Panama Papers exposes nexus between havens & political terrorism

TIOL - COB( WEB) - 498 APRIL 28, 2016

By Shailendra Kumar, Editor

AFTER a good recess and a hectic electioneering for assembly polls in many States, our Members of Parliament (MPs) are back in action. Quite predictably, many of them grabbed the Papers issue and demanded that the Government should make public the list of 500 Indians figuring in the 11.5 mn documents leaked so far. The Government has also given predictable answers to many of the starred and unstarred questions. The SIT on Black Money has also been groping in the dark to find a toehold to fathom the depth of the leak.

If we move away from the Indian scenario, the political establishments across the world and multilateral agencies have so far given very measured but conventional reactions to the one of the biggest leaks in the recent years. Even as the G-20, the OECD and the EU have been talking about toughening their response to some of the non-cooperative tax havens, the fact remains that the global political leadership evidently lacks in devastating willingness and the moral force to wipe out the financial existence of such tax havens.

Most of the global forums have often been talking about tax havens from the perspective of providing tax shelters to multinational enterprises through private treaties or trusts or foundations or shell or shelf companies but not commenting on the most deleterious dimension of tax havens threatening political stability in many regions and thereof, the global peace. Let's not ignore the nexus of Panama as a and the speculated funding of Syria-based Islamic State . It has not been ruled out that shell companies were floated to fund the terrorist activities of the ISIS in Europe and other parts of the world. This was always a serious hazard and all the like-minded political leaders across the continents need to deal with it on urgent basis.

Historically speaking, tax havens always had a close nexus with global criminal syndicates specialising in human trafficking, cocaine trafficking, blood-diamond transactions and financiers of outfits like Al Qaeda or Somalian piracy. In addition, they have been providing shelters to white-collar criminals like insider traders in stock markets, dictators' bagmen and tax dodgers. Going by various global estimates if more than USD 20 trillion wealth is routed through tax havens, naturally, a major chunk is non-tax wealth - illicit in nature. The quantum of money laundered since 1970s has jumped manifold and a large swathe of such money had its origin in criminal activities across the world. Whether it was dictator's wealth or a democratically-elected politician's wealth or druglords' money, all such funds were provided anchorage by tax havens and they were routed back to several geographical pockets for serving various political and non-political objectives.

The USA may be one of the leading beneficiaries of the first leak (the Swiss-leak) in the series of leaks but it continues to retain its dubious status as the one State which went hammer and tong against notorious banks encouraging by the American wealthy taxpayers but many of its States continue to be wrapped in exemplary opacity and secrecy. The pervasiveness of such secrecy services offered by the States like Nevada, Delaware and Wyoming stands in glaring contrast to the Washington's message to the rest of the world. As per some estimates, more than 20 lakh new companies & LLCs are incorporated in the USA every year . The three notorious States are believed to have more than 10 lakh LLCs and Companies. In contrast to shell or paper companies, these American States also offer 'shelf' companies off the shelf!! It is a niche area within the domain of shell companies. The real difference between the shell and shelf companies is that a shell company may only hide the real ownership of assets, a shelf company which is set up and left to 'season' for years , can be sold to individuals or agencies looking for a short-cut way to secure bank loan or bid on contracts. In fact, shelf companies can also be purchased with old bank accounts, credentials of creditworthiness and also tax returns. In other words, a similarity can also be drawn between a Scotch Whisky and a seasoned shelf company - the older they are, the higher would be the price.

Page 1 of 2 Commenting on the unregulated companies formation sector in the USA, a professor from Griffith University has reportedly said that Somalia has a slightly better standard than Nevada and Wyoming. This was reported in 2011 and not much noticeable change has taken place since then.

Let me now take you to the grandfather of the world's most opaque tax havens. Notwithstanding some recent amendments in its banking secrecy laws, Switzerland hardly offers any useful data to any tax jurisdictions which may fix their own citizens on the charges of tax evasion. As per Swiss Bankers' Association own report published last year, their banks had close to USD 6.6 trillion worth of assets under management and over 50% had come from abroad. Thus, Switzerland accounted for about 28% of the global asset management market.

Close to India, 's fund management industry had over USD two trillion under management in 2015. It was also reported that Hong Kong had the world's highest density of ultra high net worth individuals with personal wealth of over USD 100 mn at 15.3 per lakh households.

Let me further explore the patronage tax havens have been receiving from criminal syndicates by going deeper into the history. One of the American crime legends from New York, Meyer Lansky, was widely held as the architect of offshore money laundering. How powerful gangster he was, can be made out from the fact that he inspired the key character in the widely successful film 'The Godfather' . He was hailed as underworld entrepreneur. It was the era of prohibition in the USA and he sold liquor, hijacked goods from syndicates; established bottling units and ran a profitable shipping business. He started his foray into Swiss Banking in the 1930s with notorious International Credit Bank of Switzerland and reportedly pioneered the globally known modus operandi of 'loan back'. Money was transported in the forms like cash, bonds and traveller's cheques and would come back home as loans to persons who started the cycle. And he would pay back the loan with interest which used to be claimed as deduction in tax returns. With his business growing manifold Lansky built the Havana Riviera, a massive hotel with casino. Later he moved to the Bahamas where he built a gambling kingdom. What followed his illegal wealth was the notorious Swiss bank which utilised the illicit funds to re-finance legal businesses.

There are many more such interesting tales about how notorious gangsters and criminal syndicates always provided the much-needed oxygen to notorious banks and tiny tax havens in the early decades of the 20th century. But in the 21st century when the global financial system is in a tattered state and the political stability stands threatened by various international terrorist outfits, it is high time the global political leadership takes collective moral responsibility to ward off this crisis period sooner by effectively dealing with the issue of tax havens. Any dilly-dally approach would further widen economic inequality, indebtedness of poor countries and trafficking in humans and drugs. In a nutshell, any attempt to see tax havens as a pure issue would be a certain recipe for bad times ahead.

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