Black Money – Domestic and International Efforts

Black Money – Domestic and International Efforts

The Functioning of the Enforcement Directorate (ED)

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Enforcement Directorate, PMLA

Mains level : Read the attached story

The Enforcement Directorate (ED) is in the news now and often.

About Enforcement Directorate (ED)

  • It goes back to May 1, 1956, when an ‘Enforcement Unit was formed in the Department of Economic Affairs.
  • It then aimed for handling Exchange Control Laws violations under the Foreign Exchange Regulation Act (FERA).
  • The ED today is a multi-dimensional organisation investigating economic offences under the Prevention of Money Laundering Act (PMLA), Fugitive Economic Offenders Act, Foreign Exchange Management Act and FERA.

From where does the ED get its powers?

  • When proceeds of crime (property/money) are generated, the best way to save that money is by parking it somewhere, so one is not answerable to anyone in the country.
  • Therefore, there was a need to control and prevent the laundering of money.
  • The PMLA was brought in for this exact reason in 2002, but was enacted only in 2005.
  • The objective was to prevent parking of the money outside India and to trace out the layering and the trail of money.
  • So as per the Act, the ED got its power to investigate under Sections 48 (authorities under act) and 49 (appointment and powers of authorities and other officers).

At what stage does the ED step in when a crime is committed?

  • Whenever any offence is registered by a local police station, which has generated proceeds of crime over and above ₹1 crore, the investigating police officer forwards the details to the ED.
  • Alternately, if the offence comes under the knowledge of the Central agency, they can then call for the First Information Report (FIR) or the chargesheet if it has been filed directly by police officials.
  • This will be done to find out if any laundering has taken place.

What differentiates the probe between the local police and officers of the ED?

Case study:

  • If a theft has been committed in a nationalised bank, the local police station will first investigate the crime.
  • If it is learnt that the founder of the bank took all the money and kept it in his house, without being spent or used, then the crime is only theft and the ED won’t interfere because the amount has already been seized.
  • But if the amount which has been stolen is used after four years to purchase some properties, then the ill-gotten money is brought back in the market.
  • Or if the money is given to someone else to buy properties in different parts of the country, then there is ‘laundering’ of money.
  • Hence the ED will need to step in and look into the layering and attachment of properties to recover the money.
  • If jewellery costing ₹1 crore is stolen, police officers will investigate the theft. The ED, however, will attach assets of the accused to recover the amount of ₹1 crore.

What are the other roles and functions of the ED?

  • The ED carries out search (property) and seizure (money/documents) after it has decided that the money has been laundered, under Section 16 (power of survey) and Section 17 (search and seizure) of the PMLA.
  • On the basis of that, the authorities will decide if arrest is needed as per Section 19 (power of arrest).
  • Under Section 50, the ED can also directly carry out search and seizure without calling the person for questioning.
  • It is not necessary to summon the person first and then start with the search and seizure.
  • If the person is arrested, the ED gets 60 days to file the prosecution complaint (chargesheet) as the punishment under PMLA doesn’t go beyond seven years.
  • If no one is arrested and only the property is attached, then the prosecution complaint along with attachment order is to be submitted before the adjudicating authority within 60 days.

Can the ED investigate cases of money laundering retrospectively?

  • If an ill-gotten property is acquired before the year 2005 (when the law was brought in) and disposed off, then there is no case under PMLA.
  • But if proceeds of the crime were possessed before 2005, kept in storage, and used after 2005 by buying properties, the colour of the money is still black and the person is liable to be prosecuted under PMLA.
  • Under Section 3 of PMLA, a person shall be guilty of money-laundering, if such person is found to have directly or indirectly attempted to indulge or knowingly assist a party involved in one or more of the following activities:
  • Concealment; possession; acquisition; use; or projecting as untainted property; or claiming as untainted property in any manner etc.

 

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Black Money – Domestic and International Efforts

[op-ed snap] Inaccurate diagnosis, draconian remedy

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Nothing much

Mains level : Tackling black money in India

Context

India’s fight against foreign black money is unfinished. 

Challenges

  • The problem itself was misdiagnosed.
  • The legislative measures are bereft of constitutional and economic common sense. 
  • They relied too little on persuasion, and too much on browbeating.

