Shivakantjha.org - 'In a Nutshell' - 11: Introducion: An Apology

'In a Nutshell' - 11

In the Vodafone Context

Introducion: An Apology

By Shiva Kant Jha

April 7, 2012

Let us play Columbus to explore the regions of Darkness on our good Earth

The Hon’ble Court has found reasons for the Pyramidal corporate structure through the holding companies and the corporate conglomerates forming one architecture in which the ‘nit corporations’, forming the corporate behemoth, can travel all lands to promote what they consider their corporate purpose. They love to operate through opaque systems so that the World can see the Trojan horse, but not the soldiers hidden in that. As the MNCs rule the world from the realm of darkness, I would tell you something about the areas at which the Vodafone drama had reached its climax, or denouement (it would depend how you look at the drama). My quest reminds me of T. S. Eliot’s poem Macavity the Mystery Cat that I had read in my early years. Its first few lines come to my mind when I think of what these MNCs and the leaders of the global finance do from tax havens and dark regions.

Macavity's a Mystery Cat: he's called the Hidden Paw--
For he's the master criminal who can defy the Law.
He's the bafflement of Scotland Yard, the Flying Squad's despair:
For when they reach the scene of crime--Macavity's not there!

John Milton’s Comus was a ‘Mask Presented at Ludlow Castle’. It tells us how the spell of deception was cast by Comus on the young Lady through his necromancy and sophistry. Milton contrived the plot to show that she ultimately escaped from the trap. Comus had declared, to quote from Milton; ‘’Tis only daylight that makes sin.’ Our Supreme Court refers to it in Shrisht Dhawan v. Shah Bros¹. When I think of this enchanted castle, my mind goes to many modern versions of Ludlow Castle built in the tax havens where the Rogue Finance waxes high, and plays the role of financial wizardry facilitated by a host of global financial wizards, chartered accountants, lawyers, and the experts in geopolitics of micro and macro states, and skilled in exploring all the possibilities of the Cyberspace.

Once I asked the lawyers present in our Supreme Court Library: “Do you know where is ‘Cayman Islands’?” None could say where it was, or what it was. I asked one of my brilliant juniors to find that out on a big map. After devoting about one hour he could discover a tiny dot on this terra firma in the region called the Caribbean. Those were the days when our Hon’ble Supreme Court was hearing almost daily for more than a month the Vodafone Case. When the Hon’ble Court delivered its judgement, it said with remarkable brevity (para 68):

“It is a common practice in international law, which is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding or operating company, such as Cayman Islands or Mauritius based company for both tax and business purposes. In doing so, foreign investors are able to avoid the lengthy approval and registration processes required for a direct transfer (i.e., without a foreign holding or operating company) of an equity interest in a foreign invested Indian company.”

The Realm of Darkness out to subjugate the Realm of Light

How dexterously the realm of darkness was crafted, especially after the World War II, would be subject matter of a separate article (In Nutshell 12). On reading them you would realize that it was the strategy of the super-rich and the corporations mainly of the United States and the United Kingdom. Perhaps they were searching for space to evade the counsel that the Holy Bible provided in Matthew (6:19-21):

“Lay not up for yourselves treasures upon earth, where moth and rust doth corrupt, and where thieves break through and steal: But lay up for yourselves treasures in heaven, where neither moth nor rust doth corrupt, and where thieves do not break through nor steal: For where your treasure is, there will your heart be also.”

The Rogue Finance that succeeded building this Realm of Darkness on the oceans, on land, and now also in space, turned so mighty as even to bid the stars, to say in the words of Shakespeare, to go blank to let them rule the world: “Stars, hide your fires; Let not light see my black and deep desires.”

When I call such jurisdictions the Realm of Darkness, I do not call them so because the Sun does not shine there. The Sun shines their brighter, and almost all the year round, because the Caribbean is in the tropical region. The whole of the Caribbean in which are located about 7000 islands is the most well-lit, and the rays which must be making the coral ridges wear romantic smile turning the turtles to go on the paroxysm of joy. I call such regions the Realm of Darkness because they frustrate our right to know, they ensure that access to sources of knowledge is denied. They establish legal regime to ensure that such regions function as the present-day versions of the old Alsatia where law-breakers and law evaders sought refuse in olden days. The tiny tots in the vast Oceania serve the purposes that the notorios Kalapani (Andman Islands) had played during the British imperialism. Those were the days when we did not have quick communication, and the electronic technology of fast knowledge transmission did not exist. The new states were created in the Caribbean so that the things going on could be evaded from public gaze, communication could be tightly controlled, and such regions could be insulated against public wrath, and the penetration of the outsiders for tolerating whom the ancient Egypt and Rome had paid the heavy penalty of total destruction.

