Why Indian Prime Minister Narenda Modi’s First Act Was to Go After Illicit Financial Flows

May 30th, 2014

This post originally appeared on the blog of Global Financial Integrity, a coordinating member of the FTC

In his first official act after winning the biggest democratic election in world history, Indian Prime Minister Narendra Modi announced the formation of a Special Investigative Team (SIT) to probe illicit financial flows, or ‘black money’ as they are commonly referred to in India.

Illicit financial outflows are a massive problem for India. GFI research finds that India lost $343.9 billion to illicit outflows from 2002-2011:

India ranks 5th in the world in illicit outflows, and is the poorest country in the top-10 by per-capita GDP:

The outflow of black money has been a huge issue in India since GFI released its first report on illicit financial flows from developing countries, but rose to a new level after the release of The Drivers and Dynamics of Illicit Financial Flows from India: 1948-2008 in 2010 and the resulting public outcry. Illicit flows are on the agenda in India as much as any place in the world.

The previous administration began to beef up efforts to curtail trade misinvoicing at customs two years ago, recovering nearly $400 million in additional tax revenue in two years. However, India has just scratched the surface at curtailing illicit financial flows. The Wall Street Journal reports:

“The Modi government is hoping to track down the biggest chunks of black money that it expects is deposited in bank accounts outside of India. It is often hidden in accounts in the countries with regulations that protect the identity of account holders or have low taxes.”

Of course, this requires the cooperation of Swiss authorities, who have every incentive to drag their feet. In the mean time, Indian account holders can move their money to another secrecy jurisdiction. This is why India was the first G20 country to call for automatic exchange of financial information, a position that the G20 has pledged to adopt by the end of 2015.

Written by EJ Fagan

Follow @FinTrCo