Inside India’s domestic tax havens

Everything about B-8 too is fake, although it serves as the registered address of at least 75 companies. There are no employees, no assets and, in fact, no real business. It’s just a drop box address – one of 6,460 across Delhi that mask as the headquarters for 41,448 shell companies, official figures accessed by HT shows.

Shell companies, the backbone of any shadow economy, are back in focus after Prime Minister Narendra Modi pulled out 86% of the cash in circulation in an ambitious campaign to stamp out corruption and ‘black money’.

But many tax evaders avoided Modi’s dragnet using phantom businesses and converted slush funds into legal money, officials and experts said.

An HT investigation based on an analysis of 10.26-lakh entities with the Registrar of Companies (RoC) found at least 133,256 drop box companies from 16,634 drop box addresses in two cities alone—Kolkata and Delhi. A majority of these companies are registered in Kolkata.

The businesses incorporated are legitimate since they do not violate any law. Yet, shell companies, which are used as conduits to convert illicit money into legal cash, are the central piece of the country’s money laundering chain.

With new, stringent guidelines in place, the government had hoped that more than Rs 9-10 trillion would return to the banking system and the treasury would be able to wipe out Rs 5 trillion of illicit cash.

But that did not happen. Much of Rs 15 trillion taken out of circulation was returned to the formal banking channel.

Government officials and experts believe shell companies such as those listed at B8 Ansal Towers played a role in helping avoid detection of ‘black money’.

In the first case of organised money laundering registered after demonetisation against Axis Bank’s Kashmiri gate branch, the Enforcement Directorate (ED) found that “huge monies were transferred through RTGS transfers (online transfer) to some shell companies including a case where the director of such a firm was a ‘petty labourer’”.

Books of shell companies are well maintained. They have their accounts audited, tax returns filed regularly and a functioning bank account. In most cases, directors and shareholders are unrelated persons and often untraceable. Except their identities, they have no direct stake.

This brings in the element of deniability and anonymity, in case they are caught.

Absence of common data base of bank accounts, tax returns and company details make it easy for shell companies to comply with individual statutory agencies.

For instance, there is no violation of income tax act as long as they pay their tax dues. Unless there is a criminal case, there is no case of money laundering that ED can make out against them.

The utility of shell companies go beyond money laundering. They come in handy for skirting regulations, for big corporations in paying-off by covering their tracks and siphoning off loan.

In law enforcement circles, domestic shell companies have a nick name, “Kolkata companies”. The city still is the epicentre of the shell-company industry.

Adjoining West Bengal’s seat of power, the Writers Building, the narrow bylanes of the Lal Bazar area is a mini tax haven in itself. From here, 180 drop box addresses and 11,120 companies are functioning.

“In every scam, shell companies are used for pay-offs and inevitably it involves Kolkata-based shell companies,” a senior ED official said

— source

so what indians are happy to be in ATM queues.

When Econ 101 Goes Wrong

You all may remember that back in 2000-01 Enron engineered an artificial shortage of electricity in California, which sent prices skyrocketing. This was a harrowing affair, and ever since then California has been building new power plants. And building. And building. And building some more.

At the same time, demand for electricity declined after the Great Recession and then flattened out. But California kept building new plants anyway. As we all know, the result of higher supply and lower demand should be lower prices. However, as these three charts excerpted from the LA Times show, that’s not how things have worked out:

This seems inexplicable. Why have prices gone up? And why are California utilities continuing to build new power plants even as they’re mothballing recently built plants because there’s no need for them? Ivan Penn and Ryan Menezes explain:

California regulators have for years allowed power companies to go on a building spree, vastly expanding the potential electricity supply in the state. Indeed, even as electricity demand has fallen since 2008, California’s new plants have boosted its capacity enough to power all of the homes in a city the size of Los Angeles — six times over. Additional plants approved by regulators will begin producing more electricity in the next few years.

The missteps of regulators have been compounded by the self-interest of California utilities, Lynch and other critics contend. Utilities are typically guaranteed a rate of return of about 10.5% for the cost of each new plant regardless of need. This creates a major incentive to keep construction going: Utilities can make more money building new plants than by buying and reselling readily available electricity from existing plants run by competitors.

The over-abundance of electricity can be traced to poorly designed deregulation of the industry, which set the stage for blackouts during the energy crisis of 2000-2001….Instead of lowering electricity costs and spurring innovation, market manipulation by Enron Corp. and other energy traders helped send electricity prices soaring.

….State leaders, regulators and the utilities vowed never to be in that position again, prompting an all-out push to build more plants, both utility-owned and independent….By the time new plants began generating electricity, usage had begun a decline, in part because of the economic slowdown caused by the recession but also because of greater energy efficiency.

The state went from having too little to having way too much power.

“California has this tradition of astonishingly bad decisions,” said McCullough, the energy consultant. “They build and charge the ratepayers. There’s nothing dishonest about it. There’s nothing complicated. It’s just bad planning.”

There you have it. Econ 101 didn’t fail after all. Regulated utilities aren’t a real market economy, and California’s regulators have allowed epic overbuilding because of the trauma of the 2000 blackouts. Utilities have happily taken advantage of this because they make more money from building useless plants than they do from trading with other utilities.