Francis Fukuyama in The End of History and the Last Man (1992) draws a panegyric of the free-market economy by singing the litany of liberal democracy dubbing it the ‘endpoint of mankind’s ideological evolution’. Knowing that ours is a profoundly scientific age, he has asserted that there is a universal evolution in the direction of capitalism. The instruction given in Mathew is seldom remembered. It said: “No one can serve two masters, for either he will hate the one and love the other; or else he will be devoted to one and despise the other. You can not serve both God and Mammon.” Now we see in our world how the financial experts help a few to serve God and Mammon making the latter as the presiding deity.

For the benefit of the beneficiaries of the neo-liberal agenda of neo-capitalism impregnable bastions were been built in the Caribbean, South Pacific, the tiny-tots in the Atlantic ocean, Micronesia and Polynesia. Let us cast a fleeting eye on some tiny states of the Caribbean Sea which is often called the American Mediterranean. It is veritably a potpourri of numerous sovereign states, overseas territories and dependencies. Amongst the island groups we have Greater Antilles where Cayman Islands exist, and Leeward Islands where the British Virgin Islands exist. The region contain many such islands about which we know little. As I am writing these short article in the Vodafone context, I would just see, or peep through, only those regions whose names we heard in the recent days at the Supreme Court, in the press, and in the coffee shops.

iii

(a) The Cayman Islands

In the post-World War II phase, circumstances got created (about which I would say in the subsequent articles) which helped the rich capitalists and finance to shift their core-operating systems to some of the tiny islands in the Caribbean. Those, who did not belong to Caymans Islands, chose these places to create artificial creature of corporate subsidiaries there. In this virtual world, the electronic communication, and technological equipments it is possible to project the phantoms of the states and regions existing on our planet into the cyberspace where it is possible to operate anytime and anywhere arranging matters to the heart’s desire.

The Cayman Islands is a British Overseas territory. It always runs the risk of being struck by hurricanes and storms. The Wikipedia writes about Grand Cayman:

“Due to the tropical location of the islands, more hurricane or tropical systems have affected the Cayman Islands than any other region in the Atlantic basin; it has been brushed or directly hit, on average, every 2.23 years.” Most of its early settlers “were British mariners and privateers and shipwrecked passengers and African slaves, as well as land-grant holders from Jamaica.” Its history does not evidence that it could have developed high in culture or finance. But thanks to the superrich and the MNCs, it has now become a 7-star hotel enabling the people there to enjoy the highest standard of living. With an average income of around KYD$47,000, Caymanians have the highest standard of living in the Caribbean. Its total Population is just about 55000. Consider the following vital statistics pertaining to Cayman Islands (gathered from Annual Economic Report 2006):

	2005	2006
Mutual fund licenses	7,106	8,134
Insurance licenses	759	767
Banking and trust licenses	305	291
Trust companies	127	135
Stock exchange listings	1,015	1,169
Company registration	74,905	83,532
Stock exchange capitalization	75.6	106.2

Total Company Registrations in 2004; 2005 and 2006 were 70,133; 74,905; 83,532 respectively. How can acountry of about 55000 can create and manage juristic persons aggregating to almost a lac. Most of these must be in someone’s hip-pocket!.

How things are done in Caymans Islands would be evident from what is done in the Ugland House. United States Government Accountability Office in its Report to the Chairman and Ranking Member, Committee on Finance, U.S. Senate (July 2008)² portrayed the way things move there:

“The sole occupant of Ugland House is Maples and Calder, a law firm and company-services provider that serves as registered office for the 18,857 entities it created as of March 2008, on behalf of a largely international clientele. According to Maples partners, about 5 percent of these entities were wholly U.S.-owned and 40 to 50 percent had a U.S. billing address. Ugland House registered entities included investment funds, structured-finance vehicles, and entities associated with other corporate activities.”

We get from that Report that the sole tenant of the Ugland House is the well-known Maples and Calder law firm. There, the Report says, 18,857 registered entities are created to exist, though very few of these have significant physical presence in the Cayman Islands, and about 50 percent of them have a U.S. billing address. As we all know what the infamous Enron had done in our country, it is worthwhile to read what the Report says something about it:

“Additionally, because offshore entities such as SPVs can be used to achieve a wide array of purposes, they can be abused even when the entities, the parties involved, and the stated business purposes pass scrutiny at the time of establishment. For instance Enron, a global energy company had 441 entities in the Cayman Islands in the year that it filed for bankruptcy. Maples and Calder partners said they created entities for Enron at the instruction of major U.S. law firms. The partners noted that Enron’s legitimate business activity often involved holding assets in offshore subsidiaries, including many in the Cayman Islands. However, Enron did use structured-finance transactions to create misleading accounting and tax outcomes and deceive investors.”

