This is a story of a man who had been robbed. He duly filled out a formal complaint, in longhand and triplicate, at his local police station. An hour later, as he was walking out of the station, he heard cries of a man being "questioned" by the police. Suddenly a bleeding and badly beaten man rushed out of the interrogation room, clutched the complainant's feet, and pleaded desperately for help.
"Please help me, sir. Only you can save me. I am the unfortunate wretch who picked your pocket. You have written that I robbed you of 10,000 rupees. You know that it was only 1,000. Sir, I have already given that amount to my captors. I have no more money. If you do not tell them the truth, they will surely kill me today." The point of the story, said to be true, is the corruption of all three parties: the victim (intending to cheat on insurance), the police and the pickpocket.
"A university of Pennsylvania research study by M. V. Rajeev Gowda and E. Sridharan suggests that secrecy in political donations became an imperative for political parties because black money was so entrenched into the system and businesses had to deal with such a wide range of parties in power in the central and state governments post the re-legalization of corporate funding in 1985, that corporates found it difficult to come above board for the fear of facing the wrath of rivals that were not supported.
The study says here are two key drivers of corruption in India - one being the government's discretionary powers for allocation of resources and the other, flawed political funding and election expenditure laws which allow the government to misuse its discretionary powers. Corporates have benefitted hugely from both these lacunae, but are clearly, suffering them as well, leading to lobby groups like CII.
Too much discretion continues to be vested with the government, which can arm twist at will. This has perpetuated an electoral system which is largely run on black money derived from extortion. The dependence on secretive big money for election spending has rampantly led to policies that have not favoured public interest as has been perceptibly demonstrated by the Niira Radia tapes and the coal allocation scam.
"Where does the political party gets its funds from? Come on, I've been in Parliament for four years. It's not cheques, it's not by small members. All money comes in through black money. Black money doesn't come from heaven" Industrialist Rahul Bajaj was quoted.
Under the current law parties are not obliged to reveal source if the donation falls in the below Rs 20,000 range. So a corporate wanting to extend support in lieu of favours can easily do so by making multiple donations under Rs 20,000."
- Business Standard.
Policy cannot be a response to crisis. It has to anticipate and avert it. In Pental's view, Indian policy makers do not move unless pushed. So the Green Revolution was a reaction to the food crisis and 'ship-to-mouth' humiliation inflicted on the country by USA's Johnson administration. Similarly, economic reforms of 1992 happened when the country's dollar reserves had dwindled to a few weeks of imports and we had to suffer the mortification of halving to pledge gold. And the latest flurry of policy activity has occurred when the country is teetering on a fiscal precipice.
A convenience store that sells basics such as milk, vegetables, cereal, bread, eggs, meat and baby food will require a minimum of 29 licenses from nearly 20 different authorities, according to a list of licenses compiled by the Retailers Association of India and obtained by Reuters.
Those include a food license; a license for sale, storage and distribution; a food-handler's certificate; a license for milk products and another for frozen non-vegetarian food. All those licenses comes from the state-level FSSA, but require separate applications.
But the FSSA does not give permission for operating freezers and chillers. That requires a separate license from a municipal body. Selling baby food requires a permit from a state Controller of Food and Supply. The state Agriculture Produce Marketing Committee must give permission to sell vegetables; the central Directorate of Marketing and Inspection gives permission to grade and sort those vegetables; the Controller of Rationing grants licenses for selling essential commodities like rice.
Permits needed to open a store range from the mundane, such as a trade license, to the petty: lighted shelves require a separate permit, and even a shop window needs a license.
Want to play music in the store? That requires a license. So does selling cosmetics or providing valet parking.
All those licenses need to be renewed, sometimes annually. It's not just the red tape of getting those licenses, it's also the under-the-table money that retailers typically have to pay on top of the official fees.
In Bandra, a high-end suburb of Mumbai, a state-issued trade license for a 10,000-square-foot (930 square-meter) store - very large by Indian standards - officially costs 100,000 rupees ($1,825). But there is an "additional charge" of 1.25 million rupees ($22,800), according to documents obtained by Reuters from the Employee State Insurance, Provident Fund and Industrial Law Practitioners Association of India (EPILPA), which assist retailers in obtaining permits.
