Political Economy

There's Billions Stashed Abroad But the ED is Not Willing to Open the Pandora Box

Can a special investigative team or a bureaucratic multi-agency group bring back a single dollar?

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Nothing has fazed the country’s wealthiest it appears. The latest set of global leaks indicates that the rich and mighty continue to shift their assets into safe tax havens abroad.

This, of course, begs the question: what has happened in terms of regulatory or government action?

Instead of making any effort to bring back funds by triggering Foreign Exchange Management Act, 1999 (FEMA), the Centre seems intent on appointing committees and groups to monitor the investigation. On May 27, 2014, the Centre constituted a high powered SIT comprising two judges of SC, Secretary Revenue, RBI Deputy Governor, IB Chief, RAW Chief, CBI, ED and CBDT. The SIT, formed to unearth black money, is still functional.

And on October 4, 2021, after the latest Pandora Papers exposure, the Centre set up a Multi Agency Group (MAG), comprising Chairman CBDT, ED, RBI and FIU. SIT was bypassed. Former SC judges, Secretary Revenue, RAW Chief, IB Chief and CBI (all parts of SIT) were dropped from MAG. Can SIT or MAG bring back a single dollar? No, is the emphatic answer! They can only collect information and submit reports, but cannot supplant statutory powers of ED under FEMA.

RBI administers FEMA through delegated legislation. And the Enforcement Directorate (ED) enforces the Act. However, the ED has remained inert and has not acted under FEMA to adjudicate on stashed funds.

Stashed funds can be brought back and confiscated only by ED under FEMA, but the agency has so far not triggered FEMA at all. Hundreds of names have been floating in the public domain since the leaks of Liechtenstein (2008), Luxembourg (2014), Panama (2016), Paradise (2017) and now Pandora (2021), but ED’s inaction is inexplicable.

The agency prefers to administer the Prevention of Money Laundering (PML) Act, 2002 rather than FEMA, 1999.

One reason could be the delaying and harassing tactics of arrest jurisprudence. ED cannot arrest under FEMA. To inquire and adjudicate under FEMA for stashed funds abroad, it is required to act meticulously after weighing evidence. It cannot keep the adjudication hanging.

PMLA, on the other hand, empowers ED to arrest and keep the investigation hanging. ED only has to argue that matter has international ramifications and investigation is at a crucial stage. ‘National security is involved’. These three pet sentences are parroted and that starts remand jurisprudence! After PMLA was notified on 1.7.2005, the entire focus of ED shifted to this new law. ED’s failure to set FEMA into motion in the teeth of hundreds of names appearing in the public domain is shocking. Centre is thus clearly not interested in bringing back stashed funds. This is the inevitable conclusion one is constrained to draw.

Centre has also failed to grasp the distinction between exchange control issue and tax issue, arising out of stashed funds. Exchange control issue under FEMA has been blacked out so far. It is unlikely that this issue will be pursued with prominent names appearing.

To be fair to all the foreign asset holders, they must be given the opportunity to clear their names. ED must issue notices to them and close those cases where reply is found satisfactory. Presently only press statements are being issued in panic. In some categories of cases even RBI can issue notices to them and clear their names under FEMA, if so warranted. If the reply is not found satisfactory, then all may be subjected to the majesty of law. This becomes imperative since all stashed assets cannot be illegal. ED must separate wheat from chaff.

Irrespective of violation of FEMA, if funds or assets held abroad have not been disclosed, then The Black Money (Undisclosed Foreign Income and assets) and Imposition of Tax Act, 2015 comes into play. Therefore, it is not a case of setting in motion either FEMA, 1999 or Black Money Act, 2015. Both have to be set in motion. It is the obligation of statutory authorities to trigger law into motion when facts come in public domain. However, both these legislations are oppressive, draconian and unimplementable.

The problem is that whenever something sensational surfaces, draconian legislations are enacted with knee jerk-reaction. Enactment of Black Money Act, 2015 was entirely uncalled for. It’s a draconian law without any efficacy. Penalty of three times the tax computed is required to be paid in addition to tax. Under FEMA, similarly, ED can slap a penalty up to three times the sum involved in contravention, in addition to repatriation and confiscation. Can such thoughtless draconian laws ever be enforced? FEMA is enough to deal with stashed funds; and Income Tax Act, 1961 is enough for taxing undisclosed income.

On October, 4 2021, while constituting the new MAG, Centre announced that under the Black Money Act, 2015, as on 15.09.2021 Rs.20,352 crores have been detected in Panama and Paradise investigations. Mark the word “detection”. How many dollars have been repatriated, let alone confiscated? Zero.

Bishwajit Bhattacharyya is a Senior Advocate of the Supreme Court and Ex-Additional Solicitor General of India.