How to stop the looting machine

Despite the staggering scale of their larceny, Nirav Modi and Vijay Mallya are hardly the only Indians who have successfully salted away large sums to unknown shores. The pretension that the current administration is in earnest to combat black money or has the capability to recover it is gossamer-thin. The best proof were the tall claims made for demonetization and the laughable results achieved. The unbelievable ineptitude of the way the measure was implemented, the avoidable suffering it inflicted on thousands, the damage it caused to commerce, especially in the unorganized sector, served as only the drumbeat of fake news. The results are now clear: practically all the black money has been successfully laundered into lily-white money.

By Manish Nandy
  • Published 22.02.18
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Despite the staggering scale of their larceny, Nirav Modi and Vijay Mallya are hardly the only Indians who have successfully salted away large sums to unknown shores. The pretension that the current administration is in earnest to combat black money or has the capability to recover it is gossamer-thin. The best proof were the tall claims made for demonetization and the laughable results achieved. The unbelievable ineptitude of the way the measure was implemented, the avoidable suffering it inflicted on thousands, the damage it caused to commerce, especially in the unorganized sector, served as only the drumbeat of fake news. The results are now clear: practically all the black money has been successfully laundered into lily-white money.

If black money was really the target of the exercise, astounding is the scant attention given to the ways it is squirrelled away and the means to prevent it. The money is not preserved in bundles under the mattress or in bedroom safes. We live in the golden age of money laundering, thanks to globalization and the worldwide capital market it has created. There is unprecedented ease and convenience of one-touch, lightning-speed transfer of funds from one end of the world to another. This is matched by the huge, growing, well-heeled army of 'enablers', including American attorneys, French bankers, German accountants and British public relations firms. These specialists know exactly what laws to circumvent and what loopholes to take advantage of in different lands.

The volume of black money criss-crossing the frontiers is astounding. The International Monetary Fund estimates that five per cent of the world's GDP is laundered black money; only one per cent of it is ever identified. Global Financial Integrity calculates that a trillion dollars of illicit money is being taken out of developing countries every year. Arun Kumar, a professor at the Jawaharlal Nehru University, assessed that the Indians' hoard abroad is $2 trillion, which potentially could have netted a tax revenue of $600 billion, six times the amount the government will borrow to meet expenses this year.

A massive and skilled industry has sprung up to make sure this happens without a hitch, and the 'Looting Machine', as Tom Burgis calls it, functions splendidly. Remember that the successful thief has two problems. First, his reputation makes further stealing more difficult. Second, it gets harder to protect his loot from ferreting fingers. The enablers solve both the problems. They convert the ill-gotten wealth into respectable funds, make it impossible to trace it back to crimes that yielded it or the criminal who garnered it, put the funds to lucrative or purposeful use, and ensure that the money confers power and respectability on its corrupt owners.

All an Indian leader has to do is to pick up his phone and call one of the 4,000 incorporation agents the world over. They will swiftly identify a good offshore bank of his choice, in Cyprus, Gibraltar, Guernsey, Switzerland, the Bahamas or Virgin Islands, and set up the initial company. Then, in turn, will be set up other companies as holding or interlocking companies. These are not real companies, but corporate entities with ownership carefully guarded to withstand identification of the owner or his source of funds, either in his country or where the money is stashed.

The money is stored in reliable hands - Barclays, Deutsche Bank and HSBC readily come to mind - rebranded as foreign money, and it can re-enter the homeland easily, to fund political campaigns, buy opulent real estate and lubricate business transactions. The Panama Papers, 11 million documents leaked by a whistle-blower, showed that Mossack Fonseca alone had created 2,14,000 shell companies for the kleptocrat president of Sudan, the thieving prime ministers of Georgia, Moldova, Ukraine, Jordan, Iraq and Pakistan, sons of a British premier and a UN secretary- general, and members and mistresses of Spanish and Moroccan royal families.

This may not be enough if you continue to live in the country, for you may go to prison for a variety of reasons. Vladimir Putin could put the Yukos chief, Mikhail Khodorkovsky, in jail because he lived in Russia, although he had built his entire corporate structure in places like Jersey and Isle of Man. There is thus the need to gain legal entry into a convenient Western country. The rich Chinese have been buying in record numbers US visas for a million dollars and UK visas for two million pounds. Indian businessmen can gain foothold cheaper in Portugal, Greece and Latvia, and can even buy passports from Malta and some Caribbean countries.

Once in the new land, the device of the shell company is perfectly serviceable to acquire the finest houses money can buy. The priciest mansions in New York and London can be had with the help of realtors and lawyers who regularly advise possessors of dirty money how to go around anti-laundering rules, if the country has any. Above all, in the rare case of a problem, one can use the best resources of the adopted land to protect one's interest, as Vijay Mallya is now doing.

The final stage of black-money utilization is reached when the thief becomes the saint. Many who surreptitiously transfer their wealth seamlessly embed themselves in the elite of the new society. Some turn university benefactors, like Saif al-Islam, the son of Muammar Gaddafi, who hobnobbed with the British royal family. Some become arts patrons, like Dasha Zhukova, the wife of the oligarch, Roman Abramovich. Some simply buy top sports teams. Still others turn lobbyists and make lucrative careers in Washington, selling contacts in their homeland. They zealously guard their reputation through defamation laws and promote their image to gain social invulnerability.

This is the real and burgeoning challenge India is now facing that ham-handed demonetization cannot solve. To solve it, we have to think of other means. The glittering scions of the Indian elite who now deck the Ivy League business schools of the United States of America will probably follow the highly successful route of the Russian and Chinese kleptocrats and their children, unless the route is blocked well and fast.

Since it is a problem that crosses borders, we need to seek an international solution. Since most Russian and Chinese émigrés have been striking root in the United Kingdom and the US, and now that their authorities have woken up to ugly reality that besides the mega-thieves, terrorist groups and drug cartels have also taken to the offshore device, India must join their efforts to stem the tide. It should include the initiative to de-shell the shell companies and force them to disclose their beneficiaries, at the cost of severe sanctions; compel realtors and their lawyers and accountants to report high-value cash transactions; step up penalties and travel restriction for corrupt practices, including bribe-giving and bribe-taking and fund and strengthen government agencies for intelligence and prosecution of global corruption.

It is time to stop the Looting Machine.