Govt records show that Gupta called Rajaratnam nine times in 2008 and 2009, providing him information for trading
Source:- Livemint, By John Helyar, Carol Hymowitz, Mehul Srivastava
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Atlanta/New Delhi:
On a sunny Friday afternoon in June 2003, Rajat Gupta was greeted at his waterfront home in Westport, Connecticut, by scores of his McKinsey and Co. partners. They had come from London, Frankfurt, New Delhi and other cities around the world—and brought along an elephant, which they tethered on the front lawn.
Gupta was stepping down after nine years as managing director of the global consulting firm, and his colleagues were gathered to celebrate his tenure and wish him the best in the next phase of his career.
They offered champagne toasts and took photos of Gupta, standing next to the elephant, which was draped in a brightly coloured shawl.
Today, some of those same people say they’re stunned by what they’ve since learnt about Gupta. In March, the US Securities and Exchange Commission (SEC) filed an administrative order against Gupta saying that he had passed confidential information to hedge fund billionaire Raj Rajaratnam, the central figure in the biggest crackdown on insider trading in US history.
Rajaratnam was convicted on 14 counts of conspiracy and securities fraud on 11 May and could face 19 years in prison, pending his 29 July sentencing in federal court.
Government wiretaps and phone records show that Gupta called Rajaratnam nine times in 2008 and 2009, giving the hedge fund manager information to make trades for his New York-based Galleon Group Llc.
Gupta, 62, who divides his time among his Connecticut home, a Manhattan apartment and a Florida getaway, has lived a double life. For 34 years until 2007, he worked for McKinsey, including nine years as the top executive of one of the world’s most trusted and prestigious consulting firms.
He was the confidant of chief executive officers such as Goldman Sachs’ Lloyd Blankfein and Procter and Gamble Co.’s (P&G) former head A.G. Lafley. Gupta sat on the boards of both of those companies—and he was a director at four other publicly traded corporations.
As a philanthropist, Gupta raised millions of dollars for education and healthcare, especially in India where he was born and to which he wanted to give back. He’s done charitable work with Microsoft Corp.co-founder Bill Gates, former US president Bill Clintonand Indian Prime Minister Manmohan Singh. Friends describe him as brilliant and humble.
At McKinsey, a firm known for keeping secrets, Gupta harboured a few of his own. As the managing director and then as senior partner of McKinsey for four more years before he retired, he ran his own consulting business on the side—a violation of McKinsey rules.
He and Anil Kumar, a former McKinsey partner who last year pleaded guilty to passing confidential information to Rajaratnam, set up their own consulting company. Gupta also independently advised Gurgaon-based GenpactLtd, which manages business processes for other companies. That work, too, broke McKinsey’s rules.
“It has always been a clear violation of our values and professional standards for any firm member to provide consulting or advisory services outside of McKinsey for personal monetary gain,” says Michael Stewart, a McKinsey partner and director of communications.
McKinsey conducted an internal investigation of Gupta and Kumar, and has cooperated with prosecutors and SEC.
During the past decade, Gupta, who was already a millionaire, began to veer off track. He spent more time with Wall Street money managers. He told colleagues that he wanted to be a deal maker, not just a consultant. Gupta declined to comment on what he told his colleagues or on anything else reported in this story.
While Gupta was devoted to his philanthropy in India, his quest to amass great wealth led him to lapses in judgement, says Bala Balachandran, dean of the Great Lakes Institute of Management in Chennai, and a friend for almost three decades.
“He wanted a billionaire’s life and the question for him was how could he become a billionaire in a short time,” Balachandran says.
Gupta, a man to whom corporate chieftains turned for advice and counsel, chose poorly when it came to investment partners.
In December 2006, two years before he reached McKinsey’s mandatory retirement age of 60, Gupta co-founded private equity firm New Silk Route Partners Llc(NSR Partners) with investors, three of whom had previously paid fines to settle SEC actions against them.
Among the three was Rajaratnam, whose Galleon Group paid $2 million (around Rs. 9 crore today) in a fine and forfeited profits to the government in May 2005 to settle an SEC complaint it had made improper trades. He neither admitted nor denied wrongdoing.