Enron may be long dead, but its ghost lives on. California paid the price for Enron’s machinations in 2000, and now it’s paying the price again thanks to fear of another Enron happening someday. Plus we got Arnold Schwarzenegger out of the deal.1 It’s amazing how much damage a single greedy company can do.

1Schwarzenegger was elected in place of Gov. Gray Davis, who was recalled. But the recall was largely driven by anger over the blackouts and the subsequent rate increases. It never would have happened if not for the electricity crisis.

— source By Kevin Drum

Snowstorm – tax havens and organized crime today

Organised crime has had a long association with tax havens. As our own Nicholas Shaxson wrote in an article The truth about tax havens, the Bahamas was set up as a secrecy jurisdiction by Meyer Lansky, none other than Al Capone’s lawyer. When Lansky was thrown out he moved to nearby Caymans. It is easy to see the attraction, loose laws and financial secrecy make the laundering of the proceeds of crime much easier.

But how much do governments and police forces include tackling tax havens in their thinking of modern organised crime? Not much according to two experts on the issue Mary Young and Michael Woodwiwiss.

Currently the UK government spends a significant amount of its development aid in countering organised crime, but appears to have little scientific understanding about what exactly that is. There is also little transparency about where that aid money is going. Currently the issue is being considered by a UK Parliamentary committee, which often meets in secret, but even they are having difficulty getting to the bottom of the issue.

This article from Michael Woodiwiss and Mary Young discusses some of these issues and outlines the case they have been making on how to fight global organised crime more effectively. At the heart of their recommendations is the need to focus on tax evasion as form of organised crime, and for the UK to be doing much more to look at illicit flows of money passing though the biggest offshore centre of them all, London.


By: Michael Woodiwiss and Mary Young

The authors are based in the Department of History and Bristol Law School at the University of the West of England. Their research encompasses the interdisciplinary exploration of the conceptualisation of organised crime and its impact within norm making at the national, regional and international levels.

The authors are happy to be contacted directly at Michael.Woodiwiss [@] and Mary.Young [@]

It may seem surprising but the last scientific and objective government sponsored inquiry into organised crime in any country was undertaken by the U.S.’ Wickersham Commission between 1929 and 1931. The commission concluded that, ‘[i]ntelligent action’, on organised crime, ‘requires knowledge – not, as in too many cases, a mere redoubling of effort in the absence of adequate information and a definite plan’. Its primary recommendation was, ‘for immediate, comprehensive, and scientific, nation-wide inquiry into organized crime’ to ‘make possible the development of an intelligent plan for its control’. Sadly no such inquiry took place and the concept of organized crime was captured by a succession of opportunist politicians most notably Presidents Richard Nixon (1969-1973) and Ronald Reagan (1980-1988). During Nixon’s administration, a flawed and so far unsuccessful crime control policy template was set in stone by the Organized Crime Control Act of 1970. This was built on by the Reagan administration and exported first to Britain during the Thatcher years and, with British support, to the rest of the international community through U.N. Conventions and other mechanisms in the years that have followed.

The latest manifestation of this process was apparent on Monday 28th November 2016 when three representatives of the UK government’s security community gave evidence to the National Security Strategy Committee on the Conflict, Security and Stability Fund (CSSF). Since 2015 the UK government has been spending in excess of £1 billion every year through the fund, in an attempt to tackle conflict and build stability overseas, especially in conflict affected ‘fragile’ regions. A large part of this funding is intended to tackle ‘organized crime’ or ‘transnational organized crime’. The writers of this article believe that British tax-payers’ money is perpetuating an unwise approach to organised crime that, as the Wickersham Commission warned, will amount to ‘a mere redoubling of effort in the absence of adequate information and a definite plan’. The authors of this article submitted evidence to the Committee on the disaster looming if their points were not taken into consideration: their evidence to the Committee is available at CSSF Fund Written Evidence Young & Woodiwiss.

The case the authors made to the Committee was as follows:

1) If the government is against organised crime it should make itself aware of what actually constitutes organised crime. Why, for example, is tax evasion excluded from the range of illicit activities listed by the government’s National Security Strategy Review? Tax evasion clearly represents an organised crime threat that involves a range of legitimate world actors such as lawyers, bankers, accountants and estate agents who act as enablers.

2) Since the National Crime Agency as well as other sources has made clear that vast amounts of criminal money continue to be ‘laundered’ through the City and the Crown Dependencies, shouldn’t the UK government clean up its own house before it attempts to clean up conflict-afflicted situations?

3) Given the amount of money being dispensed through the CSSF fund shouldn’t the processes involved be more transparent and accountable than they currently are.

The authors recommended that the fund should be frozen until responses were made to these points and that the government urgently needs to appoint a commission of inquiry into organized crime. There has never been such an inquiry although a succession of U.K. governments signed up to numerous international conventions that committed our police to the thankless and unending task of combatting a phenomenon that is only dimly understood by our policy makers.