State of Black Money

  • Black money Law: tax rate – At the minimum tax rate of 60%, the law has less incentive for the hoarders to come clean. 
  • Stats – As of May 2019, the total untaxed foreign assets mined was ₹12,500 crore. 
  • Recovery – Even this recovery was aided greatly by international exposes such as the Panama Papers.
  • Indonesia – Indonesia recovered about ₹25 lakh crore under similar schemes.
  • Tough laws – government passed an even more confiscatory law, the Fugitive Economic Offenders Act.

Existing laws

  • Income Tax Act – is provided for up to three times the penalty on escaped tax. 
  • Willful attempts to evade taxes have been punishable with imprisonment of up to seven years. 
  • Automatic exchange tax information – under a protocol for, India is now receiving data from Switzerland.
  • An amendment requiring all citizens to disclose foreign assets with their domestic tax returns.

Post-May 2014 tax control policy

  • It is different only in three aspects, all constitutionally suspect.
  • Retrospective application of tax and penal laws are so confiscatory and discriminatory that they walk over a citizen’s right to life, carry on business and own property. 
  • Shifting the burden of proof onto the citizen to establish that he is not an offender. 
  • Citizens can be subjected to criminal trials without the taxman proving that there has been tax evasion. 

Results

  • Enforcement Directorate secured a conviction in less than 1% of the case but attached assets worth ₹29,468 crores. 
  • The agency’s equivalents in the U.S. and the U.K. secured a conviction in about 50% cases. 
  • Income Tax Department’s records show near 2% conviction rates in Financial Year (FY) 2016-2017. 
  • Comptroller and Auditor General report showed that in FY 2016-2017, the number of raids more than doubled, as compared to FY 2013-2014. But in the same period, the undisclosed income detected was less than one-fourth the amount during the latter period.

Black money estimates

  • No clear estimate of black money owned by Indians and stashed abroad is available. 
  • Between 2008 and 2012, various reports quoted anywhere between $500 billion and $1.5 trillion relying on estimates of a Swiss Bankers Association (SBA) report.
  • James Nason, an officer of the SBA, has said that the SBA had never published any such report. 
  • In 2019, the National Institute of Financial Management reported to the Lok Sabha Standing Committee on Finance, that the estimate is about $216 billion-$490 billion. This is one-seventh the estimate quoted ahead of the 2014 elections. 
  • Misdiagnosed – India’s foreign black money problem was misdiagnosed and unverified, exaggerated numbers went into satisfying Parliament that draconian financial laws are justified.

Taking cognizance

  • Demonetisation – it is labelled by international media as a ‘massive theft of people’s property’.
  • The announcement that ₹15 lakh will be deposited in each citizen’s account was found to be a political bait.
  • Being an intrusive, browbeating confiscator does not enrich Indians. It doesn’t.
  • The draconian fiscal laws must be repealed.
  • Increased international cooperation, technological advances, and banking penetration implode black money more than any law or sermon on patriotism.
  • India’s war on black money can only be won through democratic, persuasive and economically-sound means.

Black Money – Domestic and International Efforts

Automatic Exchange of Information (AEOI) Programme

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Automatic Exchange of Information (AEOI) Programme

Mains level : Curbing black money


  • India has received the first tranche of details about financial accounts of its residents in Swiss banks under the automatic info exchange framework, the Switzerland government.

Automatic Exchange of Information (AEOI) Programme

  • India is all set to receive the bank account details under the AEOI programme.
  • In 2016, India and Switzerland had signed an information-sharing deal on bank accounts, which was to come in effect from January 2018.
  • This provides for exchange of information on financial accounts that are currently active as well as those accounts that were closed during 2018.
  • The next exchange would take place in September 2020.

Under high secrecy

  • This exchange of information is being carried out under the Common Reporting Standard (CRS), the global reporting standard for such exchange of information.
  • The CRS has been developed by the Organisation for Economic Cooperation and Development (OECD).
  • It takes care of aspects such as confidentiality rules and data safeguards.