Two other investors in New Silk Route, Parag Saxenaand Victor Menezes, like Gupta, had connections in the US and India.
Saxena, a former money manager, paid a $250,000 fine in 1994 to settle civil claims that he had received pre-initial public offering stock in companies at big discounts and then recommended the shares to his clients at Chancellor Capital Management Inc., after the companies went public.
In January 2006, Menezes, a former CitigroupInc.senior vice-chairman, paid $2.7 million in a fine and forfeited trading profits to the US to settle SEC charges that he sold Citigroup holdings ahead of an announcement of losses from a subsidiary in Argentina. Both men neither admitted nor denied wrongdoing.
Balachandran says he warned Gupta of his choice of business partners.
“You’re an eagle, so why do you want to be with these chickens who can’t fly?” Balachandran says he told Gupta. “You’ll get the chicken flu.”
Gupta hasn’t been charged with a crime in the Galleon insider trading scandal. The SEC administrative action against him is a civil complaint—and the most that could happen to him is a fine and a consent decree that could bar him from serving on public company boards in the US.
Gupta and Rajaratnam have known each other since the 1990s, and their relationship is both personal and professional. Gupta invested $10 million of his own money with Rajaratnam, according to Gupta’s lawyer, Gary Naftalis. Gupta gave Rajaratnam more than money; he passed along information on Goldman Sachsand P&G, prosecutors said during Rajaratnam’s trial in Manhattan.
Justice department prosecutors called Gupta an unindicted co-conspirator. They presented wiretap evidence to the Rajaratnam jury showing that Gupta had told the hedge fund manager that in 2008, Goldman Sachs’ board was discussing possible acquisitions of American International Group Inc.or Wachovia Corp.
He also gave Rajaratnam early word on earnings at Goldman Sachs and P&G, SEC says in its action.
Gupta sent an email in late February to fellow directors of the Indian School of Business (ISB), Hyderabad, declaring his innocence. “I have done nothing wrong,” he wrote to the board of the school, which he co-founded in 2001. “The SEC’s allegations are totally baseless.”
For the 85-year-old McKinsey, the Kumar conviction and the SEC action against Gupta have been a blow to its elite image. The firm counts among its clients hundreds of the world’s leading corporations and governments.
Consultants never talk about their clients in public, and the firm won’t even disclose customers’ identities. Leaders of major companies have started their careers at McKinsey, including Boeing Co.chief executive officer (CEO) Jim McNerney, former American Express Co.head Harvey Goluband one-time International Business Machines Corp.CEO Lou Gerstner.
For decades, until the 1970s, the firm was the ultimate old boys’ club, where consultants were required to wear hats and long, dark-coloured socks, with white, button-down cotton shirts and conservative suits. Gupta was the first non-white and non-US-born elected managing director of the firm.
McKinsey veterans have been deeply troubled by Gupta’s run-in with SEC.
“I was shocked, totally and completely shocked, at the news of the allegations,” says Ian Davis, who succeeded Gupta as McKinsey’s managing director from 2003 until 2009 and is now a director of BP Plc and Johnson and Johnson Services Inc.
Gupta got caught up in envy and emulation of the super rich, says Terry Connelly, dean of the Ageno School of Business at Golden Gate University in San Francisco.
“You can never underestimate the seductive power of three or more zeroes added to net-worth numbers,” says Connelly, a former managing director at Salomon Brothers Inc. “You can be successful, but if you’re in hedge fund managers’ circles and you’re not rich like them, you can start asking, ‘Why can’t I get that? I’m every bit as smart.’”
Smart is a word people often use when describing Gupta. His ascent from lower-middle-class roots in Kolkata to the top of McKinsey is a triumph of brain power and drive.
He was born in December 1948, 14 months after India became independent of British rule. His father, a journalist who worked for two newspapers, fought for India’s independence and was jailed several times for his political activism. His mother was a teacher in a Montessori school.
The family moved to New Delhi when Gupta was five. He, his two sisters and younger brother attended Modern School, one of India’s few English-language, Western-style high schools at the time—located off what was then New Delhi’s most exclusive shopping district, Connaught Place.
