Fake Exports Scam?: Black Money coming back to India by exports-over-invoicing with help of government

In a report dated 10 Oct 2011, Sanjeev Prasad, Sunita Baldawa and Amit Kumar of Kotak, unearthed the possible export-scam amounting to even more than combined 2G, mines and all other scams.

The report said that in between 2008-09 and 2010-11, exports to the Bahamas jumped to $2.2 billion from $2.2 million. Yet, India’s share in Bahamas’ imports, which totalled $2.8 billion in 2010, is a relatively minor 7.5 percent. Thus, this 1000 fold in 2 yrs is no-doubt an issue which demands criminal investigation.

According to UNCTAD —The global trade and investments monitoring agency of UN— says, the number in no way matches the data on the Bahamas’ global imports, which, was $2.8 billion in 2010. There are more reasons to smell scam in these figures. The 29-island Bahamas have an economy not larger than $8 billion and a population of only 3,50,000.

These and other skyrocketing increase in ‘copper articles’ exports points that some black money might have been repatriated back to the country via ‘over-invoiced’ exports (done by billing high fake amounts for overseas transactions with fake buyers or shell companies) given that international scrutiny is increasing over unaccounted funds in Swiss bank accounts and other financial centres.

It is clear that how India could continue achieving blistering rates of growth in exports (almost more than 50 percent each month) when the US and Europe, two top export destinations, are clearly in major financial trouble.

Recently, the fin min Pranab Mukherjee said that tax authorities had obtained 9,900 leads from foreign banks about suspicious overseas transactions involving Indian citizens, as well as examining data on another 30,700 domestic transactions for suspected tax evasion and money laundering. However, the Washington-based Global Financial Integrity released a report last year that estimated about$213 billion ($462 billion at today’s prices) was illegally transferred overseas between 1948 and 2008.

Some reports have alleged that some individuals may have been compelled to bring back funds through the official route by simply over invoicing exports or even resorting to fraudulent exports due to reasons such as (1) increased international scrutiny of unaccounted funds in bank accounts in Switzerland and other financial centres, and (2) heightened debate in India about action against unaccounted overseas wealth.”

WHILE EXORTS SCAM MIGHT SEEM A REALITY, FII INFLOW ALSO CASTS DOUBTS REGARDING PHONY MONEY

2010-11 foreign investor flows added up to $22 billion, according to official figures. But a cross-check with international sources like exchange-traded funds and EPFR Global (which tracks $ 15 trillion in global investment flows) shows that not more than $4.5 billion came to India. Though it is obvious that EPFR data is not 100 percent foolproof, since its sometimes excludes sovereign and private equity funds, the gap of $17.5 billion is simple too huge to be explained by normal data omissions.

If true, these type of fake fund flows via FII route could be camouflaging (1) hot money/illicit, unaccounted or black money from overseas accounts of resident Indians, and (2) high levels of proprietary positions of global investment banks, and (3) round-tripped money from Indian companies.

THE GOVERNMENT’S EXPLANATION ON DATA-CRASH AND SYSTEM-MISTAKE:

Commerce Secretary Rahul Khullar, exports were overstated by around $9.4 billion during April-October this year because of a system crash in the commerce ministry and mistakes in data classification and data entry.

People in media are asking that-ok, if this is computer mistake than why after many months the outsiders-reporters found out this mistake and told your, and not any of the government agencies not even your  your ministry’s Directorate General of Commercial Intelligence and Statistics (DGCI&S). This fiasco, (hoping it is not a real scam) will also worsen the already bad reputation of data collection and reporting in India.  The media is also asking that if the computer crash at DGCI&S happened at the start of the financial year, how come it took you six months to report the problem to us. They further add that RBI-which has cross check mechanism-as it has to keep up with the researve requitement and balance of payments situation-could not alarm about a mistake as big as $9.4 billion (Rs.50,000) Even after this reporting of the data mistake-the media reports also add that the real goof-up is not merely $9.4 billion, but much bigger. For example, the figures given out on Friday spoke of a $15 billion over-reporting of engineering exports, and a $12 billion underestimation in the case of petroleum and gems and jewellery. The net figure may be $9.4 billion, but what has really happened is a $27 billion error – since one error in engineering and another in petroleum and gems cannot really cancel each other out. While some other media reports that there were exaggerations of up to $0.5-1 billion each in some other product categories and ‘all sorts of things’, including double counting.” At last one website asks citing the Kotak report, that if the data crash thing happened this year, than what about the huge discrepancy in exports date for previous year which showed 79% surge in exports?

Let us all hope that this is just the computer mistake only and not a deliberate scam involving the Ministry of Finance, RBI, Directorate General of Commercial Intelligence and Statistics (DGCI&S), the commerce minister, the commerce secretary and others who are running the country…