Significance

  • In 2018, data from Zurich-based Swiss National Bank (SNB) had shown that after declining for three years, money parked by Indians in Swiss Banks rose 50 per cent to CHF (Swiss Franc) 1.02 billion (Rs 7,000 crore) in 2017 over the previous year.
  • India is among 75 countries with whom information on bank accounts will be shared this year.
  • The step is likely to shed more light on the wealth Indians have stashed away in Swiss bank accounts, for so long governed by strict local rules of secrecy.

Black Money – Domestic and International Efforts

Automatic Exchange of Information (AEOI) Regime

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Automatic Exchange of Information (AEOI) Regime

Mains level : Curbing black money

  • Banking details of Indians with accounts in Switzerland will be available to tax authorities as the automatic exchange of information regime kicks off between the two countries.
  • In 2016, India and Switzerland had signed an information-sharing deal on bank accounts, which was to come in effect from September 2019.
  • Both countries intend to start collecting data in accordance with the global AEOI standard in 2018 and to exchange it from 2019 onwards.

About AEOI

  • This automatic exchange of information (AEOI) is to be carried out under the Common Reporting Standard (CRS), the global reporting standard for such exchange of information.
  • It takes care of aspects such as confidentiality rules and data safeguards.
  • The CRS has been developed by the Organisation for Economic Cooperation and Development (OECD).
  • Under the agreement, India will not receive information on bank accounts prior to 2018.
  • Under the agreement both jurisdictions will inform each other of any relevant developments in respect to the implementation of the OECD Common Reporting Standard in their respective domestic laws.
  • Each jurisdiction confirms that it has informed the other jurisdiction about the modalities made available to persons making a voluntary disclosure of their financial assets.

Benefits of the regime

  • In 2018, data from Zurich-based Swiss National Bank (SNB) had shown that after declining for three years, money parked by Indians in Swiss Banks rose 50 per cent to CHF (Swiss Franc) 1.02 billion (Rs 7,000 crore) in 2017 over the previous year.
  • The step is likely to shed more light on the wealth Indians have stashed away in Swiss bank accounts, for so long governed by strict local rules of secrecy.
  • It is a significant step in the government’s fight against black money and the era of “Swiss bank secrecy” will finally be over.

Black Money – Domestic and International Efforts

Elephant Bonds

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Elephant Bonds

Mains level : Curbing black money

  • A high level government-appointed committee on trade and industry has suggested it to issue ‘Elephant Bonds’ to people for declaring undisclosed income to mandatorily invest 50%.

Elephant Bonds

  • Elephant Bonds are the 25-year sovereign bonds in which people declaring undisclosed income will be bound to invest 50 per cent.
  • The fund, made from these bonds, will be utilized only for infrastructure projects.
  • It is like an Amnesty scheme to help State treasury raising tax revenues, adding beneficiaries in tax base who have not declared their assets previously.

Are there any provisions in UN which can help us chase black money?

 United Nations Convention Against Corruption

Yes, there are a few. And they might help us get black money back in India. Let’s look at the history of such negotiations to learn more about them and hone your understanding for Probable questions for IAS Mains.

  1. Tough negotiations on this subject in Vienna, Austria, in 2003 was a vital part of the United Nations Convention Against Corruption (UNCAC).
  2. The first breakthrough came when the group established asset recovery as a “fundamental principle” of the convention.
  3. Then it was only a matter of laying a framework, in both civil and criminal law, for tracing, freezing, forfeiting and returning funds obtained through corrupt activities.
  4. What did the convention accomplish? Legal obstacles should be tackled with international cooperation rather than by domestic laws.
  5. Some of the relevant provisions of the convention are crucial to the question of recovery of assets.
  6. It provides that each state party shall take such measures as may be necessary to permit its competent authorities to give effect to an order of confiscation issued by a court of another state party.They are also required to share information with the competent authorities of another state, when necessary, to investigate, claim and recover proceeds of offences.

The UN, through its Office on Drugs and Crime, which leads the fight against illicit drugs and international crime, has been given the responsibility to implement the convention, particularly its assets recovery provisions.


Refining India’s approach

  1. In the case of India, difficulties may have arisen not in establishing that the sums amassed abroad belong to India, but in proving that the assets were illegally obtained.
  2. There is a need of domestic management and disposal of seized and confiscated assets and the management of the return and disposal of assets recovered in the context of international corruption cases.
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