Gupta was orphaned at the age of 18 after both his parents died of natural causes within two years of each other. He persuaded an unmarried aunt to live with him and his siblings, according to a 1994 interview Gupta gave to Business Today magazine.
He said he was shattered by his father’s death and became very studious, careful never to make a mistake that could cost him his high school scholarship.
Gupta ranked in the top 20 applicants among hundreds of thousands of Indian youth who took the entrance examination in 1966 for a spot at the elite Indian Institutes of Technology, according to an interview he gave to The Economic Times when he became head of McKinsey.
He chose the Delhi campus, which kept him close to home and, in 1971, he earned a bachelor’s degree in mechanical engineering. His main leisure activity was acting in plays in the school’s drama club, where he met his future wife, Anita Mattoo, an electrical engineering student.
In the socialist India of the 1970s, white-collar positions outside the civil service were scarce. Gupta got his first job offer from ITC Ltd. He turned it down when he was admitted to Harvard Business School on scholarship.
The academic workload was unrelenting for most, but not for Gupta, says John Carberry, who lived in the same Boston dormitory and was Gupta’s friend.
“Sometimes we’d still be doing cases at 2am, but he’d be done by 11pm and lying on his bed, watching Johnny Carson,” says Carberry, who’s now president of Wellesley, Massachusetts-based FL Putnam Investment Management Co. “But if you had problems with your school work, he’d always help.”
At a time when students at Harvard Business School were overwhelmingly white, Gupta stood out culturally and intellectually, Carberry says.
“Gupta was unassuming and humble,” he says. “When he spoke in class, though, everyone put their pencils down and listened. He was the smartest guy in my section, just brilliant.”
Gupta became a Baker Scholar, a distinction earned by the top 5% of students in his graduating class in 1973. With his Master of Business Administration degree, he applied for a spot with McKinsey.
Even with his stellar academic record, the firm turned him down. Walter Salmon, one of Gupta’s professors who had McKinsey connections, wrote Gupta a recommendation, and the consulting firm decided to hire him in New York.
Gupta advanced steadily, becoming a McKinsey partner in 1980 and moving to Copenhagen the following year. In 1984, Gupta began overseeing all of the firm’s business in Scandinavia. He moved to McKinsey’s Chicago office in 1987 and became head there in 1989. The office served many of the region’s manufacturing and consumer products companies.
James Kilts, a former CEO of Nabisco Group Holdings Corp. and GilletteCo., says he was impressed when he first met Gupta in Chicago in the late 1980s. Kilts was then an executive at Kraft FoodsInc., and Gupta advised him about strategy for cheese products.
“He was very thoughtful and self-deprecating,” Kilts says. “He could take a complicated subject and simplify it.” Kilts kept in touch with Gupta as both men advanced. “You could always learn something from him,” he says.
Gupta’s big career leap came in 1994, when McKinsey held elections for a new leader, something that happens every three years. The firm’s 427 partners nominated seven of their peers in the order they preferred. After several rounds of ballots, Gupta, who was 45 at the time, was elected. He became McKinsey’s youngest managing director.
McKinsey grew rapidly under his leadership. He won re-election twice, and during his three terms, the maximum the firm allows, revenue increased to $3.4 billion from $1.2 billion. The number of partners rose to 891, according to Kennedy Information Llc, a research firm that tracks the consulting industry.
McKinsey opened 26 new offices in 30 countries under Gupta, who pursued global expansion in India, China and other emerging markets where the firm’s biggest clients increasingly were doing business.
As the tech boom took hold in the 1990s, Gupta pushed McKinsey to take on Internet start-ups as clients, even when they could pay only in stock. That broke from the firm’s tradition of serving mostly blue-chip clients who paid fees. The equity, which McKinsey accepted from about 150 fledgling firms, went into a profit pool for partners, according to former partners.
Client demand for McKinsey services declined following the bursting of the Internet bubble in 2000. Global Crossing Ltd, Kmart Corp., Swiss International Air Lines AG and other companies McKinsey had advised filed for bankruptcy. The biggest public embarrassment was Enron Corp.’s collapse.
The Houston-based energy trader, which had been the seventh largest company by assets in the Standard and Poor’s 500 Index, lost almost all of its value when regulators found the company had used accounting gimmicks to create a massive fraud.
