How black money finds its way out of India, and how it comes back as white

 In February 2008, R Prasad, the then chairman of the Central Board of Direct Taxes (CBDT), led a team of tax sleuths to Port Louis, the capital city of Mauritius.

Backed by a team from the ministry of external affairs, Prasad made an attempt to convince Mauritius officials to re-negotiate the double tax avoidance agreement (DTAA), which was resulting in massive tax losses to India

Prasad's attempt was unsuccessful, but what he discovered in the process was startling: a handful of persons acted as directors for about 30,000 companies located in that island nation. Also, companies there exist only on paper, as addresses of many of those begin with a mere post box number.

"Mauritius and many other tax havens act as buffers to bring back India's black money as white.

And the challenge before the investigators is to establish the criminality of those involved in such activities," says Prasad, who retired as CBDT chairman six years ago.

Now, the Supreme Court-appointed Special Investigation Team (SIT) on black money wants such tax treaties to be re-drafted, a move that will put the government in a spot.

Only this week, a reluctant government had to hand over to the apex court a complete list of 627 Indians who have accounts in HSBC Bank, Geneva.

"The debate so far has been what comes first: investment or tax? Is India ready to sacrifice investments worth billions of dollars for the sake of some tax gain? So far as Mauritius is concerned, any retreat from India's side will allow China to woo the island nation," says a finance ministry official who did not want to be named, explaining why New Delhi hasn't been assertive with Mauritius, a nation where Indian defence forces harbour strategic interests.

In Black and White

While tax havens like Mauritius will help black money come back into the country as white, Indians continue to send illicit money abroad.

This is done through various methods, hawala transactions — where money is transferred abroad without any real movement of funds — being one of them although, according to a finance ministry white paper on black money released two years ago, hawala transactions have actually dwindled over the past decade.

"In recent years, after the 9/11 incident in the US, due to intense scrutiny of banking transactions, enhanced security checks at airports and ports and relaxation of exchange controls, transfer of money through hawala has reduced significantly," says the report. "...increasing pressure on financial operators and banks to report cash transactions has also helped in curbing hawala transactions."

However, there are other methods to siphon black money out of the country, two of which are manipulation of export invoices and setting up of trusts abroad.

Two income-tax officials told ET Magazine that a large number of the accounts of the 627 names based on data stolen by an employee of HSBC, Geneva, would be of such trusts. The modus operandi adopted here is as follows: black money moves abroad through routes like hawala.

Then a trust is formed in, let's assume, the Netherlands. The trustees in this case will be Dutch nationals, but the beneficiaries will be relatives of an Indian back home who put in the initial corpus.

"But we can initiate a probe only when money gets reflected in the accounts of the beneficiaries," explains one of the tax officials.

As the incometax department and the Enforcement Directorate (ED) will now work under SIT, one can expect more urgency in the mission to bring back unaccounted money. Yet, genuine hurdles may come in the way of that endeavour.

The classic example of such a hurdle is seen in the case of Pune-based stud farm-owner Hasan Ali Khan, who was raided by the I-T department seven years ago. Documents and data in his laptop established that he had a Swiss bank account with a whopping $8 billion (roughly Rs 48,000 crore) in deposits. Ali was sent to jail, but the ED that probes money laundering cases found out from the Swiss authorities that Ali's accounts had been emptied.

The multi-billion dollar question then: how many of the 627 whose names exist in a sealed cover would have done the same?