-ever journalistic collaboration, involving more than 600 journalists from 150 media outlets in 117 countries”.
  • The International Consortium of Investigative Journalists (ICIJ) has researched and analysed the approximately 12 million documents in order to unravel the functioning of the global financial architecture.
  • The Pandora Papers, unlike the previous cases, are not from any one tax haven; they are leaked records from 14 offshore services firms. The data pertains to an estimated 29,000 beneficiaries.
  • The 2.94 terabytes of data have exposed the financial secrets of over 330 politicians and public officials, from more than 90 countries and territories.
  • These include 35 current and former country leaders.

Role of financial centres and banks

  • A large extent of the illicit financial flows have a link to New York City and London, the biggest financial centres in the world that allow financial institutions such as big banks to operate with ease.
  • The big financial entities operating from these cities have been prosecuted for committing illegalities.
  • In 2012, an investigation into the London Interbank Offered Rate or LIBOR — crucial in calculating interest rates — led to the fining of leading banks such as Barclays, UBS, Rabobank and the Royal Bank of Scotland for manipulation.
  • These banks also operate a large number of subsidiaries in tax havens to help illicit financial flows.

Modus operandi

  • Tax havens enable the rich to hide the true ownership of assets by using: trusts, shell companies and the process of ‘layering’.
  • Financial firms offer their services to work this out for the rich.
  • They provide ready-made shell companies with directors, create trusts and ‘layer’ the movement of funds.
  • The process of layering involves moving funds from one shell-company in one tax haven to another in another tax haven and liquidating the previous company.
  • This way, money is moved through several tax havens to the ultimate destination.
  • Since the trail is erased at each step, it becomes difficult for authorities to track the flow of funds.
  • It appears that most of the rich in the world use such manipulations to lower their tax liability even if their income is legally earned.

Why funds are moved to the tax havens?

  • Even citizens of countries with low tax rates use tax havens.
  • Over the three decades, tax havens have enabled capital to become highly mobile, forcing nations to lower tax rates to attract capital.
  • This has led to the ‘race to the bottom’, resulting in a shortage of resources with governments to provide public goods, etc., in turn adversely impacting the poor.
  • Lowering tax liability: It appears that most of the rich in the world use such manipulations to lower their tax liability even if their income is legally earned.
  • Moving funds out of reach of creditors: Revelations suggest that funds are moved out of national jurisdiction to spirit them away from the reach of creditors and not just governments.
  • Many fraudsters are in jail but have not paid their creditors even though they have funds abroad.

Challenges in checking the illicit financial flows

  • The very powerful who need to be onboard to curb illicit financial flows (as the Organisation for Economic Co-operation and Development, or the OECD is trying) are the beneficiaries of the system and would not want a foolproof system to be put in place to check it.
  • Strictly speaking, not all the activity being exposed by the Pandora Papers may be illegal due to tax evasion or the hiding of proceeds of crime.
  • The authorities will have to prove if the law of the land has been violated.
  • Operators outside the purview of tax authorities: Many Indians have become non-resident Indians or have made some relative into an NRI who can operate shell companies and trusts outside the purview of Indian tax authorities.
  • That is why prosecution has been difficult in the earlier cases of data leakage from tax havens.
  • The Supreme Court of India-monitored Special Investigation Team (SIT) set up in 2014 has not been able to make a dent.
  • Role of organised sector: The Government’s focus on the unorganised sector as the source of black income generation is also misplaced since data indicate that it is the organised sector that has been the real culprit and also spirits out a part of its black incomes.

Way forward

  • Global minimum tax: Recent development has been the agreement among almost 140 countries to levy a 15% minimum tax rate on corporates.
  • Though it is a long shot, this may dent the international financial architecture.
  • Ending banking secrecy: Other steps needed to tackle the curse of illicit financial flows are ending banking secrecy and a Tobin tax on transactions; neither of which the OECD countries are likely to agree to.

Consider the question “How illicits financial flows affect the economies of the nations? What are the challenges in curbing it?” 


To curb the illicit financial flows, the global community needs to reach a consensus on several issues and tackle the challege collectively.

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