Open Complaint to SIT on about $ 153 billion worth black money sent abroad via Gold imports in 5 years

I have sent the following open complaint to the Special Investigation Team (S.I.T.) on Black Money, appointed by Hon’ble Supreme Court, for investigating into the allegations of about US$ 153 billion work black money sent abroad though over-invoicing of gold imports in the 5 years period of 2008-2012. This complaint is being put in the public domain in the interest of transparency since the basic information is already in public domain. What is reproduced below is a slightly modified form of the complaint sent (modified to make it web-friendly). The complaint is reproduced as under:

From:

Dr. Ashok Dhamija,

M.Sc., LL.M., Ph.D. (Law), Ex-IPS,

Advocate, Supreme Court of India, New Delhi.

Date: 20.01.2015

To,

Joint Secretary [and Member Secretary, Special Investigation Team (S.I.T.) on Black Money, appointed by Hon’ble Supreme Court],

Department of Revenue, Ministry of Finance, North Block, New Delhi.

Sub:     Complaint on about $ 153 billion worth black money sent abroad via Gold imports in 5 years’ period from 2008 to 2012.

Dear Sir,

It is generally believed that gold imports are used for routing of black money to secret accounts in foreign banks which are notorious for non-transparency. Estimates mentioned below show that as much as about US $ 153 billion appear to have been sent abroad as black money during the five year period from 2008 to 2012 through Gold imports. Unfortunately, no serious investigation has been done in this regard to find out how much black money has been sent abroad to secret bank accounts, even though conducting such investigation would not be impossible, though difficult. Some suggestions are given hereinbelow as to how serious efforts can be made to investigate and detect the black money sent abroad through over-invoicing of gold imports.

About one year back, on 6 November 2013, an article “Two theories about gold”, written by four well-known experts, was published in the financial newspaper Business Standard. One of the authors of this article is Arvind Subramanian, who at that time was working at the Centre for Global Development, and who is presently the Chief Economic Adviser to the Union Finance Minister Shri Arun Jaitley in the Central Government headed by Shri Narendra Modi. Other three co-authors of the said article are Devesh Kapur (at the University of Pennsylvania), Marla Spivack (at the Centre for Global Development), and Milan Vaishnav (at the Carnegie Endowment for International Peace). The high credentials of these authors provide some basic assurance about the quality of the research data mentioned in the said article. This article is available online here. A printed copy of this article is also being sent herewith.

On the basis of the research conducted by them, they found that there were large disparities in the amount of gold imported by India in the 14-year period from 1999 to 2012 vis-a-vis the amount of gold purportedly exported by the countries from which the said gold was claimed to have been imported. For example, these authors mention that: “in recent research we have undertaken, we find that while India claims to import large amounts of gold from Switzerland (more than $26 billion), Switzerland reports that it shipped gold worth less than $6 million (yes, million, not billion) to India, resulting in a large unaccounted trade”.

They have presented a graphical depiction of the origin of India’s gold imports during the aforesaid 14 years period, and also a graphical depiction of the discrepancy in India’s gold trade during this 14 years period. These two graphs are available online at this link and a printed copy thereof is enclosed herewith.

From these two graphs, I have deduced the approximate numbers for the gold imports made by India and the discrepancy in India’s gold trade during the five-year period from 2008 to 2012. These numbers are shown below (these figures are approximate since these have been deduced from the graphs and there may be some mistakes in such inference from the graphs):

*Note: Disparity shows by how much amount (in US$ billion) the reported gold imports of India are greater than the corresponding reported gold exports of the partner countries.

It can thus be seen from the above figures that during the period of five years from 2008 to 2012, India has imported gold worth about US$ 183 billions, out of which $88 billion worth of gold was imported only from Switzerland. Secondly, while India has reported import of gold worth $ 183 billions during this period, the partner countries have reported export of gold to India during this period only of about $ 29.5 billion leaving a disparity of about $ 153.5 billion!

It is pertinent to point out that these disparity figures are much more astonishing when the gold trade data with Switzerland alone is considered. It can be seen that during the period of five years from 2008 to 2012, while India has reported import of gold worth $ 88 billions from Switzerland, the export of gold to India reported by Switzerland during this period is only about $ 3.5 billion leaving a huge and astronomical disparity of about $ 84.5 billion! It is worth mentioning that there may be some errors in these calculations since Switzerland does not publish country-wise gold trade data, while it provides country-wise data for import & export of other commodities (however, since January 2014, Switzerland has started publishing country-wise gold trade data also). As mentioned above, there may also be some errors in these figures since I have inferred these figures from graphs.

There is, thus, a huge disparity between the import of gold as reported by India and the export of gold to India by the corresponding partner countries. As mentioned above, during the period from 2008 to 2012, the disparity in the gold import is about $153.5 billion for gold imports from all countries, and about $ 84.5 billion for gold imports from Switzerland alone.

The simple question that arises for consideration is – why should there be such huge disparity in these figures? Normally, these figures should match completely since the amount of gold imported by India should match the amount of gold exported by the corresponding partner country. This clearly implies massive manipulation of the system.

