Tuesday, November 23, 2010

Where has the looted money gone?



Given below are 2 eye-opening articles on what could have happened to the money looted in various scams including the 2G scam.


The first one by Prof R.Vaidyanathan enumerates where and how the looted money could have gone and how we need a strong judicial action to check the growth of looters.


The second one is the report by the Global Financial Integrity, based at Washington on the flow of illegal / looted funds from India. These articles remind me of Dr Subramanian swamy's repeated call to the Prime Minister to contact the American authorities to track down the looted money. He is right after all.


We all know that huge money is being looted by politicians and corporates.

We also know where that money goes.

And we know that the money will not be brought back!

Unless the looter does a la Ramalinga Raju, he will not be caught.

In looters we trust!

Their words we trust and to them we entrust governance.

What a people we are!








Scam-tainted money may be moving the markets




R Vaidyanathan

Professor of Finance,

IIM, Bangalore


The financial accounting course taught in every commerce college and business school — Accounting 101— includes a discussion on the sources and uses of funds. In all the discussions on the scams pertaining to the Commonwealth Games (CWG), the Indian Premier League or the 2G spectrum, the focus is on sources, not uses. For instance, in the case of the 2G spectrum scam, which involves an opportunity loss of upto Rs1,76,000 crore to the national exchequer, the documents indicate that a substantial portion of the funds for the bidding came from tax havens like Cyprus, Channel Islands and Mauritius.


The last date for the submission of applications was advanced from October 1, 2007 to September 25, 2007 through an announcement made much after that period was over. On January 10, 2008 the department of telecommunications (DoT) posted an announcement on its website around 2.45pm saying letters of intent for telecom licences along with spectrum would be issued between 3.30-4.30 pm that afternoon and that application fees (worth over Rs1,000 crore) would have to be paid immediately by demand draft along with the supporting documentation.


Licences were given to those who deposited their fees using the infamous 'first-come-first-served' system. In short, spectrum licences were given through a system unknown even for pre-school admissions. The prime minister, if he was serious about tackling corruption, should have ordered an inquiry immediately and sacked the telecom minister.


Now let's see who got licences. More than 45% of Etisalat DB, which acquired a stake in Swan telecom which got the licence, was held by Tiger Trustees Pvt Ltd, a firm 99.8% owned by Dynamix Balwas, a real estate group. UAE-based Etisalat owned its stake through a Mauritius arm, while Delphi Investments, a Mauritius-based company, owned the remainder. All were clearly linked to tax havens.


Interestingly, the Central Bureau of Investigation (CBI) stumbled upon damning evidence of money transfers in the spectrum case while probing the arrest of Maharashtra and Goa chief postmaster general MS Bali. He had allegedly accepted a bribe of Rs2 crore from a builder for issuing a no-objection certificate to build on postal land in Mumbai. Along with him one Arun Dalmia was also arrested. During interrogation, Dalmia allegedly told the sleuths about two Swiss accounts, some property details and high-volume cash transactions flowing into bank accounts in Delhi, Chennai, Singapore, Dubai, Malaysia and other tax havens abroad. But this angle was never probed. Similar is the case with the CWG scam, wherein substantial sums of money have gone to tax havens.


Funds are being siphoned off from India to tax havens by political leaders in cahoots with bureaucrats and business barons. A recent report by Global Financial Integrity, a think-tank based in Washington, suggests that nearly US$460 billion is held illegally by Indians in tax havens. This can only be an underestimate.


Funds — whether in white or black — are always in rotation, and the further the funds flow away from the taxman, the faster they rotate. The same funds often come back as foreign investment in sectors like telecom or real estate, or even as portfolio investments in the stock market. Information about foreign investment in stocks is opaque — to say the least.


Our stock market has decoupled from the economy and its movement is related to scams which generate funds to be sent to tax havens abroad and which are then recycled back. Our economic growth comes primarily from the services sector — which has more than 60% share of GDP — and which is dominated by firms in trade, hotels, construction and other activities performed by the so-called "unorganised" sector. The share of household financial savings going in to stock market is less than 5%.


What we need to probe is this: is major economic activity being financed by resources drained from our own system? Is our stock market largely driven by scam-tainted money? Our political leaders seem to know all about it.


