Barack Obama Administration’s Victories in the Battle Against Offshore Tax Evasion V/s India’s Battle; Why And How Has The Modi Administration Failed In This Regard?

Barack Obama’s rise to the presidency was a testament to his exceptional leadership, compelling vision, and grassroots organizing.

Obama’s political career began with his service in the Illinois State Senate and later as a U.S. Senator. Inspired by his experiences, he embarked on a historic presidential campaign in 2008; his exceptional oratory skills, strategic campaign organization, and ability to connect with a broad range of voters propelled him to victory, securing the Democratic nomination and ultimately defeating Republican nominee John McCain in the general election.

Consider the following perspective, despite white Americans constituting approximately 85% of the vote bank in the United States, an African American candidate successfully won the Presidential elections. This raises the question of how such an outcome was possible.

One crucial factor contributing to this outcome was the promise made by Barack Obama to the American people during his campaign. He pledged to address the issue of corruption among politicians and the illicit flow of money into foreign banks. This promise resonated with voters across the country, leading to his historic victory, which garnered the highest-ever vote margin in American history.
Shortly after assuming office, President Obama wasted no time in fulfilling his commitment. Within the first few days of his presidency, he introduced groundbreaking legislation aimed at combating tax evasion and addressing the issue of illicit funds held in Swiss banks.

Besides the fact that his administration worked extensively towards,
Economic Policies and Financial Reform, Affordable Care Act (ACA),
Financial Regulation and Wall Street Reform, Addressing Socioeconomic Disparities, Education Reform, Criminal Justice Reform, Economic Opportunities and Job Creation, Promoting Equality and Social Justice; the Obama administration made significant progress in its fight against tax evasion, particularly in cracking down on offshore tax havens.

Thus, the focus was on tackling tax evasion by U.S. corporations and high-net-worth individuals who exploited offshore jurisdictions to minimize their tax liabilities.

India has long been grappling with the issue of tax havens, where individuals and companies use offshore accounts and jurisdictions to evade taxes; this is still an ongoing struggle, and not much has been achieved in this regard.

Now consider the efforts made by the Obama administration –

The efforts to combat tax cheats yielded notable victories, including undercutting Switzerland’s long-standing reputation for banking secrecy. Swiss banks paid nearly $4 billion in penalties for assisting tax evasion, with the example of BSI agreeing to pay a $211 million penalty to the United States. President Obama also signed the Foreign Account Tax Compliance Act (FATCA) in 2010, compelling foreign banks to cooperate in deterring U.S. taxpayers from hiding income offshore.

The IRS administered a voluntary disclosure program encouraging Americans with offshore accounts to come forward and disclose their assets. This program resulted in over 50,000 taxpayers voluntarily disclosing their offshore accounts, leading to the recovery of $7 billion in taxes, penalties, and interest. The combined efforts of law enforcement actions and the voluntary disclosure program significantly changed the risk calculus for individuals attempting to hide money offshore, making it increasingly challenging for Americans to park their money outside the U.S.

While the impact of the government’s initiatives in stopping offshore tax evasion is difficult to quantify, experts acknowledged the White House’s efforts in building upon previous administrations’ work. The voluntary disclosure program and the Swiss bank program provided avenues for taxpayers and institutions to come forward, disclose offshore activities, and avoid criminal prosecution.

UBS and Credit Suisse, the two largest Swiss banks then, faced substantial penalties for their involvement in facilitating tax evasion, with Credit Suisse paying a $2.6 billion penalty and UBS settling for $780 million and providing the names of American account holders.

The Foreign Account Tax Compliance Act (FATCA) was expected to contribute further to the government’s revenue collection from former tax evaders. Roughly 110 other countries and 160,000 financial institutions agreed to comply with FATCA, which required foreign banks to report on U.S. accounts.

Barack Obama V/S Narendra Modi, Black Money

Despite Prime Minister Narendra Modi’s claims to expose and target black money, an increasing amount of it is being discovered to have been laundered to overseas tax havens by influential businessmen, wealthy traders, and unscrupulous tax lawyers in India.