EPILPA said their members, who are consultants, collect the "speed money" from retailers and pass it on to the government officials. They act as middlemen who do not take a cut and hence should not be held responsible for the bribes being paid.
"In India, you don't need to ask retailers if you need to pay bribes," said Punit Agarwal, CEO of Promart, a mid-sized multi-brand clothing retailer. "It's known. Here you have a price tag for everything."
The history of corruption in India can be traced only to late 18th century British East India company rule. The first governor-general of India, Warren Hastings was notably impeached on accounts of corruption in 1787. Though he was acquitted in 1795, his lengthy trial brought various aspects of illegitimate company activity to light. Brian Smith of Georgetown University (2008) writes, "too much ill-gotten wealth had made its way home from India; too many of Hastings' compatriots and defenders were in the House of Commons". The East India Company laid the foundations of both a corrupt bureaucracy and a parallel economy. During World War II, this black economy experienced a surge (Financial Express, 2007). When large quantities of products and resources were allocated to the war effort, the general public experienced acute shortages of daily necessities. Scarcity, government controls, and private hoarding stimulated the growth of the parallel economy. Even though in both periods the black economy made up only a small fraction of its present size, the institutional and social practices that would facilitate its rise were developed then.
The most significant growth in the black economy occurred during and after the 1960s. Until this time, Gandhian and Nehruvian politicians who had been part of the independence struggle had largely administered the government. As their careers ended, officials who lacked their idealism, and were more likely to engage in corruption and rent-seeking practices, entered the government. According to Sondhi (2000), the keynote of this "great divide in the history of public administration in India" was amorality. The permit-license raj of the old socialist system spawned an inefficient regulatory regime, cripplingly high compliance and transaction costs, a corrupt bureaucratic system and a rent-seeking political system.
Today, corruption pervades the political leadership, the bureaucracy, law enforcement and the judiciary. Bribery is so thoroughly institutionalized that most people engaged in the transactions are aware of the scale of the charges and the lateral and upwards percentage shares in the illicit rent. Some of the most prominent causes have been patron-client relationships and communalism in the democracy, excessive bureaucratic administration and low wages at the bottom rung of public sector employment, ineffective punitive and combative measures, and a social environment conducive to corrupt practices.
Since the sixties, a new brand of electoral politics has seen leaders succeed who cater to specific regional, caste, religious, or linguistic communities as well as distinct private lobbies. In order to be reelected in a divisive environment, officials hand out benefits to private supporters and client communities. Nepotism in the allocation of government contracts and the siphoning-off of public sector funds occur on a large scale. For example, public sector real estate plots are taken over by individual politicians who then sell them at preferential rates to family members, campaign contributors, and other supporters in a process that is called "writing down".
Democratic corruption is further compounded by rampant electoral malpractice, which undermines the legitimacy of the participatory process. Vote buying and voter coercion, political thuggery and warlordism are commonplace. Corruption pervades the political realm from the local district level, to the state level, to the national level, to the Prime minister's office - as Sondhi (2000) writes, "the scams and scandals of the nineties revealed that among the persons accused of corruption were former Prime Ministers, former Chief ministers, and even former Governors."
During the sixties the development of a second factor also impacted corruption. Private sector wages and relative social prestige, particularly at the lower levels, grew faster than those of the public sector, creating incentive for corruption. According to The Times of India, the payscale for police constables in 2006, was between Rs. 3,050 and 4,590 in Maharashtra. In India, such wages are too low to guarantee a dignified life, forcing constables to turn to bribes. Therefore, it is common for well-off individuals to buy their way out of arrest. Additionally, the colonial legacy of an extensive administrative network facilitated the spread of corrupt activity in the bureaucracy, judiciary, and law enforcement. According to Sondhi, "the British had designed this legal system to strengthen a regulatory colonial administration...It has built in provisions for delays, prolonged litigation, and evasion. Its provisions are ideally suited to the promotion of corruption at all levels."