Enron had McKinsey in its bloodlines. Jeffrey Skilling, the firm’s CEO, had once been a McKinsey partner, and the consulting firm had advised the company for 18 years as it transformed itself from an oil pipeline operator to a derivatives trader. Skilling was convicted of fraud in 2006 and sentenced to 24 years in federal prison.
As McKinsey’s spate of woes swelled, so did Gupta’s outside interests. He raised personal donations from India’s top business executives, including Infosys Technologies Ltd chairman N.R. Narayana Murthy, to start ISB.
He also tapped McKinsey consultants based in India, including Kumar, who would later get caught up in the Galleon scandal. ISB, which has become the most prominent one-year business school in India, opened in July 2001.
When an earthquake struck Gujarat in April 2001, Gupta co-founded the American India Foundation (AIF) to raise funds for victims. The foundation has since raised millions of dollars from Hollywood stars, executives and money managers to aid India’s poor.
Rajaratnam and his wife donated $1.5 million to the foundation in 2006 for an HIV-AIDS programme, and made more donations later.
Gupta’s McKinsey partners supported his philanthropic efforts. They didn’t, however, know about the for-profit work he did while still at the firm, according to Stewart, McKinsey’s director of communications.
In 2001, Gupta and Kumar set up their own consulting company, Mindspirit Llc, in the names of their wives, Anita Gupta and Malvika Kumar, according to a filing with SEC by Omaha-based InfoGroup Inc. The two men, working for Mindspirit, gave advice to the company’s CEO, according to the SEC filing.
InfoGroup, a database company, compensated Mindspirit with 200,000 stock options, which the consulting company exercised for an undisclosed amount, the filing said.
Bill Clinton, honorary chairman of AIF and another InfoGroup consultant, according to the filing, was granted 100,000 stock options he never exercised.
The same filing disclosed the settlement of a shareholder suit against InfoGroup’s CEO Vinod Guptafor his use of company funds for personal pleasures. He had 20 cars, a yacht with an all-female crew and a private jet he used to fly his family and friends to Africa, Cancun and Italy.
Vinod Gupta, who’s not related to Rajat Gupta, had collaborated with the latter in building AIF. He resigned as CEO in August 2008 and repaid InfoGroup $9 million, according to the filing.
Another company that Gupta independently advised was Genpact, spun off from General Electric Co.(GE). Genpact’s sole client initially was GE, to which it provided back-office support.
Gupta was an advisory director from 2005 to 2007, for which he was granted 81,405 stock options, valued at 93 cents each then, according to Genpact’s 2008 proxy statement. He hasn’t exercised the options which expire in 2015, according to company filings. Genpact shares traded at $16.88 on 16 May.
Gupta became enamoured of private equity as he saw others on Wall Street earning far more than he could make at McKinsey.
In 2006, he co-founded NSR Partners, which eventually raised $1.3 billion to invest in India and other emerging economies, company filings show. Rajaratnam dropped out as a partner before NSR Partners opened. He invested $50 million in the firm. He withdrew his stake last year, according to Kathleen Lacey, an outside spokesperson for NSR Partners.
After retiring from McKinsey in 2007, Gupta globe-trotted constantly. He travelled to India to look for investments for NSR Partners and to cities throughout the US and overseas for meetings at the five public companies and many non-profit boards on which he was a director.
When Gupta was in New York, he spent time with Rajaratnam. According to testimony at Rajaratnam’s trial, Gupta and his NSR Partners co-founders initially worked in cubicles at Galleon’s headquarters. NSR Partners later leased an office on Madison Avenue that was less than a block-and-a-half from Galleon’s. Gupta, in 2007, joined Rajaratnam and a third partner to form GB Voyager Multi-Strategy Fund, an investment fund, contributing $10 million of his own money. The $50 million fund invested in Galleon hedge funds, including those that traded on Gupta’s allegedly illegal tips, SEC says.
Gupta passed confidential information to Rajaratnam in 2008 and 2009, SEC says. He disclosed information on two calls to Rajaratnam in September 2008 about the $5 billion investment in Goldman Sachs from Warren Buffett’s Berkshire Hathaway Inc., the regulator says.
