Going after illicit/illegal account holders in foreign banks: Why not invoke UN Convention against Corruption?

Black money stashed in illicit/illegal accounts in foreign banks has been a burning issue. Many times, it has assumed political hue and is only used to score political brownie points against each other, thereby creating a general impression in the minds of public that no Government is serious in going after the holders of these illicit/illegal account holders in foreign banks.

Some efforts are made to extract information under the provisions of Double Taxation Avoidance Agreement (DTAA) entered into by India with various countries. However, these efforts can at best be described as ‘some semblance of action is better than no action’.

Basically, the object of DTAA is to provide for the tax claims of two Governments both legitimately interested in taxing a particular source of income either by assigning to one of the two the whole claim or else by prescribing the basis on which the tax claim is to be shared between them. DTAA seeks to eliminate double taxation of certain income where a resident of one country derives income from a source in another country and aim to ensure facilitating international trade and commerce, flow of investments as also equitable collection of revenue. The DTAA tend to achieve the aforesaid aims by:-

a.    clarifying where a country of source may tax non-resident in respect of certain types of income;

b.     limiting rate of tax a country of source may apply to certain types of income; and

c.    Providing foreign tax credits in the country of residence against taxes paid in that country on income having source in other country.

The basic object of DTAA is to prevent tax avoidance by exchanging information. In my earlier blog, I have explained that under the relevant clause of DTAA dealing with exchange of information, the Competent Authorities of the contracting states exchange information

-       As is necessary for carrying out the provisions of the

-       Tax agreement, or

-       Domestic laws of the contracting states concerning

-       Taxes covered by the tax agreement, in particular for

-       Prevention of fraud or evasion of such taxes

-       Not restricted by article 1.

Thus the scope for exchange of information appears to be prima facie restricted to this area.

What is the way out for speedy disclosure of names of the persons who have stashed their ill-gotten wealth in foreign bank accounts?  

Is there any other international convention that is more potent than DTAA?

How about invoking the United Nations Convention against Corruption?

After all the ill-gotten money stashed in foreign bank accounts is essentially the result of corruption. Money laundering through secret commission, over invoicing in case of imports, under invoicing in case of exports, havala transaction etc. are only the modes of transferring the money to these accounts.  

In its resolution 55/61 of 4 December 2000, the General Assembly recognized that an effective international legal instrument against corruption, independent of the United Nations Convention against Transnational Organized Crime (resolution 55/25, annex I) was desirable and decided to establish an ad hoc committee for the negotiation of such an instrument in Vienna at the headquarters of the United Nations Office on Drugs and Crime.

The text of the United Nations Convention against Corruption was negotiated during seven sessions of the Ad Hoc Committee for the Negotiation of the Convention against Corruption, held between 21 January 2002 and 1 October 2003.

The Convention approved by the Ad Hoc Committee was adopted by the General Assembly by resolution 58/4 of 31 October 2003. The General Assembly, in its resolution 57/169 of 18 December 2002, accepted the offer of the Government of Mexico to host a high-level political signing conference in Merida for the purpose of signing the United Nations Convention against Corruption.

In accordance with article 68 (1) of resolution 58/4, the United Nations Convention against Corruption entered into force on 14 December 2005. A Conference of the States Parties is established to review implementation and facilitate activities required by the Convention.

Convention highlights

Prevention

Corruption can be prosecuted after the fact, but first and foremost, it requires prevention. An entire chapter of the Convention is dedicated to prevention, with measures directed at both the public and private sectors. These include model preventive policies, such as the establishment of anticorruption bodies and enhanced transparency in the financing of election campaigns and political parties. States must endeavour to ensure that their public services are subject to safeguards that promote efficiency, transparency and recruitment based on merit. Once recruited, public servants should be subject to codes of conduct, requirements for financial and other disclosures, and appropriate disciplinary measures. Transparency and accountability in matters of public finance must also be promoted, and specific requirements are established for the prevention of corruption, in the particularly critical areas of the public sector, such as the judiciary and public procurement. Those who use public services must expect a high standard of conduct from their public servants. Preventing public corruption also requires an effort from all members of society at large. For these reasons, the Convention calls on countries to promote actively the involvement of non-governmental and community-based organizations, as well as other elements of civil society, and to raise public awareness of corruption and what can be done about it. Article 5 of the Convention enjoins each State Party to establish and promote effective practices aimed at the prevention of corruption.