Insufficiently low wages are generally characteristic of the lower levels of bureaucracy, and therefore most simple government services require bribing to be obtained. Many bureaucrats see their salaries as pocket money, while their actual incomes are determined by illegitimate means. Even in prestigious civil services like the Indian Administrative Service (IAS) and Indian Revenue Service (IRS) that require entrance examinations, salaries are significantly lower than private sector alternatives. Corruption income is often taken into account when bright individuals choose the civil services over the private sector.
Looking at the problem from a broader perspective, pervasive corruption has generated social attitudes that no longer view it as morally wrong, but as normal. High degrees of corruption in the police and judicial system coupled with widespread corruption among elected officials have contributed a collective disregard for the rule of law in society. "People often approach someone known to them for favors which they know are not legally due to them. Jumping the traffic lights or a queue or getting the benefits not due to one has become part of social ethos" (Sondhi 2000). A vicious cycle has been created where, because so many public officials are corrupt, corruption has found social acceptance, and this results in an even greater number of officials becoming corrupt. Therefore, increased corruption is a consequence of corruption itself.
The economic impact of corruption is a powerful one. In theory, countries where talented people are allocated to rent-seeking activities tend to grow more slowly (Mauro 1995). Mauro finds that if the integrity and efficiency of bureaucracy in developing countries were to be improved, their investment and GDP growth rates would rise significantly. Controlling for GDP per capita, he concludes that corrupt governments spend less on education, and therefore achieve lower levels of human capital formation. According to Mauro, if corruption in India was reduced to Scandanavian levels, investment would rise by 12% annually and GDP would grow at an additional 1.5%.
In India, the black economy has resulted in an immense loss of tax revenue. If it accounted for 40% of GDP in 1998-99, the loss of direct tax revenue at the prevailing rate would amount to at least Rs. 200,000 crore, or 47.5 billion U.S. Dollars (Kumar 1999, 5). According to the BBC (2004), only 2 million of India's billion people pay taxes, just 2% of the population. The government therefore suffers a perennial shortage of funds and public services languish. To make matters worse, public services and public enterprises are themselves extremely corrupt - the Public Works Department and the State Electricity Boards that are responsible for the provision, maintenance, and distribution of infrastructure and energy respectively, are among the most corrupt departments in India. "In the capital city of Delhi itself the transmission and distribution losses in the power sector are estimated to be over 50%, out which almost 30% is attributed to theft which is done with the connivance of the electricity board employees" (Sondhi 2000). Due to corruption, public sector enterprises appear to be inefficient and making large losses. In 1991, they lost over Rs. 30,000 crore, or $7.1 billion due to corruption; if not for illegal activity, profit margins would have been 30% as opposed to the reported 5% (Kumar 1999, 4)
Black incomes also form a major tax on investment. Rather than being spent and injected into the economy, they tend to be mostly saved. Furthermore, these savings tend to be concentrated in areas that do not further investment. Black money tends to be laundered in destabilizing speculative bubbles such as real estate and gold, or deposited outside the country. Income from corruption constitutes a significant leakage from the economy, amounting to a tax on investment of almost 20 percentage points (Sondhi, 2000).
Given the magnitude of corruption and its consequences, it is imperative that the problem is dealt with immediately. The government has already developed a number of agencies to deal with the problem such as the Prevention of Corruption Act (1947), Central Bureau of Investigation (CBI), Administrative Vigilance Division (AVD), and Central Vigilance Comission (CVC). However, a number of these agencies are corrupt themselves, while others lack the expertise to function effectively. I believe that a carrot and stick approach must be used to combat corruption. That is, the monetary incentive for corruption must be removed, while adequate punitive measures are simultaneously implemented. Corruption has lead to a vicious cycle where it keeps tax revenue low, thus keeps public sector wages low, and therefore perpetuates itself. The government must bear the initial cost and incur a deficit to raise public sector wages and make them more comparable to the private sector, while strengthening anti-corruption bodies. Theoretically, a higher salary should make an employee content and the increased probability of prosecution should deter their corrupt practices.
Electoral reform is also necessary to restore faith in a free democratic process. Instituting stricter poll monitoring policies and replacing the inkblot voting technique with newer technology would better safeguard against malpractice. Allocating a fixed election budget for each party a-la the European Union would set somewhat of a barrier against rent seeking and patron-client politics.