Rajaratnam’s Galleon technology funds, which held no Goldman Sachs investments before those calls, bought 120,000 Goldman Sachs shares after Gupta talked to Rajaratnam, SEC says. On a phone conference call at 3.15pm on 23 September, the Goldman board approved Berkshire’s $5 billion investment.
“Gupta participated in the board meeting telephonically, staying connected to the call until approximately 3.53pm,” SEC wrote. “Immediately after disconnecting from the board call, Gupta called Rajaratnam from the same line.
“Within a minute after this telephone conversation, at 3.56pm and 3.57pm, and just minutes before the close of the markets, Rajaratnam caused the Galleon technology funds to purchase more than 175,000 additional Goldman shares,” the regulator wrote.
Galleon made more than $900,000 on the Goldman stock bought in advance of the announcement of Berkshire’s stake, according to SEC.
A month later, Gupta called Rajaratnam 23 seconds after a Goldman Sachs board call during which senior executives informed directors of poor results by the bank, SEC says.
Gupta also knew that Kumar, who was still employed at McKinsey, was being paid by Rajaratnam from offshore accounts, according to phone calls tape-recorded by federal investigators.
“You know, Rajat, I’m paying him a million a year for doing literally nothing,” Rajaratnam told Gupta in a July 2008 call recorded by federal investigators.
“I think you’re being very generous,” Gupta replied. “He should sometimes thank you for that, you know?”
Kumar, in pleading guilty, said Rajaratnam paid him $1.75 million to $2 million.
For himself, Gupta wanted at least a 10% stake in the Galleon International Fund, one of Rajaratnam’s hedge funds, in exchange for attracting investors. In a May 2008 wiretapped call, Rajaratnam told Kumar that he was ready to offer this to Gupta.
“He’s not giving me the luxury of saying, ‘Why don’t you come up with a package?’” Rajaratnam said. “He’s telling me, ‘I want so much’.”
Gupta never got that stake, according to testimony at Rajaratnam’s trial. The $10 million he invested in the Voyager Fund with Rajaratnam was wiped out in the 2008 global financial meltdown.
Gupta’s NSR Partners private equity fund hasn’t turned a profit with exits on any of its investments to date, according to Venture Intelligence, a Chennai-based research firm that tracks private equity in India.
Rajaratnam was arrested in October 2009. Gupta left the Goldman Sachs board in 2010, remaining a director at AMR Corp., Genpact, Harmon International Industries Inc., P&G and OAO Sber bank of Russia.
In January 2011, SEC notified Gupta that it had tied him to Rajaratnam and would file an administrative action against Gupta. He gave no hint of his legal perils when, on 27 February, he joined friends and business colleagues in a corporate box at Bangalore’s Chinnaswamy Stadium.
India was facing England in a group stage match of the cricket World Cup.
“He was chatty and looked dapper and cheerful,” says Shoba Narayan, an Indian author and acquaintance of his.
Gupta had already informed fellow directors at ISB that an SEC action was imminent.
“Just to be clear: There are no tapes or any other direct evidence of me tipping Mr Rajaratnam,” he wrote in the email he sent directors. “I have spent my entire professional career zealously guarding the confidences of my clients. There is no reason for me to suddenly deviate from a lifetime of probity and honour.”
Gupta flew back to New York after the match, which ended in a draw. Two days later, on 1 March, SEC filed its administrative action against him.
Gupta’s civil case is scheduled to be heard by an SEC administrative judge in July. He has filed a suit to get the SEC civil case transferred to a federal court where it would be heard by a jury. Naftalis, Gupta’s lawyer, declined to say why his client wanted a jury trial and declined to comment on any aspect of the SEC action.
Meanwhile, McKinsey has tightened its rules, barring consultants and support staff, as well as their spouses and children, from investing in any company McKinsey has served in the past five years or is cultivating.
Employees are also required to take a test about this policy and won’t receive their bonus unless they achieve a 100% score.
Gupta’s former Harvard dorm mate Carberry says he’s dumb founded as to what went wrong with his friend.