Criminalization

The Convention requires countries to establish criminal and other offences to cover a wide range of acts of corruption, if these are not already crimes under domestic law. In some cases, States are legally obliged to establish offences; in other cases, in order to take into account differences in domestic law, they are required to consider doing so. The Convention goes beyond previous instruments of this kind, criminalizing not only basic forms of corruption such as bribery and the embezzlement of public funds, but also trading in influence and the concealment and laundering of the proceeds of corruption. Offences committed in support of corruption, including money-laundering and obstructing justice, are also dealt with. Convention offences also deal with the problematic areas of private-sector corruption.

International cooperation

Countries agreed to cooperate with one another in every aspect of the fight against corruption, including prevention, investigation, and the prosecution of offenders. Countries are bound by the Convention to render specific forms of mutual legal assistance in gathering and transferring evidence for use in court, to extradite offenders. Countries are also required to undertake measures which will support the tracing, freezing, seizure and confiscation of the proceeds of corruption.

Asset recovery

In a major breakthrough, countries agreed on asset-recovery, which is stated explicitly as a fundamental principle of the Convention. This is a particularly important issue for many developing countries where high-level corruption has plundered the national wealth, and where resources are badly needed for reconstruction and the rehabilitation of societies under new governments. Reaching agreement on this chapter has involved intensive negotiations, as the needs of countries seeking the illicit assets had to be reconciled with the legal and procedural safeguards of the countries whose assistance is sought.

Several provisions specify how cooperation and assistance will be rendered. In particular, in the case of embezzlement of public funds, the confiscated property would be returned to the state requesting it; in the case of proceeds of any other offence covered by the Convention, the property would be returned providing the proof of ownership or recognition of the damage caused to a requesting state; in all other cases, priority consideration would be given to the return of confiscated property to the requesting state, to the return of such property to the prior legitimate owners or to compensation of the victims.

Effective asset-recovery provisions will support the efforts of countries to redress the worst effects of corruption while sending at the same time, a message to corrupt officials that there will be no place to hide their illicit assets. Accordingly, article 51 provides for the return of assets to countries of origin as a fundamental principle of this Convention. Article 43 obliges state parties to extend the widest possible cooperation to each other in the investigation and prosecution of offences defined in the Convention. With regard to asset recovery in particular, the article provides inter alia that "In matters of international cooperation, whenever dual criminality is considered a requirement, it shall be deemed fulfilled irrespective of whether the laws of the requested State Party place the offence within the same category of offence or denominate the offence by the same terminology as the requesting State Party, if the conduct underlying the offence for which assistance is sought is a criminal offence under the laws of both States Parties".

We have seen illegal commission being paid in various defense deals. We have seen various scams like 2G, Coal, Common Wealth Games, etc. etc. India is admittedly a corrupt nation.

Consider the study prepared by Transparency International in 2013.  

India ranks among the highly corrupt nations and its rank remains unchanged as compared to 2012. The list was topped by Denmark and New Zealand as the cleanest while Somalia emerged as the most corrupt. Though India’s rank remains unchanged some of its neighbors seem to have improved their ranking on the corruption index. It’s only Sri Lanka whose rank has further gone down indicating increasing level of corruption in the island nation.

As per the 2013 corruption index, Bhutan ranks 31st, Sri Lanka 91, Nepal 116, Pakistan 127 and Bangladesh 136.

In 2012, Bhutan stood at 33rd rank, Sri Lanka at 79, Nepal 139, Pakistan 139 and Bangladesh 144.

India, however, maintained a status quo with 94 Rank both in 2013 and 2012.

Also among India’s BRICS peers, it is behind China (80th), South Africa and Brazil (both 72nd). It is, however, better than Russia which is ranked at 127th in the list that is prepared annually. In 2012, China was ranked on 80, Brazil and South Africa at 69 and Russia on 133rd rank.  

