Global offshore money maze

All responsible governments in recent years have shown commitment to retrieving looted money by their citizens, but in Pakistan the PPP-led government during its five-year-tenure (2008-2013) acted as the main stumbling block to any such move. It is well-established fact that billions of funds of Pakistanis are lying abroad-these were not offered for tax and their sources are obviously dubious.

On April 4, 2013, International Consortium of Investigative Journalists (ICIJ) revealed tens of thousands of people in more than 170 countries and territories linked to offshore companies and trusts. Dozens of journalists sifted through millions of leaked records and thousands of names to produce ICIJ’s investigation into offshore secrecy. A cache of 2.5 million files has cracked open the secrets of more than 120,000 offshore companies and trusts, exposing hidden dealings of politicians, con men and mega-rich the world over. The secret records obtained by the ICIJ lay bare the names behind covert companies and private trusts in the British Virgin Islands, the Cook Islands and other offshore hideaways.

They include American doctors and dentists and middle-class Greek villagers as well as families and associates of long-time despots, Wall Street swindlers, Eastern European and Indonesian billionaires, Russian corporate executives, international arms dealers and a sham-director-fronted company that the European Union has labelled as a cog in Iran’s nuclear-development program. The leaked files provide facts and figures – cash transfers, incorporation dates, links between companies and individuals – that illustrate how offshore financial secrecy has spread aggressively around the globe, allowing the wealthy and the well-connected to dodge taxes and fuelling corruption and economic woes in rich and poor nations alike-see details at http://www.icij.org/offshore/who-uses-offshore-world.

The report of ICIJ also included the names of two politicians from Pakistan. The report of ICIJ is an eye-opener for all those who have been claiming that capitalism and free markets should work without any interference from States. In the 1990s, the Organisation for Economic Co-operation and Development (OECD) began pushing offshore centres to reduce secrecy and get tougher on money laundering, but the effort ebbed in the 2000s. Another push against tax havens began when US authorities took on UBS, forcing the Swiss bank to pay $780 million in 2009 to settle allegations that it had helped Americans dodge taxes. US and German authorities have pressured banks and governments to share information about offshore clients and accounts and UK Prime Minister David Cameron has vowed to use his leadership of the G8, a forum of the world’s richest nations, to help crack down on tax evasion and money laundering.

Promises like these have been met with skepticism, given the role played by key G8 members – the US, the UK and Russia – as sources and destinations of dirty money. Despite the new efforts, offshore remains a “zone of impunity” for anyone determined to commit financial crimes, said Jack Blum, a former US Senate investigator who is now a lawyer specialising in money laundering and tax fraud cases. “Periodically, the stench gets so bad somebody has to get out there and clap the lid on the garbage can and sit on it for a while,” Blum said. “There’s been some progress, but there’s a bloody long way to go.

“Those who loot state funds through corruption or deprive their state of revenues through tax evasion need more than a bank: they need to hide their identity behind a corporate front. It is so easy to set up such a company that criminals, terrorists and corrupt politicians can easily move money around the world with impunity. Hidden company ownership facilitates state looting, denying the citizens of poor countries the chance to lift themselves out of poverty and leaving them dependent on aid”-see details at http://www.washingtonpost.com/investigations/piercing-the-secrecy-of-offshore-tax-havens/2013/04/06/1551806c-7d50-11e2-a044-676856536b40_story.html.

Countries such as the UK might have a company registry and consider themselves ‘onshore’, but as long as they do not publish the names of the ultimate ‘beneficial’ owners of companies, they are effectively permitting companies to hide their true owners, making them as offshore as any palm-fringed island. The original purpose of a limited liability company is in its name – to limit the personal liability of individuals going into business in order to promote enterprise and entrepreneurship. The mechanism by which companies do this – the creation of a ‘legal person’ separate from a ‘natural person’ – has a side-effect: the ability to hide the real person behind the company. Hidden ownership of assets has now become the main aim of vast numbers of companies in every corporate registry in the world. This means that limited liability companies are being abused for secrecy purposes on an industrial scale – not just by the corrupt, but by tax evaders, fraudsters, human traffickers, drug traffickers and terrorists.