“If the SEC charges are true, something happened to Rajat,” he says. “The Rajat I knew at business school was of the highest integrity. The Rajat I’ve heard on wiretapped conversations isn’t the person I knew.”
Wednesday, May 18, 2011
Backdoor Amnesty: A New Window for Swiss Bank Account Holders
(What Supreme Court described as wrong doings, Government found way to legitimize illegal wealth and allow them to keep it too…Way to Go!!!)
Bring back the money, legitimize it by paying 15% tax, & park it in any account with an Indian bank
SUGATA GHOSH
There’s some delightful news for those with Swiss bank accounts. Indians, who opted for such numbered account service, have a way to mislead anyone trying to hunt them down. For them, a new window in the tax law has flung open just when some of the doors are about to shut. The law of the land has made it possible for them to bring back the money, legitimize it by paying 15% tax, and park it in any account with a bank in India. No questions will be asked.
The taxman won’t harass them because it’s money on which tax has been paid. Officials at the enforcement directorate can’t slap a summon because it’s authorised transfer of funds from an overseas firm to a company in India through official banking channels. There are certain expenses involved as lawyers and accountants have to be hired to make the money transfer look genuine. You can’t really ask your Swiss banker to send the money straightaway to your savings account with the State Bank’s Santacruz branch. The man may think you have finally lost it.
There are other foolproof ways of going about with such business. A new company has to be set up in one of the tax havens, money has to be moved out from the secret numbered account to the account of the newly-formed company with another bank and then pay the amount as dividend to an Indian company. Ask your chartered accountant; he knows all about it, and even if he doesn’t, he will give you the telephone number of a professional who does. Such a professional will guide you through the maze of foreign exchange and tax rules to help you bring back the money that is rightfully or wrongfully yours.
Take one step at a time:
Step 1: Set up a company in Dubai. It’s easier than setting up one in India: Apply for a name with Dubai authorities and submit a simple memorandum. It will cost a few lakhs and will be done in a week. You will get an address, bank account and directors pooled in from an army of ‘service providers’ floating around in Dubai. (In a recent seminar, one of the Dubai state officials promised all assistance to Indian companies setting up arms in UAE). An Indian firm controlled by the Swiss bank account holder floats the Dubai subsidiary. This new subsidiary has a single purpose: to hold the money that will move out of Switzerland to Dubai, before it travels to India.
Step 2: Now, the money lying with the Alpine bank has to be transferred to a Dubai Bank, where the newly set-up company has an account. Let’s call this firm Fei Qian — the Chinese term for flying money. Since it’s unlikely that any company in Dubai will carry such a name, authorities in UAE will take little time in giving the permission. Hours after the Swiss bank receives instruction, money flows out of the numbered account to Fei Qian’s account in Dubai. Fei Qian poses as a global consultant with clients across Europe, and the money that has just flown into its Dubai account are fees from these clients. Swiss banks will never say why and where they transfer funds, while Dubai survives by instructing their banks not to ask such silly questions.
Step 2 is over. What follows is the last leg of the money flow — the passage to India.
Step 3: The Indian parent of Fei Qian receives the money as dividend income from its subsidiary in Dubai. The money may travel in tranches with decent intervals to avoid needless suspicion.
Indians with Swiss bank accounts couldn’t have asked for a better deal from New Delhi. Pay a 15% one-time tax and everything is forgotten and forgiven. Dubai has no tax. So, Fei Qian pays no tax — neither when it ‘earns’ the money nor when it distributes dividends to the Indian parent. The only tax that’s paid is 15% of the money after it comes to India. It’s a tax rate that’s 2-3% lower than Singapore’s, and half of what firms and individuals in India pay.
More and more individuals are beginning to spot the beauty of the 15% tax rule. It’s nothing but a backdoor amnesty scheme. A full-blown amnesty scheme, particularly calling it ‘amnesty’, would have stirred a hornet’s nest: bad press, hue and cry from the Opposition, public interest litigations filed by righteous individuals and embarrassing questions from Supreme Court judges. Why turn things ugly? Lower the tax on certain inflows from abroad and let smart guys figure out the rest.
What’s more, once the Dubai subsidiary is up and running, the Swiss bank account holders do not have to snap their ties with the banks that have guarded their secrets for years.