One notable instance is the Panama Papers scandal, where The Indian Express, in association with the International Consortium of Investigative Journalists (ICIJ), revealed a list of 500 Indian individuals who had channelled funds to Panama, particularly through the German-managed bank Mossack Fonseca, renowned for facilitating the laundering of concealed foreign assets.

Therefore, even after all the aggressive pre-election posturing from the BJP on offshore accounts, Narendra Modi and his ministers have yet to do much or have done little to fix the problem.

The Modi government faces several pertinent questions regarding its efforts to tackle black money in India.

In his Independence Day speech, Prime Minister Narendra Modi claimed that “no one dares to send money abroad now.” However, he did not provide any supporting evidence for this assertion. It is important to note that illicit offshore transactions are challenging to detect, and occasional leaks offer only a glimpse into the scale of such activities.
Therefore, the absence of visible outflows does not necessarily imply an absence of money being routed abroad. The government should back such claims with concrete proof instead of presenting them as facts; hence, did the prime minister make a wild guess or state a fact?

Secondly, did and if yes, then what lesson did the government learn from the failure of the compliance window scheme?
The compliance window scheme, which aimed to encourage the disclosure of black money, did not yield the expected results. The government initially announced that Rs 6,500 crore was received under the scheme but later clarified that this figure pertained to the HSBC probe and not the compliance window.

This discrepancy in numbers raised questions about the effectiveness of the scheme. It indicated that tax evaders and individuals involved in offshore transactions feel secure and are not deterred by the government’s treaties, laws, or investigations. The failure of the compliance window highlighted the need for more robust measures and strategies to combat black money.

Why is the government routinely discouraging whistleblowing in India?
The most substantial recoveries of black money in India have resulted from leaked data, particularly in the case of HSBC Bank, Geneva, and LGT Bank, Liechtenstein. This raises the question of why the government is not actively supporting whistleblower protection laws, both domestically and internationally.
Encouraging insiders to report corruption and illicit activities can significantly enhance anti-black money efforts. Instead of relying solely on laws, treaties, vows, and warnings, the government should prioritize the enactment of whistleblower protection laws to facilitate effective information disclosure.

Did national bank scams lead to any significant outcomes at all?
Cases such as the Bank of Baroda and Oriental Bank highlight the involvement of local banks in offshore money laundering, using banks like HSBC as intermediaries. However, the ultimate conclusion of these investigations remained uncertain. Penalties imposed by the Reserve Bank of India on several Indian banks for violating anti-money laundering norms may not be sufficient to deter them from engaging in offshore transactions worth thousands of crores. Stronger actions and stricter penalties are necessary to discourage such activities effectively.

And most important, will the government outlaw election funding from corporations?
Large-scale tax evasion, which severely impacts national economies, is often perpetrated by big businesses. The government should demonstrate tangible actions if it is genuinely committed to addressing this issue. Banning corporate funding for election campaigns, as Brazil recently did, would be a significant step towards curbing the influence of corporations involved in illegal financial activities. The government could lead by example by ensuring transparency in its own party’s election funding.

Why can’t India be as proactive as Argentina or America?
Argentina took decisive action against offshore tax evasion; it indicted HSBC, demanded repatriation of funds, and involved the HSBC whistleblower in their investigations. In contrast, Indian authorities limit important statements to the finance minister and prime minister, and there is a reluctance to engage with the media regarding black money investigations. Strengthening collaborations and adopting a more proactive approach is necessary to tackle the offshore problem effectively.

Finally, are offshore industry experts outsmarting Indian investigators?

The offshore industry possesses vast resources and expertise, making it challenging for investigators to tackle the problem effectively. Indian investigators should adopt a more dynamic approach, moving beyond traditional methods.
Collaboration and information-sharing with insiders and experts are crucial.

Individuals like UBS whistleblower Bradley Birkenfeld and UBS insider Stephanie Gibaud had offered their assistance, and Indian investigators should have taken their insights seriously. Understanding the modus operandi of offshore banks and continuously evolving strategies are key to combating illicit financial activities effectively.

The Last Bit, By addressing these questions and concerns, the Indian government could have and can work towards more transparent and comprehensive efforts to combat black money and offshore tax evasion. In the battle against tax evasion, particularly in cracking down on offshore tax havens, Barack Obama and his administration won hands down!