We get a wonderful appreciation of this Ugland House in the very first sentence of the Wikpedia’a article on the Ugland House: it says:

“Ugland House registered office address for 18,857 entities and has for years been linked to tax evasion. During his presidential campaign, U.S. President Barack Obama referred to Ugland House as "the biggest tax scam in the world."

It was reported that Mr Obama had said, while referring to “a building in the Cayman Islands that… supposedly housed 12,000 US-based corporations, that "That's either the biggest building in the world or the biggest tax scam in the world," he said.³

Even the US, which virtually rules the Caribbean, had considered it prudent to enter into ‘Agreement between the Government of the United States of America and the Government of the United Kingdom of Great Britain and Northern Ireland, including the Government of the Cayman islands, for the exchange of information relating to taxes’. It had effective terms: to quote Article 6 of Tax Examinations (or Investigations) Abroad.

The requested party may, to the extent permitted under its domestic laws, allow representatives of the competent authority of the requesting party to enter the territory of the requested party in connection with a request to interview persons and examine records with the prior written consent of the persons concerned. The competent authority of the requesting party shall notify the competent authority of the requested party of the time and place of the meeting with the persons concerned.
At the request of the competent authority of the requesting party, the competent authority of the requested party may permit representatives of the competent authority of the requesting party to attend a tax examination in the territory of the requested party.
If the request referred to in paragraph 2 is granted, the competent authority of the requested party conducting the examination shall, as soon as possible, notify the competent authority of the requesting party of the time and place of the examination, the authority or person authorized to carry out the examination and the procedures and conditions required by the requested party for the conduct of the examination. All decisions regarding the conduct of the examination shall be made by the requested party conducting the examination.

Our Hon’ble Supreme Court’s notions about Caymans Islands are conditioned by a string of erroneous assumptions. It says (para 53) of its Judgement :

“OECD's blacklist was avoided by Cayman Islands in May 2000 by committing itself to a string of reforms to improve transparency, remove discriminatory practices and began to exchange information with OECD. Often, complaints have been raised stating that these centres are utilized for manipulating market, to launder money, to evade tax, to finance terrorism, indulge in corruption etc. All the same, it is stated that OFCs have an important role in the international economy, offering advantages for multi-national companies and individuals for investments and also for legitimate financial planning and risk management. It is often said that insufficient legislation in the countries where they operate gives opportunities for money laundering, tax evasion etc. and, hence, it is imperative that that Indian Parliament would address all these issues with utmost urgency.’

The Tax Information Exchange Agreement between India and Cayman Islands, like all such Agreements are, to a large extent, futile and deceptive. The tax havens keep their basket of information of foreign companies empty. And we cannot get anything of relevance from the basket that is itself empty. Secondly, the cover of secrecy, built by administrative and legal provisions, is so tight that we cannot even peep through that. Besides, in the Caribbean itself there are so many islands and territories (many phony) that no human being, except the Rogue Finance, can find out what these are and where they exist.

In this short article I cannot evaluate what the Hon’ble Court said in the para quoted. I would restrain myself by quoting a well-known proverb: “the proof of the pudding is in the eating” . The way the Court accepted what was submitted before it reminds me what C. K. Allen said in the context of Liversidge v. Anderson: “In Liversidge v. Anderson the majority of the Lords felt the same confidence in the wisdom and moderation of executive officials; there is, apparently, something in the tranquil atmosphere of the House of Lords which stimulates faith in human nature”.

(b) The Virgin Islands

Another theatre of operation relevant to the Vodafone Case is the British Virgin Islands, (BVI). It is a British overseas territory with an area of 59 sq. miles, and population at 28000. In the context my articles, it is enough to quote from the Wikipedia to show how economy runs there: to quote--

“Substantial revenues are also generated by the registration of offshore companies. As of June 2008, 823,502 companies were so registered (of which 445,865 were 'active'). In 2000 KPMG reported in its survey of offshore jurisdictions for the United Kingdom government that over 41% of the world's offshore companies were formed in the British Virgin Islands. Since 2001, financial services in the British Virgin Islands have been regulated by the independent Financial Services Commission.”

What happens to about 400000 non-active incorporated companies? Aren’t they ready enough commodities for instant supply to the global customers within the shortest possible time , dated from any point of time from the remote past to distant future? Companies already minted are available in such tax havens. Didn’t John Milton’s Comus , to which this Hon’ble Court referred in Shrisht Dhawan v. Shah Bros⁴,

‘T is only daylight that makes sin.’

