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Indians are using overseas real-estate markets to hide their wealth: GFI director

Lakshmi Kumar, Policy Director at Global Financial Intelligence, talks about the different ways in which HNIs hide wealth

October 20, 2021 / 05:50 PM IST
Lakshmi Kumar, Policy Director at GFI © 2019 | Kristina Sherk Photography | www.Kristinasherk.com

Lakshmi Kumar, Policy Director at GFI © 2019 | Kristina Sherk Photography | www.Kristinasherk.com


Tax avoidance is not tax evasion. The first is done to reduce tax burden through legally sanctioned methods and the second involves hiding wealth, which is an illegal way to reduce tax burden. The Pandora Papers exposed how the HNIs in India have smartly done the first--used legal but complicated financial arrangements to avoid taxes. All within the law, even if distasteful. Indians are also adept at tax evasion, which involves laundering money so that it can be brought out into the light of day.


In an interview with Moneycontrol, Lakshmi Kumar, who is the Policy Director at Global Financial Integrity, shares how wealthy Indians are ring-fencing their wealth--legally and illegally. Global Financial Integrity has been studying illicit flow of money across countries for 15 years now.

What are the different ways in which Indians avoid and evade taxes?

Usually there are legal structures used, such as trusts and LLCs (limited liability companies). They provide anonymity because you have to go through six or seven companies before you figure out who the owner is. But what is more interesting are the other methods, such as real-estate. It is common knowledge how the real-estate market in India is susceptible to black money but the truth is Indians are also using overseas real-estate markets to hide their wealth.


When we did a report called Acres of Money Laundering, we found that 80% of the real-estate money-laundering cases in the US were for money that came from outside the country. We were able to trace it back to 26 countries and India was one among them. In the UK, India and Pakistan were among the top countries for money-laundering cases.


Then, in India, because of the FDI rules, round-tripping is an infamously well-known method to launder money. Therefore, India’s trade relationship with the UAE is significantly larger than its trade relationship with the US… which makes no sense, other than by factoring in round-tripping of finances.

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Then, there are ways in which lawyers facilitate tax evasion by accepting money from overseas into their accounts claiming that it is their legal fee. Then they will transfer it into a domestic account linked to the client or they will use it to buy property for the client.


But when the lawyer buys a property in the name of the client, won’t it be easy to link that property to the client?


The property will be bought in the name of an LLC or a trust. Say a person has received $20 million, that person will go to his/her lawyer and ask them to invest it through an LLC. In the US, there will be no publicly available information on who the owner is, the property papers will only show the lawyer as the director. If anyone wants to know who owns it and asks the lawyer for it, the enquirer will need to show why they need it and what evidence they have to link it to the owner. Otherwise, the lawyer can protect the ownership information under attorney-client privilege.


It is perfectly legal for a lawyer to set up a trust or a company for a client. If anyone needs information about that asset, the enquirer needs a very good reason for it.


Lawyers need to be asking clients about the source of their income but they don’t, and that is true in many parts of the world.


Why is overseas real-estate so commonly used?


The truth is there are no rules to regulate it. We have seen a case where a person used a lawyer in India to set up an LLC and bought a real-estate asset in the US through this LLC. Who is asking questions about where the money came from? The person selling just wants the money and no one is checking whether the source of income is legitimate.


Then the US has its immigrant investor programmes, in which you invest $500,000 dollars and you get a Green Card. This can be offered as an ‘extra benefit’ to politicians, like we have seen with Chinese corrupt politicians. Most of these investments are made in commercial real-estate.


What about the use of gold?


Is it any surprise that it is used, with Indians’ love for the metal? A lot of gold that comes into India is undeclared gold, which is one form of money laundering because then you sell that gold and earn from that… all of it under the radar. For example, we had the case of an Indian man who was running a cannabis operation and he would fly to UAE with his three-year-old child who would be draped in gold, with bangles and necklaces. All of it was just cannabis profits that he had turned into gold and taking into the UAE.


Actually, there are various trade-based money-laundering methods too. For example, depending on which government is at the centre, the export of beef can be a controversial issue. So there were cases where farmers would simply let a herd of cows walk across the border to Bangladesh, which is a porous border, or they would invoice one piece of tractor as the export commodity and send a herd of cattle along with it. Money earned from such trade is then not logged anywhere.


Will the new spot exchange reduce the extent to which gold is being used for laundering?


I really hope it does by providing a market for better price discovery.


In India, the government is more concerned about loss of revenue from gold sales. But, in the US and EU, agencies see gold as a risk because of its ability to fund terrorism or support human-right violations… they see this as money laundering too. So the spot exchange may address India’s concerns about loss of revenue to an extent, the exchange won’t address the concerns on how the proceeds from its sale can be used to finance undesirable activities.


A reasoning given by people named in the Pandora Papers is that what they have done is perfectly legal. So what is the counter to that?

The long-term consequences of their action is that there is less money for public services such as building schools and hospitals. There is less money that a country such as India needs with its population and which is dependent on tax revenues. During the pandemic, we have seen how there is a growing inequity between the rich and the poor in the country, and such practices only makes this inequity worse.

Asha Menon
first published: Oct 20, 2021 11:47 am

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