All they have to do is close the numbered account and let the Dubai Company open a new account with the Swiss bank. The money that’s not sent to India as dividend can come back to the new account in Switzerland. If the Indian government fishes for details on certain individuals after January 1 when the now-famous Indo-Swiss treaty comes into force, Swiss banks are not bound to talk on accounts that have already been closed. Numbered accounts will be history while new accounts opened by some Dubai firms will pass off as normal corporate business. Like Dubai, Switzerland too needs our money.
Source: Times of India, By Sugata Ghosh.
Bring back the money, legitimize it by paying 15% tax, & park it in any account with an Indian bank
SUGATA GHOSH
There’s some delightful news for those with Swiss bank accounts. Indians, who opted for such numbered account service, have a way to mislead anyone trying to hunt them down. For them, a new window in the tax law has flung open just when some of the doors are about to shut. The law of the land has made it possible for them to bring back the money, legitimize it by paying 15% tax, and park it in any account with a bank in India. No questions will be asked.
The taxman won’t harass them because it’s money on which tax has been paid. Officials at the enforcement directorate can’t slap a summon because it’s authorised transfer of funds from an overseas firm to a company in India through official banking channels. There are certain expenses involved as lawyers and accountants have to be hired to make the money transfer look genuine. You can’t really ask your Swiss banker to send the money straightaway to your savings account with the State Bank’s Santacruz branch. The man may think you have finally lost it.
There are other foolproof ways of going about with such business. A new company has to be set up in one of the tax havens, money has to be moved out from the secret numbered account to the account of the newly-formed company with another bank and then pay the amount as dividend to an Indian company. Ask your chartered accountant; he knows all about it, and even if he doesn’t, he will give you the telephone number of a professional who does. Such a professional will guide you through the maze of foreign exchange and tax rules to help you bring back the money that is rightfully or wrongfully yours.
Take one step at a time:
Step 1: Set up a company in Dubai. It’s easier than setting up one in India: Apply for a name with Dubai authorities and submit a simple memorandum. It will cost a few lakhs and will be done in a week. You will get an address, bank account and directors pooled in from an army of ‘service providers’ floating around in Dubai. (In a recent seminar, one of the Dubai state officials promised all assistance to Indian companies setting up arms in UAE). An Indian firm controlled by the Swiss bank account holder floats the Dubai subsidiary. This new subsidiary has a single purpose: to hold the money that will move out of Switzerland to Dubai, before it travels to India.
Step 2: Now, the money lying with the Alpine bank has to be transferred to a Dubai Bank, where the newly set-up company has an account. Let’s call this firm Fei Qian — the Chinese term for flying money. Since it’s unlikely that any company in Dubai will carry such a name, authorities in UAE will take little time in giving the permission. Hours after the Swiss bank receives instruction, money flows out of the numbered account to Fei Qian’s account in Dubai. Fei Qian poses as a global consultant with clients across Europe, and the money that has just flown into its Dubai account are fees from these clients. Swiss banks will never say why and where they transfer funds, while Dubai survives by instructing their banks not to ask such silly questions.
Step 2 is over. What follows is the last leg of the money flow — the passage to India.
Step 3: The Indian parent of Fei Qian receives the money as dividend income from its subsidiary in Dubai. The money may travel in tranches with decent intervals to avoid needless suspicion.
Indians with Swiss bank accounts couldn’t have asked for a better deal from New Delhi. Pay a 15% one-time tax and everything is forgotten and forgiven. Dubai has no tax. So, Fei Qian pays no tax — neither when it ‘earns’ the money nor when it distributes dividends to the Indian parent. The only tax that’s paid is 15% of the money after it comes to India. It’s a tax rate that’s 2-3% lower than Singapore’s, and half of what firms and individuals in India pay.
More and more individuals are beginning to spot the beauty of the 15% tax rule. It’s nothing but a backdoor amnesty scheme. A full-blown amnesty scheme, particularly calling it ‘amnesty’, would have stirred a hornet’s nest: bad press, hue and cry from the Opposition, public interest litigations filed by righteous individuals and embarrassing questions from Supreme Court judges. Why turn things ugly? Lower the tax on certain inflows from abroad and let smart guys figure out the rest.
