Taking The Lid Off Illicit Financial Flows

Context: Pandora Papers highlighted the need for concerted steps to alter the global financial architecture.

Pandora paper leak: Exposed illegal activities of rich and mighty across the world

• The International Consortium of Investigative Journalists (ICIJ) carried out Pandora Papers investigation, “the world’s largest-ever journalistic collaboration, involving more than 600 journalists from 150 media outlets in 117 countries”.
  • It covered records from 14 offshore services whereas Paradise & Panama Paper leaks were focusing a particular tax haven.
• This unraveled the functioning of global financial architecture which helps illicit financial flows, enabling the rich to throw a cloak over their incomes and activities.
• Trail of data trove covers more than 330 politicians and 130 Forbes billionaires, as well as celebrities... drug dealers, royal family members and leaders of religious groups around the world.

Issues in global financial  architecture

• Presence of active hubs breeding financial crimes: In 2017, Paradise Papers were leaked out from offshore law firm, Appleby.
  • In 2016, Panama Papers disclosed illicit activities by Panamanian financial firm, Mossack Fonseca.
• Legal paradigm biased in favour of rich:
  • Biggest financial centres such as London & New York allows financial institutions such as big banks that have been prosecuted for committing illegalities to operate with ease.
  • Manipulation of financial tools: In 2012, an investigation London Interbank Offered Rate or LIBOR led to fining of leading banks such as Barclays, UBS, Rabobank etc for manipulation.
  • Tax Complexity in some countries forces rich to use such manipulations to lower their tax liability.
• Depleting state resources: Tax havens have enabled capital to become highly mobile, forcing nations to lower tax rates to attract capital. That
  • Led to ‘race to the bottom’, resulting in a shortage of resources with governments to provide public goods, etc., in turn adversely impacting the poor.
• Systemic corruption – Vested Interests of powerful who are responsible to curb illicit financial flows are beneficiaries of system and hence do not want a fool proof system to be put in place to check it.
  • Legal difficulties in prosecution: Due to active layering and jurisdictional complications.
• India Specific Issues:
  • Excessive policy focus on unorganised sector as source of black income generation leads to diversion from the organised sector that has been the real culprit.
  • Legal gaps: Many Indians have become non-resident Indians or have made some relative into an NRI who can operate shell companies and trusts outside the purview of Indian tax authorities.

Way Forward: Major steps to revamp global financial architecture includes

• Ending banking secrecy and a Tobin tax on transactions.
• Minimum taxation agreement: Implementation of agreement among almost 140 countries to levy a 15% minimum tax rate on corporates.