Is there a way out? The only hope is for the Supreme Court to order a special investigation under its control and supervision, away from the CBI and the Central Vigilance Commission, which appear compromised. We need to probe the scams and create a fast track court to punish the guilty within a timeframe and create a process to bring the illegal money back from tax havens. If a couple of leaders are jailed for 20-50 years, some sanity can be injected into the system. Otherwise, we will lose our political freedoms too. Our economic freedom has already been mortgaged with the tax havens and foreign intelligence agencies know all about this. They are, thus, in a position to dictate our economic policies. Will the Supreme Court step in to protect our sovereignty and integrity?


New Report by GFI Finds Illicit Capital Flight out of India US $462 Billion

Examines Role of Tax Evasion, Corruption, Trade Mispricing


(Global Financial Integrity (GFI) is a Washington, DC-based research and advocacy organization which promotes transparency in the international financial system.

GFI promotes national and multilateral policies, safeguards, and agreements aimed at curtailing the cross-border flow of illegal money. In putting forward solutions, facilitating strategic partnerships, and conducting groundbreaking research, GFI is leading the way in efforts to curtail illicit financial flows and enhance global development and security.)



WASHINGTON, DC –"The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008," released today from Global Financial Integrity (GFI), estimates that tax evasion, crime, and corruption have removed gross illicit assets from India worth US $462 billion.  The report also finds that the faster rates of economic growth since economic reform started in 1991 led to a deterioration of income distribution which led to more illicit flows from the country. Moreover, the report finds that the poor state of governance is reflected in a growing underground economy which in turn has fueled more transfers of illicit capital from India. This analysis is cast in terms of a pre- and a post-reform period spanning a total of 61 years since independence.



"This report puts into stark terms the financial cost of tax evasion, corruption, and other illicit financial practices in India," said Global Financial Integrity director Raymond Baker.  "It also shows that these illicit outflows contribute to stagnating levels of poverty and an ever widening gap between India's rich and poor."


Primary report findings include:


    * From 1948 through 2008, India lost a total of US $213 billion in illicit financial flows (or illegal capital flight).  These illicit financial flows were generally the product of: tax evasion, corruption, bribery and kickbacks, and criminal activities.


    * Adjusted Estimates: The present value of India's total illicit financial flows (IFFs) is at least US $462 billion. This is based on the short-term U.S. Treasury bill rate as a proxy for the rate of return on assets.


    * India's aggregate illicit flows are more than twice the current external debt of US $230 billion.


    * Based on the last five years of the study, 2004-2008, India lost assets at a rate of US $19 billion per year.


    * Total capital flight out of India represents approximately 16.6 percent of India's GDP as of year-end 2008. In present value terms, India lost an equivalent of about 36 percent of its 2008 GDP which represents a staggering loss of capital.


    * Some 68 percent of India's aggregate illicit capital loss occurred after India's economic reforms in 1991, indicating that deregulation and trade liberalization actually contributed to/accelerated the transfer of illicit money abroad.


    * IFF Drivers: High Net-Worth Individuals (HNWIs) and private companies were found to be the primary drivers of illicit flows out of India's private sector.  India's underground economy is also a significant driver of illicit financial flows.


    * IFF Trends:  From 1948 through 2008 the Indian private sector shifted away from deposits into developed country banks and moved more of its money into offshore financial centers (OFCs).  The share of OFC deposits increased from 36.4 percent in 1995 to 54.2 percent in 2009.


"In this report we clearly demonstrate how India's underground economy is closely tied to illicit financial outflows," said GFI lead economist and report author, Dr. Dev Kar.


"The total present value of India's illicit assets held abroad accounts for approximately 72 percent of India's underground economy.  This means that almost three-quarters of the illicit assets comprising India's underground economy—which has been estimated to account for 50 percent of India's GDP (approximately US $640 billion at the end of 2008)—ends up outside of the country.  We also find that there is a statistical correlation between larger volumes of illicit flows and deteriorating income distribution."



The report also makes recommendations for economic reforms and good governance measures and contains comprehensive tables, charts, and other data for detailed analysis of India's illicit financial flows, economic indices, and history of financial reforms.


The report is available at http://india.gfip.org.





Dev Kar, the author of the report, utilized the World Bank Residual Model (CED) and a trade Mispricing Model based on IMF Direction of Trade statistics.


