Time to probe Swiss accounts

The government needs to introduce asset-seizure legislation to confiscate mammoth reservoir of untaxed black money

By Huzaima Bukhari

and

Dr Ikramul Haq

Unscrupulous individuals and companies can no longer hide their untaxed Swiss bank accounts. Succumbing to international pressure, Switzerland has recently ended its 300-year banking secrecy. Like Liechtenstein, Luxembourg and Andorra, Switzerland has now agreed to share information regarding bank accounts on request from foreign governments. Pakistani tax authorities -- knowing that there exists a treaty of avoidance of double taxation and exchange of tax information with the Swiss government -- have not yet taken any step to probe into hidden Swiss accounts of Pakistanis.

The Swiss House of Representatives following the Senate on June 9, 2010 accepted the demands of the Organisation for Economic Co-operation and Development (OECD) that it would follow Article 26 of the OECD's Model Tax Convention, which countries agree to share relevant data in cases of suspected tax fraud. In practical terms, Switzerland from now on cannot restrict its administrative assistance to cases of presumed tax fraud (which involves the falsification of documents). It is legally bound to provide information where tax evasion is suspected -- in other words, where money not declared to national tax authorities, has been deposited in a Swiss bank.

It is no secret that Pakistani tax evaders have been transferring huge amounts of money to Swiss banks -- generated through illegal activities by some politicians, bureaucrats, terrorist networks and businessmen. Pakistan is facing the challenge of measuring and countering enormous revenue leakages and black money -- its size estimated to be three time the regular economy.

Till today, no effort appears to have been made by the National Accountability Bureau (NAB), Federal Board of Revenue (FBR), Federal Investigating Agency (FIA), Anti Narcotics Force (AFN) or Narcotics Control Board to conduct an in-depth study to quantify the magnitude of black money and amounts shifted to Swiss banks. According to an estimate, it is not less than 200 billion dollars -- four times the external debt of Pakistan.

The process started when US Department of Justice (DOJ) took the Swiss bank UBS to court to obtain the names of 52,000 clients of the bank: US citizens who, the US government claimed, did not declare to the Internal Revenue Service (IRS) all details of their financial information. NAB and/or FBR have learnt no lessons from this move by the US authorities.

"At a time when millions of Americans are losing their jobs, their homes and their health care, it is appalling that more than 50,000 of the wealthiest among us have actively sought to evade their civic and legal duty to pay taxes," says John DiCicco, acting Assistant Attorney general for the DOJ's tax division. In the wake of US success, the European Union also announced its intention to seek a similar agreement with Swiss banks, to release the names of clients who are citizens of EU countries.

According to an estimate, the money lying in Swiss banks of Pakistanis is to the tune of US $200 billion which appears plausible as parallel economy is growing at an alarming rate of 20 percent per annum. The volume of black money generated in the year 2008-09 alone was not less than US$40bn. This is still not final. It does not account for kickbacks in foreign trade, smuggling and foreign exchange racketeering, apart from trade in narcotics and other criminal activities by terrorist outfits. According to various studies, the underground money generated through smuggling in goods and narcotics trade alone is between US $50 billion.

Policymakers must realise that a sound development strategy seeks to reduce the size of the informal economy and bring into the open resources that lie in the form of black money. Apart from such mechanisms as foreign exchange and tax amnesties, taxation is used as a tool to tap the resources inherent in these areas. According to a conservative estimate, tax evaders in Pakistan annually deprive the country of revenue of over US $10 billion -- but the government, instead of putting them behind bars, encourages their unlawful activities.

Politicians, policymakers and tax managers during the last many years have miserably failed to tap untaxed money despite borrowing a whopping US$ 100m for Tax Administration Reforms Programme (TARP) -- every year billions of rupees are transferred from Pakistan to Zurich, Dubai, Johannesburg and elsewhere.

It is not possible to determine the precise amount of revenue loss and size of black money or shifting of money abroad. Revenue loss on account of smuggling of Afghan transit trade alone, as estimated by the World Bank, amounted to US$ 35 billion in 2008-2009. Apart from direct monetary costs of corruption, both Pakistani and international literature pinpoint many other costs, such as loss of government credibility, spread of injustice, distortions in resource allocations and loss of foreign and local investment.

When the presence of black money is so apparent, its criminal accumulation and generation are not revealed and the offenders punished, is a question which continues to baffle honest citizens.

The ugliest face of black money emerges in the corridors of power, political as well as administrative. Pakistan is passing through the worst financial crisis of its history, i.e., the crisis of resources manifested in the huge budgetary deficits. Revenue has to be collected and all measures both stringent and persuasive have to be taken in that direction. The government, therefore, needs to introduce asset-seizure legislation to confiscate the mammoth reservoir of the untaxed black money -- huge chunk of which is lying in the Swiss banks. It is now time to seek information from Swiss government as has been done by the US, EU countries, and many other countries in Asia and Africa.