In June 2012, Organisations representing over 1000 civil society groups sent a letter to the European Union (EU) calling on it to establish a new standard for company ownership transparency. The letter pointed out that in 2010 there was a US $58 billion shortfall in the funds needed to achieve the Millennium Development Goals. Yet at the same time developing countries were estimated to have lost between US $775 billion and US $903 billion in 2009 to illicit financial flows; the opacity around the beneficial ownership of companies and other legal structures facilitates these flows on a vast scale.

The corrupt in Pakistan have shifted billions outside while the State is caught in severe debt trap. The enormous money looted by indomitable civil-military bureaucracy and greedy businessmen-cum-politicians is parked in various countries. Report of ICIJ (http://www.icij.org/offshore/who-uses-offshore-world) suggests that Pakistani corrupt businessmen, officials and politicians have been transferring huge amounts of money abroad.

In Pakistan, huge money is generated through illegal activities by avaricious politicians, corrupt bureaucrats, Jihadi-terrorist-drug-for-arms networks and greedy businessmen. The country is facing a grim challenge of countering terrorism, money laundering and enormous revenue leakages-size of parallel economy is estimated three times the regular economy. Till today, no effort has been made by the National Accountability Bureau (NAB), Federal Board of Revenue (FBR), Federal Investigating Agency (FIA), Anti-Narcotics Force (AFN) or Narcotics Control Board to conduct an in-depth study to quantify the magnitude of underground economy, amounts shifted to Swiss and Dubai banks and offshore centres-according to estimates, it is not less than 200 billion dollars that is four times the external debt of Pakistan.

The report of ICIF gives a hint that the money lying in onshore and offshore centres of Pakistanis is not less than US $200 billion, which appears plausible as parallel economy is growing at an alarming rate of 20% per annum. Every fifth rupee transacted in Pakistan is black. The volume of black money generated in the year 2011-12 alone was not less than US $90 billion. This is still not final. It does not account for kickbacks in arms deals, foreign trade, smuggling and foreign exchange racketeering, apart from trade in narcotics and other criminal activities by terrorist Jihadi outfits. According to various studies, the annual money generated through smuggling in goods and narcotics trade alone is around US $50 billion.

Pakistani policy-makers must realise that a sound development strategy seeks to reduce the size of the informal economy and bring into the open, resources that lie in the form of black money. Apart from such mechanisms as foreign exchange and tax amnesties; and exercises such as demonetisations, taxation is used as a tool to tap the resources inherent in these areas. According to a conservative estimate, tax evaders in Pakistan annually deprive the country of revenue of over US $40 billion-but government, instead of putting them behind bars, encourages their unlawful activities. Our politicians, policy-makers and tax managers during the last many years have miserably failed to tap untaxed money despite borrowing a whopping US $100 million for Tax Administration Reforms Programme (TARP)-every year billions of rupees are transferred from Pakistan to Zurich, Dubai, Johannesburg and elsewhere.

It is not possible to determine the precise amount of revenue loss and size of black money or shifting of money abroad. Revenue loss on account of smuggling of Afghan transit trade alone, as estimated by the World Bank, amounted to US $35 billion. Apart from direct monetary costs of corruption, both Pakistani and international literature pinpoint many other costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment.

The ugliest face of black money emerges in the corridors of power, political as well as administrative. Pakistan, therefore, needs to introduce asset-seizure legislation to confiscate the mammoth reservoir of the untaxed black money-huge chunk of which is lying abroad. It is now time to seek information from other government as has been done by India, the US, the EU countries and many other governments in Asia and Africa of funds of Pakistanis in their countries. In case swift action is not taken to seize money and property arising out of corruption, tax evasion, narco-arms-trade and other unlawful activities, the day is not far off when our tolerance towards ill-gotten wealth leads to self-annihilation.

(The writers, tax lawyers, are Adjunct Faculty at Lahore University of Management Sciences)