More than 2/3rd of the 177 countries ranked in the Transparency International (TI)’s Corruption Perception Index 2013 (CPI 2013), scored below 50, on a scale from 0 (highly corrupt) to 100 (Clean). India had same score as last year of 36.

“Such a low rank and score could be attributed to recently exposed scams of corruption involving government officials, politicians and private companies,” said a statement by the Transparency International India (TII).

Incidentally, India has signed the UN Convention against Corruption on 9th December 2005. UPA Government was delaying the ratification of the said Convention. The said Convention was finally ratified by India on 9th May, 2011.

The then Prime Minister's explanation for the delay was that the ratification had been under active consideration since September 2010 and a Group of Ministers was deputed to oversee the process. He did not explain what was his Government doing between 2005 to 2010? In a statement issued before his departure for Kabul, the then Prime Minister further said: “….the ratification is a reaffirmation of our government's commitment to fight corruption and to undertake vigorously administrative legal reforms to enable our law-enforcement agencies to recover the illicit assets stolen by corrupt practices.” It is unfortunate that Dr. Man Mohan Singh’s Government took six years to ratify a potent treaty and after ratification, simply slept over it. His actual conduct in not doing anything against black money and corruption only exposed the hollowness of his public postures.

When India has a potent instrument in its hand to go after these scamsters who have stashed their ill-gotten wealth in foreign bank accounts, what is preventing India from invoking this UN Convention against Corruption is a point of intrigue. Why does India prefer to get bogged down by DTAA that essentially has a limited scope in such matters?

Dr. Man Mohan Singh had his own compulsions in not invoking the stringent provisions of UN Convention against Corruption to go after the account holders of illicit/illegal accounts in foreign banks.

What is preventing the present Government from invoking the UN Convention against Corruption? Will someone from the Government answer?

Disclosure of names of illicit account holders in foreign banks:

There has been a hue and cry over NDA Government’s refusal to share the names of the persons who are holding the accounts in foreign banks to park their ill-gotten money or on which they have evaded income tax.

"No such thing (as secrecy agreement) exists in officially obtained data on corruption." Dr Swamy thundered. Mr. Ram Jethmalani has been very livid in his criticism of NDA Government on this issue. I wonder what makes him defend Jayalalitha in DA case. Anyway that is a different topic altogether.

  

Finance Minister Arun Jaitley said that the NDA government will not withhold any information from the public about those who have stashed black money abroad, but was bound by the "legacy" of the treaties it has inherited and which forbid it from disclosing the identities of those operating dubious accounts until investigations against them have been completed and the quantum of their illicit hoard established.

Rejecting the charge that the NDA reversed itself in SC on Friday, Jaitley said while the NDA government was committed to disclose all information on black money, including names of those who have stashed ill-gotten wealth abroad, it was hamstrung by the Double Tax Avoidance Agreement( DTAA) the Congress government signed with Germany in 1995 which lays down that the identity of a person having an account in foreign bank can be disclosed only after charges have been filed against him in a court. He suggested that violation of treaty for propaganda or partisan purpose will prove counterproductive and choke off information flow from foreign countries.

The present NDA government unfortunately inherited the legacy of that DTAA. We may have negotiated a better deal, but if we scrap the treaty we get no further information. The covenant to the treaty is that names of the account holders and information received there under will only be disclosed when charges are filed in court. This obviously cannot be utilized for political propaganda or political mileage.

The choice before the NDA government is clear, violate the treaty and get no names in future; or abide by the treaty, collect evidence, file charges in courts and let the names become public so that the account holders can be named and shamed. One act of adventurism of violating the treaty and discussing the name could perhaps jeopardize future cooperation from the reciprocating State.  

To substantiate his argument about the danger of the violation of DTAAs, Jaitley said Germany got very upset when the government here had to, at the instance of Supreme Court, share the names of some of the foreign account holders to the petitioner in the "Black Money Case".

The minister said while NDA's approach on black money was "doggedly persistent", it would not do anything which might prove counter-productive.

"We are not going to be pushed into an act of adventurism where we violate the treaties and then plead that we are no longer able to get the cooperation of reciprocating states. Such an approach may actually help the account holders. Adventurism will be short-sighted. A mature approach will take us to the root of the matter," he said.