The World Bank Residual Model tracks illicit outflows by measuring differences in a country's recorded source of funds relative to its use of funds. According to this method, illicit outflows exist when a country's recorded source of funds exceeds its recorded use of funds.


The Trade Mispricing Model compares a country's recorded imports to what the world says it exported to that country; similarly, the country's recorded exports are compared against world imports from that country. Import values are adjusted for the cost of freight and insurance before they are compared to exports. GFI's estimates of trade mispricing are based on the gross excluding reversals (GER) method which tracks illicit outflows as a result of export under-invoicing and import over-invoicing.


The author identified the drivers of illicit flows from India using a block-recursive dynamic simulation model which incorporated macroeconomic factors (government deficits, inflation, and inflationary expectations) structural factors (increasing trade openness, faster rates of economic growth and impact of these on income distribution), and overall governance as captured by a measure of the underground economy. (14)




Tax evasion is a major component of the underground economy, which in turn is a primary driver of India's illicit outflows. Expanding India's tax base and improving tax collection has high potential to curtail illicit flows.


Illicit financial flows cannot be curtailed without the collaborative effort of both developing and developed countries. Economic reforms key to stemming the outflow of illicit money from India and the developing world in general include:


• curtail trade mispricing (a widely utilized tax avoidance technique of international businesses);


• require country-by-country reporting of sales, profits and taxes paid by multinational corporations;


• require confirmation of beneficial ownership in all banking and securities accounts;


• require automatic cross-border exchange of tax information on personal and business accounts; and


• harmonize predicate offenses under anti-money laundering laws across all countries that cooperate on the Financial Action Task Force.






Bala said...

All of us Indian citizens are horrified and frustrated due to the various scams that are being covered in the press and TV the past few weeks. Our anger gets magnified due to our helplessness in the matter. We can only let out our anger among ourselves. Beyond that it seems that we can do nothing about it.

So the past few weeks I have been trying to find out how the situation is in the other countries, whether they face such problems and how do they try to solve it etc.

What I found out was quite depressing to say the least.

I found that a few American writers, bloggers etc had discussed the situation faced by the US and they have quoted a Scottish professor of history, namely Alexander Tytler (1747–1813), who had given his theory about democracy.

A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years.

The above is an unverified quotation attributed to him but we can judge that:

He had a very poor opinion about democracy which he said was just a chimera and that all government is essentially of the nature of a monarchy.

In brief - his theory mentioned that all democracies last only for about 200 years, which in the initial years strive well for the welfare of the people, but as time passes all the talk about liberty, equality, fraternity etc go for a toss.

People get perpetually divided into various factions, who try to get the maximum out of the elected representatives by exerting their influence on them by bribes or by such other means. The elected representatives try to enhance their own prestige and control over their subjects in their own ways by bleeding the treasury.

This situation can go on only as long as the economy can sustain them so that eventually the democracy collapses, to be followed by dictatorship and eventually by monarchy etc.

"It is a law of nature to which no experience has ever furnished an exception, that the rising grander and opulence of a nation must be balanced by the decline of its heroic virtues."

Here is the wikipedia article about Tytler: http://en.wikipedia.org/wiki/Alexander_Fraser_Tytler

1] Robert Kiyosaki, the author of the well known book “Rich Dad, Poor Dad” in his column titled : The Rise and Fall of American Democracy : “http://finance.yahoo.com/expert/article/richricher/280341;_ylt=Ai5FHhWfNVXwKG6.P90a3M4zt9IF;_ylu=X3oDMTFkZjNwYnRmBHBvcwM0BHNlYwNibG9nQmxvZ2dlckFyY2hpdmUEc2xrA3RoZXJpc2VhbmRmYQ--


2] John Eberhard, who runs the website

(in a 3 part article) have discussed the situation as far as the US situation is concerned quoting the Scotsman’s theories.

They have discussed the so called Tytler democratic cycle of

1] Bondage
2] Spiritual Faith
3] Courage
4] Liberty
5] Abundance
6] Complacency
7] Apathy and back to Bondage

Various other authors have also discussed the theory.

Our democracy is only 6 decades old and hence as per this theory there is no immediate danger of a collapse within our life time – if the theory is valid.