The media and civil society are important entities that should also be urged to expose corrupt practices. In the past, the media has exposed numerous profile cases, such as the Tehelka scandal, however less sensational corruption is left unreported. According to Kumar (1995), media entrepreneurs have interests that require favorable policy decisions and journalists have to be careful not to hurt these interests. Independent organizations however, have been more vigilant in their watch over corruption. Guhan and Paul (1997) state that the Public Affairs Center in Bangalore has developed innovative instruments, such as the report card methodology, to track down and expose corruption in the public services.
The primary obstacle to implementing stricter controls over corruption is the general social climate. If society continues to accept the normality of corruption, politicians will not be pressed to implement counter-measures. The costs of corruption can be fundamentally raised through the democratic process. Voting against corrupt politicians will ensure that those in power will reduce their own illegal practices and take steps against corruption to garner votes. But until social attitudes change, necessary legislation will not be implemented to deal with the problem.
(Meghnad Desai) "On the other hand, every day we see the reality of Mr Hyde behind the pretty facade of Dr Jekyll. The Supreme Court judgment on 2G, even as we try to digest it, tells us that something is profoundly wrong in governance. What is worse is that it is an open secret that DMK or its twin AIADMK have always insisted on securing the ‘ATM’ ministries as they are called whenever in coalition at the Centre. It was no secret and what A Raja was doing must have been known to anyone who wanted to know. We see it when the Supreme Court indicts the PMO for its laxity in the allocation of licences. We see it in the dispute over the ISRO chief and the Army Chief of Staff’s birthday.
Corruption is of course not a monopoly for any one party. The Congress is ‘fortunately’ for itself not in office in three out of five states where there is an election. Hence it can criticise the incumbent governments about corruption. But the rule is that all incumbent governments are corrupt whatever Party they may belong to. There is hardly anything to choose here. Every party also plays the caste card, selects chargesheeters as candidates on the excuse of winnability factor, welcomes fugitives from other parties who suddenly develop loyalty to their latest host and abuse their previous one. All parties use black money in elections and often are caught by the EC. No party has internal party democracy and the choice of the likely Chief Minister is entirely left to the top leadership.
None of this would matter very much if the world was the old world of the 20th century. India has been a corrupt country for all its years of independence if not since before. Where there is a problem is that now India is judged by the world since it is also a place where people come to do business. The 2G scam attracts attention because of its FDI implications. In the old days it would not have mattered. The Satyam scandal was similarly exposed on the New York Stock Exchange and not by the Andhra government or even any Central institution.
Some will say the problem is the FDI not the local corruption, that it is liberal reforms which have India more corrupt than ever before. But the truth is that liberal reform subject India to a much greater scrutiny than it has had so far. The CWG scandal was exposed by the tax authorities in UK when they received a dodgy claim for VAT exemption by a company whose normal business was not in event management."
2010 Telecom (2G Spectrum) Licence Scam
We have had a number of scams in India; but none bigger than the scam involving the process of allocating unified access service licenses. At the heart of this Rs.1.76-lakh crore worth of scam is the former Telecom minister A Raja – who according to the CAG, has evaded norms at every level as he carried out the dubious 2G license awards in 2008 at a throw-away price which were pegged at 2001 prices.
Telecoms Minister Andimuthu Raja was sacked after a report by India's state auditor said his ministry sold licences and spectrum below market prices, depriving the government of up to USD 39 billion in revenues.
The scandal swept up as high as Prime Minister Manmohan Singh, who had to explain to the Supreme Court why he sat on a request for permission to charge Raja with corruption.
In its report, the Comptroller and Auditor General of India (CAG) also said rules were flouted when the licences were given in 2007-08 which led to many ineligible firms getting them.
The CBI has launched an investigation into alleged corruption at the ministry. Nobody has been charged yet and Raja has denied any wrongdoing.
The CAG said Unitech units got licences despite having inadequate capital, Swan Telecom got a licence even though there were monopoly issues and Reliance Communications got undue benefits as it sought permission to offer services under the more popular GSM technology.
Revenue authorities have questioned Nira Radia, a top lobbyist, as part of an investigation into whether money laundering and forex laws were broken when the licences were purchased. Radia has denied any wrongdoing and has said she is cooperating with the probe.
