Black Money in Swiss Banks – Analysis Jun21


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Black Money in Swiss Banks – Analysis

On March 31 2009 L.K. Advani the then leader of opposition and prospective Prime Ministerial candidate    raised the issue of Indian black stashed in Swiss Banks and numerous other tax havens. He quoted the  massive figure of $1.4 trillion (more than India’s nominal GDP) as the amount being illegally held abroad in  numbered accounts. The BJP quickly scaled up the issue throwing figures of Rs 71 lakh crores around in the  media and promising to bring back the money if they were elected as the ruling party. The ambition was  noble doubtless, but what needs to be examined is:

‘Was it just blustery election rhetoric?’  OR  ‘Is it actually possible to bring this sum back into our nation, a sum that can instantly transform the economy and possibly eradicate poverty as we know it?’

Germany applied pressure on Liechtenstein (a European tax haven, famous for banking and numbered accounts)  in 2008 to obtain details with regard to more than 400 suspected tax evaders. After sustained pressure Liechtenstein succumbed and handed over details that uncovered a tax evasion scam running into billions of euros. Germany however borders Liechtenstein and is a major trading and manufacturing partner of the small principality having a population of only 45,000. Germany thus had significant leverage to force The Liechtenstein Global Trust (owned by Liechtenstein’s ruling family, also Liechtenstein’s largest bank) to bypass banking secrecy laws and disclose confidential client information.

In a similar but more significant case the Government of the largest economy in the world guided by their Internal Revenue Service (IRS) applied intense pressure on Switzerland to disclose confidential banking information related to 4,450 US citizens suspected of tax evasion. The Swiss have since long prided themselves on their independence and neutrality. They remained neutral and independent during both the World Wars, an island of calm amidst a raging ocean of violence and destruction. The Swiss have however faced intense criticism from some quarters for their stand especially during the Nazi era. The neutral status of Switzerland and their banking secrecy laws helped many Nazis stash away huge sums of loot during their decade long domination of Central-Eastern Europe. The Swiss however are staunchly independent and pride themselves on this status. They have stayed out of the European Union, have maintained the currency Swiss Franc though surrounded by nations carrying the Euro and joined the United Nations as late as 2002. Furthermore Swiss banking and secrecy is regarded by Swiss citizens as a flag that represents their trust-worthiness, independence and neutrality.

In this context therefore it is extremely tough to put leverage or pressure on the Swiss, especially in relation to Swiss Banking Secrecy. The United States however threatened to cancel the banking license of UBS (Switzerland’s biggest bank) with respect to it’s role in helping US citizens commit income tax fraud and tax evasion. UBS has a significant presence in the     USA with office skyscrapers in New York and Chicago. 38% of UBS staff is employed in the USA.       Furthermore UBS is struggling in the global financial crisis racking losses quarter-on-quarter. In this  context USA was able to apply considerable leverage on UBS to disclose account details of 4,450 suspected  evaders.

Now examining the Indian economic and political scenario that presents multiple contradictions. In the year 2006 a study was undertaken by the Global Financial Integrity Survey that revealed that India had   lost an estimated $136 billion between the years 2002-2006 through money laundering activities. After several estimates undertaken under various assumptions the grand figure of Rs 71 lakh crore was announced taking into consideration all money laundering activities that had been taking place in the post independence years. The list announced that India had a sum of $1,456 billion in Swiss Banks that accounted for more than 50% of all the money kept in Swiss Banks. The Swiss categorically denied the figures. They said that it would be a primary violation of their secrecy norms if they compiled a list based on the nationalities of their customers. They said that no external financial entity had access to banking facts and figures and the list was a hypothesis not backed by substance.

Examining the Swiss reaction it is obvious to find the logic in what they say. Firstly it would be not be possible for any external entity to examine banking information, secondly it would be impossible to arrive at the figure of $1,456 billion as most of the confidential records would not contain any information with regard to the nationalities of the depositor. That in itself would violate their basic secrecy laws. Therefore serious questions may be raised on the figures announced by the Leader of Opposition.

However continuing the analysis on the assumption that the figures are accurate: The figures state that Indian citizens hold more than 50% of all deposits in Swiss Banks. If this is indeed true then revealing information to the Indian government would have disastrous consequences for the Swiss banking industry. It would be a direct threat to their largest customer base and would lead to an immediate collapse of the banking industry. Secondly, the Swiss are facing increased competition by numerous other tax havens across the globe including the Cayman Islands, Liechtenstein, Cook Islands, Barbados and many more spread all across. In the face of increased competition the Swiss would guard their reputation for secrecy ferociously. They are even more cautious now after revealing account details to the US as they look to, firstly reassure their customers world wide that Swiss secrecy is indeed still intact and secondly they look to prevent a potential cascade effect with other countries also joining the fray and asking for account details. The Indian investment and priority banking industry is still in its nascent stages and Swiss banks do not have significant exposure to the Indian economy. In this case therefore India has no direct leverage on Swiss Banks. We have examined the significant leverage possessed by Germany and USA that allowed them to access a specified number of accounts under special scrutiny. India however does not possess noteworthy instruments of pressure on Switzerland.

Considering all of the above factors and the present context of Swiss banking, I feel that it would not be possible for the Indian government to access Indian wealth locked away in numbered accounts.

Now reexamining the question:

‘Was it just blustery election rhetoric?’  OR  ‘Is it actually possible to bring this sum back into our nation, a sum that can instantly transform the economy and possibly eradicate poverty as we know it?’

The BJP government was in power from 1998-2004. The question of black money was not effectively raised at that point. Secondly the issue was not actively raised in the years from 2004-2009. However come April 2009 L.K.Advani decided to use black money as a primary election plank and publicly declared that the BJP government would make it their top priority to get the money back.

In my opinion BJP should have concentrated solely on eradicating corruption and tax evasion in the future. A focussed approach and an election campaign based primarily on the cleansing of the bureaucratic system would have won the BJP more seats in the national elections. It is necessary to focus on the efficient and clean running of the bureaucratic system and legislative expansion of the power of the Income Tax Department of India to actively pursue suspected tax evasion cases.

‘Was it just blustery election rhetoric?’

Yes it was, and it cost the Bharatiya Janata Party the national elections.

Opinions welcome. Readers may send in their views and opinions to Manan Vyas at the following e-mail address: