11.5 million documents, 2.6 terabytes of incriminating data making the world’s rich — and especially Indians — infamous, claimed the Panama Papers, the latest in the new world of document leaks from inside some of the world’s most secretive places. But chat up former Infosys CFO T.V. Mohandas Pai, under whose financial stewardship the company built up a reputation for presenting the ‘cleanest and most transparent’ corporate balance sheet, and he will tell you why rich Indians prefer to have some assets abroad. Far better, he tells S. Raghotham, for the government to fix its policies and the justice system, than to go after people.
Who are these people who invest in Panama or other tax havens?
There are three kinds of people who invest overseas. One set is legitimate -- these are businessmen or high net worth individuals (HNIs). They want to create assets outside because they get investment opportunities, and they do it legitimately as per RBI regulations. It's legitimate activity, and we must be clear that we don't malign them.
The second set are people who have traditionally got money overseas. There are many large business families who do business globally, they have got families and incomes overseas. These, too, are legitimate transactions. They may report in India or not based on whether it is necessary for them to report. Most of them do report.
The third set are people who want to create assets overseas and hide them. The money for this comes from diversion of funds from bank loans, it comes from import-export cheating, it comes from commissions, it comes from drug money, etc., and they keep it in tax havens. They structure it to various subsidiaries all over the world, so it's very difficult to trace the assets back to them. This is bad money. The government should focus on this last set of people, not harass people in the first and second categories by conducting roving enquiries.
But why do people open offshore companies, when they can as well just have a Swiss bank account?
They need to open a company because they have assets overseas. They can sell off those assets by selling off the company without having any tax complications. Or, they can leverage those companies and borrow against assets. People can have a Swiss account, they can have an offshore company, it's a choice they make, depending upon different tax jurisdictions, based on how simple it is, or whether they know people whom they trust and who can manage affairs for them. I think, mostly, they go to a lawyer. You trust a lawyer, pay them a fees and they manage it for you. These are normal activities. Most people who have got high net worth want to keep some part of their assets outside India.
Why is that, even in this day and age of our liberalised economy?
People want to keep assets overseas because of India's policies: we don't have capital account convertibility in India. So, there is no certainty that the Government of India will not reverse policies. People don't trust the consistency of government policy. Some Lallu will come and say, “no, no, we can't do this, we can’t do that”, and will change policies overnight. Secondly, many people also decide they want to live outside India at some point of time. It's a choice they make, it's perfectly legitimate.
In that case, wouldn't they be going to a legitimate destination rather than trying to hide money in a tax haven through companies like Mossack Fonseca?
There is nothing wrong with a tax haven, so long as the money that you have there is legitimate money. As RBI governor Rajan said, people do it for perfectly legitimate, legal reasons. Companies like Mossack Fonseca approach HNIs who want to keep money outside legitimately. Even the big accounting firms offer this service of doing tax planning for you overseas. I have investments in 8-10 start-ups overseas personally. It's perfectly legitimate. The only question to ask is whether I am declaring it or not. Many people in the software industry have overseas accounts, because they travel, they live overseas, etc. But it’s all declared.
So, is there a ‘old economy’ vs ‘new economy’ divide in the kind of people who invest offshore to hide their assets and ownership?
The new economy are people who want to do things legitimately, and who are scared to transgress the law. They are all educated, middle class. The old economy are business families who have been doing business in a particular way for years. Since they have got physical businesses, they are at the mercy of the political class. So, they go to the political class, do them favours and fund their elections. The political class does not understand the new economy, and the new economy people treat them with disdain, they don't need them. In the old economy, if you have got a coal mine, you got a lorry business, you are at the mercy of everybody. There is rent-seeking at every level. So, you buy peace inside the country, and hide monies outside.
So, how do we deal with the third category of people?
You focus on people who are doing hawala, fake invoicing, etc. For that, we need in government people who are experts in forensic accounting, people who can track fund flows, look at the documentation and gather intelligence to find out patterns. Then we need special prosecutors who, based on that intelligence, can book proper cases and prosecute wrong-doers. This is specialized activity. So we need special prosecutors, not some CBI fellow, who are skilled in prosecuting people for financial crimes, money laundering. Third, we need special courts, where judges understand the complexity of such money flows and can apply the law to these cases. Judges don’t understand these matters because they are all trained in civil law and criminal law, not this stuff.
So, there is a problem at all levels of the justice system. And even when all of these do come together, the crooks can go on appealing at every level and it takes 20 years for the case to go up to the Supreme Court. This is a broken legal system. And people can manipulate many things in this legal system. On top of that, our policies are not good. Until this is all fixed, no legislation on black money will work. The law that Parliament passed is draconian, but it doesn’t work. And, by the way, everybody knows – the politicians know, the Income Tax department knows – who is doing fake invoices, etc. But nobody is doing anything because for a long time they have been part of the whole thing, that’s all. Not that they don’t know. Don’t tell me, you don’t know who has got black money in Delhi and who hasn’t. Everybody knows.