Commonwealth Games Scam
Even before the long awaited sporting bonanza could see the day of light, the grand event was soaked in the allegations of corruption. It is estimated that out of Rs. 70000 crore spent on the Games, only half the said amount was spent on Indian sports-persons.
The Central Vigilance Commission, involved in probing the alleged corruption in various Commonwealth Games-related projects, has found discrepancies in tenders – like payment to non-existent parties, will-ful delays in execution of contracts, over-inflated price and bungling in purchase of equipment through tendering – and misappropriation of funds.
2010 - Housing Scam
Congress party politicians, bureaucrats and military officials have been accused of taking over land meant for building apartments for war widows. The CBI has begun investigating the case.
Local media say apartments with a value of USD 1.8 million were sold for as little as USD 130,000 each in the apartment block, which faces the Arabian Sea in one of the world's most expensive stretches of real estate in Mumbai.
The government has sacked the chief minister of western Maharashtra state, Ashok Chavan, who is a member of Congress.
The apartment block is also being investigated for several violations of norms, including environmental laws and land-use rules.
The government has now effectively taken back permissions allowing owners to occupy the apartments, which are required for water and power supplies, leading to the disconnection of these services.
As they say, every scam must have something unique in it to make money out of it in an unscrupulous manner- and Telgi scam had all the suspense and drama that the scandal needed to thrive and be busted.
Abdul Karim Telgi had mastered the art of forgery in printing duplicate stamp papers and sold them to banks and other institutions. The tentacles of the fake stamp and stamp paper case had penetrated 12 states and was estimated at a whooping Rs. 20000 crore plus. The Telgi clearly had a lot of support from government departments that were responsible for the production and sale of high security stamps.
2009 Satyam Scam
Satyam is the biggest fraud in the corporate history to the tune of Rs. 14000 crore. The founder of Satyam Computer Services, one of India's top software firms, resigned in January 2009 after admitting profits were falsely inflated for years.
The company’s disgraced former chairman Ramalinga Raju kept everyone in the dark for a decade by fudging the books of accounts for several years and inflating revenues and profit figures of Satyam. The government stepped in to save the firm by appointing a new board of directors and midwifed its sale to Tech Mahindra. The firm is now called Mahindra Satyam.
The fraud, estimated at USD 1 billion, was India's largest corporate scandal and was dubbed "India's Enron".
With clients abandoning it, shares were hammered down to near-penny-stock levels.
The Bofors scandal is known as the hallmark of Indian corruption. The Bofors scam was a major corruption scandal in India in the 1980s; when the then PM Rajiv Gandhi and several others including a powerful NRI family named the Hindujas, were accused of receiving kickbacks from Bofors AB for winning a bid to supply India’s 155 mm field howitzer.
The Swedish State Radio had broadcast a startling report about an undercover operation carried out by Bofors, Sweden’s biggest arms manufacturer, whereby $16 million were allegedly paid to members of PM Rajiv Gandhi’s Congress.
Most of all, the Bofors scam had a strong emotional appeal because it was a scam related to the defense services and India’s security interests.
The Fodder Scam
If you haven’t heard of Bihar’s fodder scam of 1996, you might still be able to recognize it by the name of “Chara Ghotala ,” as it is popularly known in the vernacular language.
In this corruption scandal worth Rs.900 crore, an unholy nexus was traced involved in fabrication of “vast herds of fictitious livestock” for which fodder, medicine and animal husbandry equipment was supposedly procured.
The Hawala Scandal
The Hawala case to the tune of $18 million bribery scandal, which came in the open in 1996, involved payments allegedly received by country’s leading politicians through hawala brokers. From the list of those accused also included Lal Krishna Advani who was then the Leader of Opposition.
Thus, for the first time in Indian politics, it gave a feeling of open loot all around the public, involving all the major political players being accused of having accepted bribes and also alleged connections about payments being channelled to Hizbul Mujahideen militants in Kashmir.
Well, I am running out of time and space over here. The list of scandals in India is just not ending and becoming grave by every decade. Most of us are aware about the recent scam in IPL and embezzlement with respect to bidding for various franchisees. The scandal already claimed the portfolios of two big-wigs in the form of Shashi Tharoor and former IPL chief Lalit Modi.
