A V Rajwade: Dirty money

WORLD MONEY

Even as the third anniversary of the 9/11 terrorist attacks in New York and Washington has passed, the US authorities' efforts in tracing the sources of funding for terrorists and cutting the supply chain have not been too successful.

To quote just one instance, $500,000 is known to have been remitted by a bank in Dubai to the US, and drawn by some of the hijackers of the 9/11 aircraft from ATMs in Florida.

So far, the source of the remittance has not been identified despite vigorous efforts on the part of authorities in all the countries involved, including the US.

But $500,000 is a small sum "" after the fall of Saddam Hussein, sealed boxes containing more than $150 million in neatly bundled $100 currency notes were found. Many of these bundles consisted of serially numbered notes with the Fed markings still intact. The authorities are still unable to trace the channel through which they reached Iraq.

The famous dictum "follow the money" given to Washington Post investigators in the Watergate scandal was far more useful and successful in tracing the support for the Watergate burglars right to the White House. But that was in the 1970s.

In the 21st century, following the money seems to be far more difficult. We in India know how difficult it is to trace funds: 20 years of investigation in the Bofors kickback monies has led to nothing.

To be sure, there has been one positive fallout of the 9/11 terrorist attack, as far as the pursuit of illicit money by tax and other authorities in the rich countries is concerned.

Earlier, the US was indifferent, if not hostile, to the efforts of the Financial Action Task Force, appointed by the G-7 back in 1989, to force tax havens to co-operate in tracing monies deposited outside the home country, to escape taxation.

The US was unenthusiastic, alleging that such efforts impinge unduly on the privacy that is the right of citizens in a free country. 9/11 changed all that and the so-called Patriot Act passed in its wake, gave far greater powers to the authorities to probe into private transactions, including between non-residents, passing through the New York clearing system.

As happens all too often, the "converted" are more faithful than the "born""" witness the "born again" Christian, George W Bush, who wears his religion on the sleeve and claims to be in direct communication with, and obeying, God himself. Overall, the origin and end uses of tainted and illicit funds are many:

Tax evasion by businessmen. Indians are supposed to have hundreds of billions of dollars in undeclared accounts outside India. The most famous, or notorious, of such accounts were, of course, the numbered accounts with Swiss banks.

I am deliberately making the statement in the past tense, because the Swiss authorities have introduced many restrictive measures on their use in recent years, under pressure from the world community.

Corrupt politicians. Too many dictators and authoritarian rulers in Asia, Africa and Latin America have looted billions of dollars from their countries and secreted them abroad. President Ferdinand Marcos of the Philippines and President Sani Abacha of Nigeria are perhaps the two most famous.

Former Chancellor Helmut Kohl of Germany was found to have kept his party's slush funds in secret accounts. He did not divulge the source and, in any case, was never accused of using the money for personal purposes.

His friend and co-European leader, President François Mitterand of France used public sector companies as sources of funding for less than legitimate end uses. France is perhaps the only major country that pays unaccounted cash to ministers "" for reasons of state, of course!

The drug lords who make billions of dollars and need to "launder" them into legitimate funding. Money laundering "involves transforming the proceeds of crime into usable form and disguising their illegal origin.... through a variety of transactions and financial vehicles". (Finance and Development, September 2002)

The trade in illicit diamonds, as good as hard cash, which has motivated and financed civil wars in countries like Liberia and Sierra Leone and is also supposed to be financing Al Qaeda.

In curbing all types of dirty money, the biggest success has probably come in respect of tax havens. The Organisation for Economic Co-operation and Development has managed to arm-twist most tax havens into co-operating with the domestic tax authorities through exchange of information about accounts.

Those unwilling to co-operate were black-listed in 2002. More recently, even that Big Daddy of tax havens, namely Switzerland, has entered into agreement with the European Union, which provides for 15 per cent withholding tax on interest income of non-residents from 2005.

The rate will go up to 35 per cent in later years. Three-fourths of such revenue will be paid to the country of residence of the interest earner.

Switzerland has also agreed to provide administrative assistance in cases of tax evasion. Similar measures have been agreed by Luxembourg, Austria and Belgium. Has Switzerland changed?

It seems so, at least from the Sani Abacha case. International media reports suggest that the Swiss authorities are co-operating more willingly and effectively in the case than the ones in the UK.

Tailpiece: Economists may well find something positive to say about unaccounted, "black" money. Since economic activity equals money multiplied by its speed of circulation, rupee for rupee, black money probably generates far more economic activity than white money!

Email: avrco@vsnl.com