How India has been illegally exporting money across borders

Trading in goods across borders and misinvoicing them is the most popular way of siphoning money out of developing countries, such as India and hiding it in different secret accounts and tax havens across the globe. Such practice has made India the fourth largest victim of illicit financial outflows in the decade from 2004 to 2013.

In fact, there has been a spurt in such outflows from 2010, the period when the world was coming out of the financial and economic crisis triggered by the fall of Lehman Brothers in 2008. Thus, if data for 2010 to 2013 is considered, India has become the third largest victim of such outflows after China and Russia.

Illicit money is commonly referred to as black money. It is income generated through legal or illegal means and hidden from tax authorities. Many Indians are known to hold such money in secret accounts in various countries, including Switzerland and a host of tiny island nations that are popular tax havens because they have very low or no taxes.

The latest report from Global Financial Integrity (GFI), a Washington-based think-tank, estimates as much as $510 billion has flowed out of India illicitly between 2004 and 2013, of which $332 billion went out between 2010 and 2013.

In 2013, for instance, about $83 billion was estimated to have been siphoned out of the country, and the only solace was that it was significantly lower than the $93 billion taken out of the country in 2012. The think-tank has estimated that over $1 trillion was siphoned out of developing nations in 2013 alone and over $7.8 trillion in the decade up to 2013. GFI, however, says its estimates are conservative, which essentially means that the amount of unaccounted money held overseas in secret accounts by Indians and other nationals may be much higher.

Estimating illicit outflows is not always easy. And, that’s one reason why no one knows how much black money is held by Indians overseas. The GFI estimates are largely based on misinvoicing of trade in goods and leakages in the balance of payments. The organisation has not been able to estimate outflows on account of cash transactions, same-invoice faking, misinvoicing in services and intangibles, and hawala transactions.

Trade misinvoicing to take money out of the country usually takes two routes - over-invoicing of imports and under-invoicing of exports. When imports are over-invoiced, the amount of money paid out is far higher than the actual value of goods imported into the country. Similarly, when exports are under-invoiced, the amount of money received as export earnings is shown as far less than the value of goods sent out.

These transactions always involve more parties than the exporter and the importer. Usually, it involves other parties related to the exporter or importer who are hiding behind shell companies in tax havens to create fake invoices for export and import of goods. And, it could involve multiple level of fake invoices (usually by re-invoicing the goods and manipulating the price of the goods) to siphon out money at different levels and park it in accounts in these tax havens.

Most of these in-between transactions go undetected and are not captured in the export-import data of the country. However, it does show up sometimes as sudden pick-up in trade with an obscure country.

Such practices always hurt the country, but it benefits not just individuals but also the companies they run. The money siphoned out through such means is used by the individuals for personal benefit such as consumption and acquisition of assets, often by setting up trusts in these tax havens. For the companies involved in the transactions, under-invoicing of exports and over-invoicing of imports translate into lower corporate profits and therefore lower taxes.

Governments across the world are now looking to cooperate with each other, sharing tax and other information to curb such practices and also to improve their tax revenues. But, it will be a long time before such practices end.