It is generally believed that gold imports are hugely over-invoiced to transfer black money from out of India. For example, to explain it in simple terms, suppose gold worth $ 50 million is shown over-invoiced as $ 100 million. So, while the exporting partner would show $ 50 million in its books of account, the Indian importer would show $ 100 million in its own books of account. Where does the remaining amount of $ 50 million go? It will be transferred to some third parties in some secret account in a foreign bank or through some other means it is transferred to a foreign party. Since the Indian importer is showing the invoice of $ 100 million, it can easily remit an amount of $ 100 million, out of which an amount only of $ 50 million goes to the foreign exporter and the remaining $ 50 million is transferred abroad to some secret account or to some designated third party. This is only a simplified example to understand the dynamics of how black money is transferred out of India through over-invoicing of gold imports. The fact that it is happening is substantiated by the above research done by none other than Mr. Arvind Subramanian, the present Chief Economic Advisor in the Central Government. However, the actual method of transferring money through gold imports may involve some complicated mechanism or routing, instead of the above simplified method.

Now, the question is how such over-invoicing is possible? The answer is simple. As hinted by Arvind Subramanian and his colleagues in the above-mentioned article, there is a likely collusion by the Indian Customs authorities. As they noted in the said article: “…Note that capital flight cannot work if customs officials are honest and their procedures effective. They can verify the quantities and values of gold that importers declare and match them against banking documentation relating to the payment for imports. Hence, the sinister explanation requires some degree of incompetence or complicity of customs officials in capital flight.”

So, it is a clear case of “complicity” or at least “incompetence” of the customs officials in India that such large scale differences could exist in the gold trade data. The fact remains that it has happened and it is a reality.

Now, the next question is: how to investigate this issue and how to punish the guilty or better still, how to get the black money back to India that has been transferred out of India through such highly over-invoiced gold imports?

I suggest the following steps that can be taken in this regard to investigate this issue:

• Prepare a list of all imports (and importers) of gold during last 5 years or more.
• Get details of the corresponding foreign parties from or through whom such gold has been imported. Get the export figures from the corresponding countries.
• Compare the actual figures for each individual imported item. Take the assistance of the foreign investigating agencies. If need be, start formal investigations under the relevant legal provisions.
• Investigate the source of funds of the importer. It may be found that most of such dishonest importers might have merely acted as conduits for transferring black money abroad. So, their sources of funds may show that amounts might have been received by them from suspicious accounts through suspicious transactions. Many of such transactions may only be on paper. These transactions should be checked to see what is the consideration therefor. What goods have been supplied in return. It is also possible that the source of funds may be through huge cash deposits in various bank accounts through direct or indirect channels. All such cash deposits need to be investigated. A chain of inflated land / property dealings also may exist to route black money to such importers, for further routing it to foreign accounts.
• Investigate the disposal of the gold imported by such importers. If the actual gold imported in only 50 kg, but on paper it is shown as 100 kg (to account for the over-invoicing), then a proper and thorough investigation can help find out where this gold has gone and where the extra quantity of gold disappeared (because it was never imported in the first instance); or else, there may be a big hole in the physical stock of gold held. How did the importer use such imported gold? Did he sell that gold in India? Did he make jewellery? Did he export such jewellery? How much is the quantity exported or sold to other parties? What is the balance quantity of gold held by him? How much is the difference in stock? There may be many bogus transactions shown only on paper.
• Details of the parties in India with whom such importer has dealt should be found out. Who are these parties? Why did they pay to the importer? Why did they buy gold from this importer (may be only on paper)? What is the main line of business of such parties? Did they enter into gold business only on one or two instances or are they regular dealers in gold?
• Under what licence or policy of Government, did an importer import a particular consignment of gold? What were the conditions attached for such import? Was such gold supposed to be imported only for exporting equivalent quantities of jewellery? Were the conditions imposed for import of gold fulfilled in such instances? What action has been taken if such conditions were not fulfilled?
• Role of the customs authorities need to be examined in detail. Who are the officers who allowed such imports? Were there some “fixed set of officers” who were always on duty for checking such imports? What checks are performed and how those checks are performed? Assets of officers, whose role is suspected, need to be subjected to scrutiny to find out whether the same are disproportionate to their known sources of income?

What is mentioned above is only an illustrative list of steps and not an exhaustive list. The actual steps would depend upon the clues obtained in an actual investigation or inquiry that is conducted and also upon the actual factual matrix of each individual case.

However, one thing should be clear. Whatever disparity (and it is huge) exists in the gold trade data, it is on record. These transactions are recorded in official records. Persons may lie but the documents will not. Once it is accepted that these disparities are on record, it is not impossible (though difficult) to trace the routes of the manipulations. Why such disparities have not been detected so far? It is only because of “complicity” of the officers involved, or at least due to their “incompetence”. Once an honest and professionally-well-trained investigator starts looking into these records, records will starts speaking for themselves and the fraud committed on the nation can and will definitely be unearthed. Steps needed to be taken may vary but the next steps would be automatically visible to any person having simple logic and professional expertise of handling such transactions.

What is needed is an honest and professional investigation. And, of course, what more is needed is the belief that it can be done. If scepticism is shown in the beginning itself, no result would be possible.

It is earnestly hoped and respectfully submitted that the Special Investigation Team (SIT) appointed by Supreme Court, which is headed by two former Hon’ble Judges of the Supreme Court, would look into these aspects. The foundation of the information mentioned in this letter is the research conducted by a team of well-qualified professionals, including Mr. Arvind Subramanian, the present Chief Economic Advisor to the Government of India, who may be contacted for further access to his research data.

Since the basic information about the subject matter of this complaint is already in the public domain, this complaint is being kept in public domain in the interest of transparency.

Copies of the references mentioned in this complaint are enclosed herewith.

Encl.: As above.

Yours sincerely,

(Dr. Ashok Dhamija)

Advocate, Supreme Court and former IPS officer.