The finance minister also said that all that the government did on Friday in Supreme Court was to clarify that it was not prohibited from signing treaties where a commitment of confidentiality may have to be made as global standards in order to secure information on Indians hiding their money in other countries, including offshore financial centres and tax havens. "The clarification sought from the SC is only to facilitate collection of information about illegal money stashed abroad."

He said while all the information including names of account holders will become public when quoted in court proceedings arising from complaints to be filed by the Income Tax Department against tax offenders. Any premature and out of court disclosure of the names of account holders would not only vitiate the investigations but will enable such account holders to get away with their offences.  

I refer to Article 26 of Indo-German DTAA that deals with exchange of information.

ARTICLE 26: EXCHANGE OF INFORMATION

1. The competent authorities of the Contracting States shall exchange such information as is necessary for carrying out the provisions of this Agreement. Any information received by a Contracting State shall be treated as secret in the same manner as information obtained under the domestic laws of that State and shall be disclosed only to persons or authorities (including courts and administrative bodies) involved in the assessment or collection of, the enforcement or prosecution in respect of, or the determination of appeals in relation to, the taxes covered by this Agreement. Such persons or authorities shall use the information only for such purposes. They may disclose the information in public court proceedings or in judicial decisions.

2. In no case shall the provisions of paragraph 1 be construed so as to impose on a Contracting State the obligation:

(a) to carry out administrative measures at variance with the laws and administrative practice of that or of the other Contracting State

(b) to supply information which is not obtainable under the laws or in the normal course of the administration of that or of the other Contracting State ; and

(c) to supply information which would disclose any trade, business, industrial, commercial or professional secret or trade process, or information, the disclosure of which would be contrary to public policy (ordre public).

I also refer to Article 24 of Indo-Swiss DTAA.

Article 24: EXCHANGE OF INFORMATION

1.    The competent authorities of the Contracting States shall exchange such information (being information which is at their disposal under their respective taxation laws in the normal course of administration) as is necessary for carrying out the provisions of this Agreement in relation to the taxes which are the subject of this Agreement. Any information so exchanged shall be treated as secret and shall not be disclosed to any persons other than those concerned with the assessment and collection of the taxes which are the subject of this Agreement. No information as aforesaid shall be exchanged which would disclose any trade, business, industrial or professional secret or trade process.

2.   In no case shall the provisions of this Article be construed as imposing upon either of the Contracting States the obligation to carry out administrative measures at variance with the regulations and practice of either Contracting State or which would be contrary to its sovereignty, security or public policy or to supply particulars which are not procurable under its own legislation or that of the State making application.

On perusal of these two articles, the following salient points are important for the comprehension of layman, lest he may get carried away with political rhetoric.

Information exchange – scope:

The Competent Authorities of the Contracting States exchange information

-          As is necessary for carrying out the provisions of  the

-          Tax agreement, or

-          Domestic laws of the contracting states concerning

-          Taxes covered by the tax agreement, in particular for

-          Prevention of fraud or evasion of such taxes

-          Not restricted by article 1.

Exchange of information is qualified by the expression “as is necessary”. It could be interpreted strictly as to mean that information may be exchanged only if the relevant purpose could not be achieved without it. Broadly, it may mean that the relevant purpose is facilitated. Strict interpretation cannot be applied as it would narrow the scope of information exchange restricting its effectiveness. The word “necessary” has therefore been used in ‘facilitative’ sense, as to be foreseeably relevant to the assessment, collection, recovery and enforcement of tax under the domestic law or the tax agreement or for any purpose thereunder.

Information Exchange – prevention of fraud or evasion of taxes:

The information under these DTAAs is exchanged as is necessary for carrying out the provisions of tax treaty or domestic laws concerning covered taxes, in particular for the prevention of fraud or evasion of such taxes. The Swiss federal Court in X v/s. FTC (1971) 10 ILM 1029 interpreted the expression “prevention of fraud” in a case which was concerned with a request for information exchange article of the US-Switzerland DTAA. The Court held:-

-   Prevention of fraud could be interpreted broadly to cover both preventive and suppressive measures;

-       It could be interpreted to mean prevention of the ultimate success of the fraudulent acts;

-         Whether or not fraud is involved is tested by law of the country required to supply the information;

-       The requested State is not to collaborate in the prosecution of  an act which it would not itself punish;

-    The requested state is required to supply the information if the established facts sufficiently warrant a suspicion that fraud has been perpetrated or is planned.