But what this theory says about democracy is chillingly coming out true in India also more than 2 centuries after it had been enunciated by the Scottish Professor.

As per this theory we are at the abundance stage presently since our economy is growing rapidly now. So the next stages are “Complacency” and “Apathy”, which will lead us to “Bondage” again and eventual collapse.

Can we do something now to prevent it?


jayasree said...

Thanks Mr Bala, for this thought provoking observation relating to Tytler cycle.
But there are silver linings I hope. The Bihar results show that corruption at the centre does have an impact on the way people think.
Another hope is that balancing consumerism of the West with age old Indian values could make democracy long live.

Bala said...

I recall one of your recent posts stating that during the current Sun mahadasa India will do very well, but it will last only till Sept. 2015 after which it will be the Moon mahadasa during which India's position will be dismal.

I shudder to think about our situation combining your above post and the Tytler theory.


jayasree said...

In Indian Independence chart, Sun is the 4th lord posited in the 3rd in rasi chart but in the 4th (own house) in the bhava chart. Sun in the 4th in own house is good for the domestic issues as we can see now rule of law taking hold of the affairs. In olden set up we used to equate sun with the king. But the current happenings show that in a democracy, sun stands for Judicial activism and rule of justice. Currently with Jupiter moving to Pisces and opposing saturn would see to it that adharmic acts will be questioned in the next 6 months.

Well, on moon dasa, I expect a spurt in naxal problems, telungana problem and deterioration in relationship with Pak. Internal turmoil can be expected then.

Bala said...

Quote: "Currently with Jupiter moving to Pisces and opposing saturn would see to it that adharmic acts will be questioned in the next 6 months."

I note that you have used the word
"questioned" and not something like "punished as per law".

What law abiding Indians would like to see is that law breakers - irrespective of their status - have to be punished appropriately. Then only people can get convinced that rule of law holds goods in India.

In the US, President Richard Nixon had to resign in disgrace in Aug. 1974 for a "minor offence" of breaking into Democratic party's office for spying purposes.

His successor Gerald Ford pardoned him for the offence but some of his aides like John Mitchell, John Dean, H.R.Haldeman, John Ehrlichman were arrested and sent to prison.

In India no politician suffers this kind of problem. At worst they lose their ministry for a few months to a few years before they come back with a bang.

So I will watch the unfolding events during the next six months for jupiter's action as per your astrological notings.


jayasree said...

In our country even "questioning" done by the judges is a big thing to happen:)

If at all some fall happens to these scamsters, it can happen in this Jup-Sat opposition period, in my opinion.

A.Raja's exact birth time is not known. But his birth details are there in the net. Based on moon sign, he has Bhandana yoga, perfect combination for imprisonment. In addition he has kemadruma. Whether he has kalpadruma yoga to cancel it will be known if we know the birth time. But his moon dasa is due to come or has already started (that also depends of his birth time). His troubles will mount in moon dasa.

I expect that some arrests (of raja including) would happen in the Jup- Sat opposition.

Bala said...

One point about Bihar election results. It appears that Nitish Kumar is sweeping the polls and is going to have a landslide victory, almost 75%.

This may not be good in the long run. It is a fact of life that whoever wins by a landslide margin becomes autocratic in his/her approach and soon lands in trouble.

Indira Gandhi won by a landslide margin in 1971 elections but by 1973-74 she had become hugely unpopular, enforced emergency in 1975 and lost in 1977.

In 1972 Nixon won a landslide election with the same results. Became too arrogant and had to resign in disgrace in 1974.

Winston Churchill was the undisputed leader at the end of the 2nd world war, but he lost the first election immediately after that in 1946.

Hope Nitish Kumar doesn't get carried away by the huge margin of his victory.


jayasree said...

Yes, brute majority is not good. But that is not a draw back. We have seen how dependence on coalition partners can wreck havoc.

The current spate of troubles for the Congress is because it enjoys unchecked majority aided by the partners. It gave rise to unchecked misdemeanor which is falling under its own weight. What helps in this situation is vigilance by the media and the people. I think the Bihar result is a reflection of the national mood on corruption. It is anti-congress vote or anti- corruption vote rather than a pro- Nitish vote. This result gives hope that no one can go scot-free for ever. This must be borne in mind by Nitish Kuamr.