(c) The Bahamas

When the Duke of Westminster had been decided, the world had about 60 States, now there are more than 200 ( about 194 states, and several others possessing limited or disputed sovereignty), most of them densely shrouded, and promoting agenda to provide, for good gains, an apt environment for the Rogue Finance. It is suggestive to mention that, when the Paris-based Financial Action Task Force subjected the banking system of the Bahamas to a close scrutiny, in one go the Bahamas, it is said, banned the “ anonymous ownership of more than 100,000 international business companies registered in the country.”⁵

How companies are incorporated and how they are used can be illustrated. How a ‘corporation’ is got incorporated in this phase of globalization deserved a Judicial Notice. What the 2002 Britannica Book of the Year ( p. 392 ) says about The Bahamas, a country (Area 5382 sq.mil.) having Population only (2001) 298000 may not be untrue about Mauritius, Caymans Islands, or the Virgin Islands: to quote

“The Bahamian government moved smartly against dubious offshore banks in Feb.2001;it closed down two operations and revoked the licenses of five others following the publication of a U.S. Senate report that described them as conduits for money laundering. In June The Bahamas was removed from the Paris-based Financial Action Task Force list of countries with inadequate laws to fight money laundering. The government had launched several initiatives, including the banning of anonymous ownership of more than 100,000 international business companies registered in the country.”

(d) Mauritius

Even Mauritius was helped to develop as a ‘tax haven’ by the interested persons. mostly from India. America and the UK developed the numerous tiny-tots in the Caribbean and the Pacific as the tax havens or secrecy jurisdictions for the purposes of the Big Business. The major western countries and their apex organization, OECD, reacted against the tax havens by taking some steps to stop abuse through those jurisdictions and areas. As these areas could not afford to annoy the great powers, they could take to their course only to the extent tolerated by these two countries.

What I have said about Cayman Islands applies, to some extent, to Mauritius also. But the Hon’ble Court, in the Vodafone Judgement, has a different perception. The Hon’ble Court observes in the Judgement (para 100):

“ Mauritius, and India, it is known, has also signed a Memorandum of Understanding (MOU) laying down the rules for information, exchange between the two countries which provides for the two signatory authorities to assist each other in the detection of fraudulent market practices, including the insider dealing and market manipulation in the areas of securities transactions and derivative dealings. The object and purpose of the MOU is to track down transactions tainted by fraud and financial crime, not to target the bona fide legitimate transactions. Mauritius has also enacted stringent "Know Your Clients" (KYC) regulations and Anti-Money Laundering laws which seek to avoid abusive use of treaty.”

Such reasons, as given in the Judgement, are, it is submitted, wholly extraneous. What effect this MOU would have on anything has got no relevance in the Voidafone’s Case. True, in the letter of assurance⁶ dated May 24, 2000 sent by the Minister of Finance of Mauritius to the Secretary-General of the OECD promised to be decent. But promise is one thing, actual deeds are different. OECD deleted its name from the blacklist on account of geo-politic reasons, and zest for FDI etc. Our Court should have asked the Income-tax Department and other investigative agencies to know if anything at all changed. The tax havens or secrecy jurisdictions function as the veritable Alsatia (a sanctuary for criminals) , and centres for money-laundering. The Wikipedia concludes that Mauritius based “ front companies of foreign investors are used to avoid paying taxes in India utilising loopholes in the bilateral agreement on double taxation between the two countries, with the tacit support of the Indian government”⁷.

I have told you about the Ugland House in the Cayman Islands. The Cathedral Square in Mauritius, is no different .

Conclusion

Hans Christoph Binswanger’s The Challenge of Faust how modern man tends to build a realm of prosperity in partnership with Mephistopheles, that trusted lieutenant of Satan, that rules in the Realm of Darkness where our Paradise can get lost unless our wisdom ensures that what survives is not lost, and what has been lost is regained.

____________________

1 AIR 1992 S C 1555

2 http://www.gao.gov/new.items/d08778.pdf

3 http://news.bbc.co.uk/2/hi/americas/7972695.stm

4 AIR 1992 S C 1555

5 2002 Britannica Book of the Year p. 392

6 “OECD’s Report, “Harmful Tax Competition: an Emerging Global Issue” (the “OECD Report”) said that the Government of Mauritius would elimination of harmful tax by administrative and legislative actions, and would ensure effective exchange of information in tax matters, transparency, and the elimination of any aspects of the regimes for financial and other services that attracted business with no substantial domestic activities in a phased manner by the end of the year 2005. Mauritius assures that it would refrain from introducing any new regime that would constitute a harmful tax practice under the OECD Report. ” (http://www.oecd.org/daf/fa/harm_tax/advcom_mauritius.htm).

7 http://en.wikipedia.org/wiki/Tax_haven