1992 - Securities Stock Market Scam
Several Indian stockbrokers were accused of siphoning off over Rs 3500 crore (USD 778 million) of funds, mostly from inter-bank transactions, to fuel a rise in the Mumbai stock market in 1992. It involved top officers of state-run and foreign banks and financial institutions, bureaucrats and politicians.
News of the scam led to an over 40% fall in shares over two months, wiping millions of dollars from market value.
Harshad Mehta, the main accused, died in 2002, convicted in only one of the many cases filed against him, for misappropriation of funds in a case involving the use of money from the bank account of car-maker Maruti Suzuki for trading in stocks.
Several bank executives were convicted for fraud in allowing bank funds to be used for trading stocks.
Some of the biggest names to come out of the Panama Papers include close friends and associates of Vladimir Putin, as well as the prime minister of Iceland, the president of Argentina, and the family of Chinese president Xi Jinping. But we haven’t seen a lot of high-wattage U.S. names in the headlines.
After all, an estimated $150 billion in potential U.S. tax revenues disappears into offshore tax schemes each year, according to a 2014 Senate subcommittee report. If this is the biggest data leak in history – and our biggest window ever onto the offshore world – where are all the Americans?
Americans can form shell companies right or "trusts" in Wyoming, Delaware or Nevada. If you form a British Virgin Islands company you have to declare who you are to the person forming the company for you; if you form in Nevada, for example, you don’t… So Nevada is great because it’s much more secret than the British Virgin Islands. Forty-nine states now offer LLCs… Basically, we have an onshore haven industry in the US that is as secretive as anywhere.
What should be one of the more shocking aspects of the documents is that Mossack Fonseca had a subsidiary to create American offshore corporations in Nevada. What’s happened is, some of the sleaziest offshore lawyers are now using American corporate shells to hide foreign corrupt activity. You’d think that the U.S. government would crack down on this.
Europe is also home to countries that provide banking secrecy that could provide haven from taxes, such as Luxembourg, Switzerland and Andorra. The country is also reportedly setting up a high-security storage facility where clients can keep assets like paintings and gold with no fear of having these possessions reported to tax authorities in their home countries. A European Union official threatened sanctions on Panama and other nations if they don't cooperate fully to fight money laundering and tax evasion.
Many Panamanians point to those activities in wealthy countries and say they are angry over what they consider a double standard behind criticism of Panama.
P.S. Lacking the deep oil reserves of surrounding nations, the key UAE city of Dubai has transformed into a world class financial center in order to overcome this shortcoming by dedicated its efforts to managing the money of its oil rich neighbors. The strategy proved remarkably successful.
Lebanon is often hailed as the “Switzerland of the Middle East” for its tight bank secrecy laws. Banking privacy in Lebanon is “absolute” and guaranteed by law, with violations being subject to criminal prosecution.
Burmuda First, it serves as the world's third largest reinsurance center, trailing only the comparably massive New York City and London. Second, the island nation is also very popular in terms of insurance-linked securities.
Seychelles has emerged as an increasingly popular offshore choice. That's particularly true with regard to mutual and hedge funds, which can be constituted as a company.
Despite having an interesting name, few people actually know where Vanuatu is located. However, this island chain off the eastern coast of Australia is well-known to many of the world’s monied elite as an offshore banking jurisdiction since its 1971 offshore legislation. While it’s still a tiny player in the offshore market, Vanuatu is among the most secretive.
There are many advantages of incorporating in the Bahamas, including complete anonymity and confidentiality to investors; exemption from local taxes and stamp duties; ease of company incorporation; and minimum requirement of one shareholder and one director.
"If we create a Private Foundation and the underlying company for you, the funds become completely private (US cannot know) as soon as the funds are deposited under a bank account or investment account in the name of the underlying company or the private foundation... You can take the money in cash, you can do a bad investment; you can purchase something and not receive anything (an expensive piano, an expensive software)... You can receive an invoice from Panama or any other location and that would justify some of the outgoing moneys. You can also declare everything to the tax administration."