The three representatives of the national security ‘team’ were Sir Mark Lyall-Grant, the government’s new ‘National Security Advisor’, Mr Robert Chatterton Dickenson, Director of Foreign Policy, National Security Secretariat (NSS), and Ms Melinda Simmons, Head of the NSS Joint Programme Hub. At the 28 November hearing, the Committee chose only to engage with a third of the points we made. Notably, Conservative MP, Dr Julian Lewis, pertinently emphasised the point about the lack of transparency involved with regard to the $1.3 billion a year fund. The Committee exists to provide parliamentary accountability for taxpayers’ money yet the hearing was evidence that they are rarely privy as to how the money from the CSSF is spent. Lewis issued an ultimatum, either the expenditure for this financial year be disclosed in full, ‘even if it has to sit in private’ or otherwise the Committee ‘should tear up the fiction that we are in anyway able to hold you to account as to how you’re spending this very large sum of money.’ Lyall-Grant replied that he was looking at ways to increase transparency.

Two years into the fund’s existence, it is clear, that there has so far been little of it. Worryingly, two out of the three panelists giving evidence were seemingly unaware of the details of the projects (including implementation and outcomes) that their CSSF bankrolls. Furthermore they were able to provide little insight into how exactly the fiscal decisions are made and by whom, with Lyall-Grant simply referring to ‘regional boards’ within Whitehall as ‘important’ for decision making. This laissez-faire attitude of Lyall-Grant towards transparency, accountability and general competency had overtones of Oliver Letwin’s earlier attempts at obfuscation when in May 2016, Letwin chaired a sub-committee of the National Security Council and gave evidence on the, ‘basis of guesswork rather than knowledge, because I have not gone into the innards of the £100 million that we are currently spending this year in Africa under the CSSF’.

There was also no discussion of the definitional issues of organised crime; a matter raised by the authors of this article in their written evidence. The CSSF’s spending decisions to combat the security threats identified as organized crime rest on undefined and opaque terminology that reflect only the influences and biases of whoever is using it at the time. There was reference at the hearing, to one of the few organised crime control success stories that could be told about the fund. Lyall-Grant noted that he was able to hold up the funding of a UK criminal justice advisers trip to East Africa and the consequent seizure of £512 million worth of cocaine in UK waters. He was not questioned, however, about the lack of impact this seizure made on the availability of cocaine for U.K. consumers, or about the ease with which successful cocaine traffickers can still launder their profits through British financial institutions. The assumption that the witnesses seemed to share with Committee members was that we British keep a clean house and can therefore intervene – usually covertly intervene – in the affairs of fragile and conflict affected regions around the world. Organised crime in other jurisdictions is thought to be a direct security threat to the U.K. while organised financial crime under our own jurisdiction remains something that is minimally tackled – despite the exaggerated rhetoric of increasing transparency, we know that ultimately nothing will be done to increase either the transparency of the CSSF’s spending decisions or the financial services industries operating in Britain’s secrecy havens.

Across the Atlantic, the record of American efforts to control organised crime is not impressive – despite most film and television accounts and the constant claims of the F.B.I. The Wickersham commission’s plea that intelligent action, on organized crime, ‘requires knowledge’ was once ignored again at the hearing yesterday, just as it has been for decades by American politicians, and the bureaucratic empire builders they ‘enabled’. We continue to experience, ‘a mere redoubling of effort in the absence of adequate information and a definite plan’. The Parliamentary Committee’s failure to engage with the failure of organised crime control in this country is another chance missed. The Committee is due to meet the government’s national security representatives next on 12 December in a ‘Private Meeting’. It seems likely that they will continue to provide a fig leaf of accountability and transparency for the billion dollar fund. To use Dr Lewis’ apt description, when things go wrong the Parliamentary Committee will be a useful ‘patsy’.

— source

Spain’s Princess Cristina acquitted in tax fraud trial

Spain’s Princess Cristina, the sister of King Felipe VI, has been cleared of helping her husband evade taxes after a year-long trial that has further tarnished the image of the royal family and done little to allay public concern over the apparent ubiquity of corruption at the highest levels of Spanish society.

Her husband, Iñaki Urdangarin, was sentenced to six years and three months in prison and fined more than €500,000 after being found guilty of charges including embezzlement, fraud and tax evasion.

— source

Defending the interests of tax dodgers

A Swiss lawyer has posted YouTube adverts, giving tips on how to “save your black money in Switzerland” with “bonanza tax loopholes”. It raises the question of how far intermediaries, like lawyers, can go in defending their clients’ assets in an age of increased transparency and litigation.

In his videos, Enzo Caputo informs potential clients of “100% legal” loopholes in the global automatic exchange of tax information system. He advises on how to “fly under the radar” by investing outside of the banking system in gold, real estate trusts, classic cars or artifacts, such as original signatures of Einstein.

— source

Morgan Stanley to Pay $8 Million Admit Wrongdoing to Settle SEC ETF Charges

Morgan Stanley Smith Barney will pay an $8 million penalty and admit wrongdoing to settle charges related to single inverse exchange traded funds (ETF) investments it recommended to advisory clients. The Securities and Exchange Commission (SEC) order finds that Morgan Stanley did not adequately implement its policies and procedures to ensure that clients understood the risks involved with purchasing inverse ETFs.

— source