Carving out the isthmus from Colombia created Panama. The vision was of a grand canal connecting the Pacific with the Atlantic and linking the North America with the South. The writer Ken Silverstein shone the light on Panama as a financial haven, “In 1903, the administration of Theodore Roosevelt created the country after bullying Colombia into handing over what was then the province of Panama. Roosevelt acted at the behest of various banking groups, among them JP Morgan, which was appointed as the country’s “fiscal agent in charge of managing $10 million in aid that the US had rushed down to the new nation.”
But the aid was a sweetener and the thin end of the wedge. American banks systematically converted Panama into a haven for tax evasion and money laundering — as well as a passage for shipping. The pioneer was Standard Oil, which worked closely with JP Morgan. Standard Oil used foreign ships registered in Panama to carry fuel for the company in order for the corporation to avoid US tax liabilities.
President Obama may legitimately denounce tax evasion using vehicles and lax laws of Panama, but he ought to realise that one of his predecessors fathered the system. As the Biblical saying goes, when you sow a wind, you reap a whirlwind. One must also understand that Panama is only a part of the money laundering, narco-trading, kleptocracy and tax evasion supply chain.
The law firms like Mossack Fonseca only serve in creating structures and providing services. There are thousands of tax experts, international lawyers, accountants, financial planners and banks behind this elaborate and opaque global operation.
The debate about Panama Papers has veered in the wrong direction: whether it is legal or not to register a company in a tax haven like Panama. There are Indian names in the list of people and companies, who have created structures in Panama to hide their wealth. Their defence: I have followed all rules and my structures are all legal.
In most cases they are right. The structures, in themselves, do not infringe any law. Even President Obama has conceded, “There is no doubt that the problem of global tax avoidance generally is a huge problem. The problem is that a lot of this stuff is legal, not illegal.”
In India, the situation would be a little trickier. In most cases, you need the approval of the Reserve Bank of India to move money out or receive money abroad. The debate, in my view, should be about whether the laws, which permit secret accounts in tax havens, should be allowed by the international community to continue. Today it is possible for a battery of international lawyers to successfully argue that a company created in the Cayman Islands with bank accounts in Panama with a shadowy board of nominees in Liechtenstein is perfectly legitimate. But to take inspiration from a German philosopher one should say, “The lawyers have hitherto only interpreted the laws in various ways; the point is to change them.”
Political leaders and businesspersons of various countries use Panama and other tax havens to hide their ill-gotten wealth from the view or reach of the citizens and regulatory authorities. They are used to launder terrorist, extortion and drug money and hide them in tax-free jurisdictions away from the long arm of law.
But there is a strong argument put forward by India entrepreneurs. The argument goes like this: I have to compete with global competitors. If my competitors use structures that are more efficient than mine, I lose out. I need to use tax advantages offered by tax havens like Cayman Islands, Panama, the Channel Islands, Mauritius and Liechtenstein to be on a level playing field with my global competitors. I have declared my structure to the Indian authorities and taken every regulatory approval, including from the Reserve Bank of India — so why do you brand me a criminal?
In a number of cases, the structures are clean as a whistle from a legal standpoint. But the companies and individuals flocking to the tax havens are mostly black sheep with the lily white ones an exception rather than a rule. According to a posting by Ian Bremmer, founder and president of the Eurasia group, a leading American political risk research firm, the bulk of the illegal money transfers are from developing countries. According to studies cited by him, at the top of the heap is China, which has transferred $1.4 trillion of illegal money, closely followed by Russia with $1 trillion.
Mexico with $528 billion (drug money is a large component) is in the third position, with India snapping at its heels with $510 billion.
Thomas Piketty, the French economist has written an article in Le Monde and warned of disastrous consequences if the global financial regulators do not orchestrate their act. He has said, “In reality, this mainly reveals the persistent hypertrophy of private-sector balance sheets and the extreme fragility of the system as a whole. It is to be hoped that the world will learn from the lessons of the Panama Papers and at long last combat financial opacity without waiting for a further crisis.”
In India, we have to walk the talk of “na khaunga, na khaney dunga.” Swachh Bharat cannot be only about creation of public latrines. The stench, filth and dirt of corruption in our political and commercial systems must be swept clean by coming down heavily on those, who have used havens like the Panama to hide their ill-gotten gains or created structures to evade taxes and foreign currency laws. If India is in the fourth position in transmitting illegal money, then we, as a nation, have a huge stake in cleaning the Aegean stables. Our government led by prime minister Modi must lead in the clean-up of the global financial system, broom in hand.
(The author is the Founder and CEO of Sumantrana,
a strategic advisory firm)
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