Fraud in the case of involving revenue, it is the State which must have been sought to be deprived by such illegal means of what is known as State’s revenue. The State has to be more proactive in such cases to unearth the tax evasion and obtain information.

Information Exchange – Secrecy and use:

Article 26 of Indo-German DTAA that is liberally quoted by everyone, inter alia, provides that any information received is treated secret in the same manner as information obtained under its domestic laws. If the information is originally regarded as secret in the tram]nsmitting state it shall be disclosed only to persons or authorities (including courts and administrative bodies) involved, with respect of taxes covered by tax treaty, in

-          Assessment;

-          Collection;

-          Enforcement and prosecution;

-          Appeals.

Unfortunately, the earlier UPA Government has sought information from Germany under clause 26 of Indo-German DTAA. Consequently, the names of the tax evaders cannot be disclosed unless charges are framed against those. Had UPA Government sought information under any other convention or by overt political pressures the way USA did with Swiss authorities when USA threatened to arrest Swiss bank Chief in the USA, India would have gone ahead in crucifying the tax evaders. However, UPA Government has given them the long rope. NDA Government is bound by the Sovereign Commitment of honouring the legal commitments signed by the earlier UPA Regime.

There is no scope for political rhetoric and people cannot mindlessly demand disclosure of names. It is also important to keep in mind every account in foreign bank is not illegal. Let Authorities file charge sheet in the concerned forum. Names would be automatically revealed. Even the Supreme Court has observed: "The revelation of details of bank accounts of individuals without establishment of prima facie grounds to accuse them of wrong doing, would be violation of their rights to privacy. Details of bank accounts can be used by those who want to harass or otherwise cause damage to individuals. We can't remain blind to such possibilities and indeed experience reveals that public dissemination of banking details or availability to unauthorised persons has let to abuse. The mere fact that a citizen has a bank account in a bank located in a particular jurisdiction cannot be a ground for revelation of details of his or her account that the state has acquired".

NDA Government has initiated measures with Swiss Authorities. As per the press release dated 17/10/2014 by Ministry of Finance, a delegation led by Shri Shaktikanta Das, Revenue Secretary and consisting of Shri K.V. Chowdary, Chairman, CBDT and ShriAkhileshRanjan, Joint Secretary (FT&TR) visited Switzerland on 15.10.2014 and held discussions with Swiss Finance and Tax Authorities on issues relating to Exchange of Information in tax matters. The Swiss delegation was led by Mr. Jacques de Watteville, Secretary International Financial Matters, Switzerland. The discussions were substantive and useful. A copy of the Swiss-Indian Joint Statement has already been released to the media yesterday.

From India’s point of view, there are four positive and significant outcomes from the above meeting. They are as follows:

(i)        Switzerland has indicated willingness to provide information in respect of cases where investigations have been carried out by our IT Department independently from what Swiss Government considers as stolen data.

This development is very significant because there are a number of cases of account holders included in the HSBC list which were investigated by our Income Tax Department independent of the HSBC list obtained from the French Government. Earlier, the Swiss Government had not agreed to provide any information on names which were included in the HSBC list on the ground that these were stolen data and have been obtained in breach of Swiss law.

(ii)        The Swiss Federal Tax Administration has agreed that their competent authority would assist India in obtaining confirmation of genuineness of bank documents on requests by the Indian side and also swiftly provide information on requests relating to non-banking information.

This willingness on the part of the Swiss authorities would help in our tax investigations.

(iii)         The Swiss authorities have also agreed to provide the requested information in a time bound manner or else indicate the reasons why the cases cannot be answered within the agreed timeline.

(iv)    Switzerland has also assured that they would commence talks with India for concluding an Automatic Exchange of Information (AEOI) Agreement between India and Switzerland at the earliest, after completion of their domestic procedures. This is the first time that Switzerland has agreed to commence discussions on a bilateral agreement on AEOI.

Hope Government does not sleep over filing charge sheet.