What’s more, once the Dubai subsidiary is up and running, the Swiss bank account holders do not have to snap their ties with the banks that have guarded their secrets for years.
All they have to do is close the numbered account and let the Dubai Company open a new account with the Swiss bank. The money that’s not sent to India as dividend can come back to the new account in Switzerland. If the Indian government fishes for details on certain individuals after January 1 when the now-famous Indo-Swiss treaty comes into force, Swiss banks are not bound to talk on accounts that have already been closed. Numbered accounts will be history while new accounts opened by some Dubai firms will pass off as normal corporate business. Like Dubai, Switzerland too needs our money.
Source: Times of India, By Sugata Ghosh.
Sunday, May 8, 2011
Fraud-Fighting Over The Next 5 Years: The Future Of Claims Investigations
Over the next five years, we should expect dramatic changes in claims handling and fraud detection—mirroring emerging trends already evident in society today. What will this brave new world look like? What are the key trends, and what will be their impact on the claims-handling and fraud-fighting workflow between now and 2016?
Here are some predictions:
• The Explosion of Social Networking
Whether communicating via Facebook, Twitter, Tumblr, You Tube or other social networking sites, consumers are opening up their lives—and possibly revealing details that could be helpful to claims adjusters and fraud investigators. The trend has already begun, for example, with workers’-compensation fraudsters posting pictures and messages online, revealing that their health is much better than they had led claims administrators to believe.
• The Rise of Information Everywhere
Where is news, entertainment and e-mail accessed? Today, the answer includes TVs, desktop computers, laptops, iPads, smart phones and even gaming systems. While many of today’s information technologies are entertainment-oriented, in the not-too-distant future the entire claims process could well be carried out on these devices. The old model of sitting at a desk to do work is changing, as work moves with people to their cars and even to their pockets.
The impact for claims adjusters is significant. The current claims-analysis systems tied into desktop and mainframe systems will be available as mobile applications that will allow on-site claims information gathering as well as instantaneous claims-data analysis. We already see evidence of such trends in mobile access to estimating data for auto and property.
• Telematics
Today it’s possible to locate people by triangulating their position via their cellphone GPS. That technology is a useful tool in crime investigations. The next-wave technology in a similar vein is telematics. When telematics devices are installed in vehicles and transmit data, insurers know not just where but how drivers are operating their vehicles. The data provided by telematics devices can inform underwriting decisions and reduce misrepresentation of fact in auto accidents.
• New Uses for Satellite Photography
Today, satellite photography is used primarily for assessment of weather conditions and to assist scientists in measuring global change. Image resolution is getting sharper, however, and the range of available images is getting larger all the time. The impact for property-claims evaluation will be significant. In the future, checking the validity of property claims may be as easy as accessing high-resolution photographs of the property before and after a loss event, all done virtually—from anywhere in the world.
• Expanded Uses for Weather Data
Weather data has greatly improved meteorologists’ ability to predict storm systems. And the accuracy with which weather events can be measured has also significantly increased. Today, technology allows the detection of lightning strikes within a two-mile radius. In the future, data will be even more precise, affecting property claims in which unscrupulous property owners try to fake structural damages to receive payments. Weather forensics—such as detecting if or when there were lightning strikes or wind damage in the vicinity—will become easier in the future, helping investigators catch property owners and unscrupulous contractors who wish to take advantage of local weather events.
• Data-Driven Investigations
In today’s claims investigation world, claims adjusters collect information, and if something seems irregular, they alert the SIU staff. The investigator then makes phone calls, hits the street and knocks on doors to discover the facts of the case: a time-consuming and laborious process.
In five years, this model will be turned on its head. As soon as claims data is input, the system will begin searching through multiple channels of information to seek out suspicious data and behaviors. The explosion of information currently being generated—through social networking, news outlets, weather data, telematics devices, satellite photography and other data-gathering systems—will be accessed instantly, with each aspect of the claim being checked for possible fraud.
Predictive and network modeling will look at data to identify which claims require special handling or investigation. The data will tell investigators whom to pursue: the clinic that always bills just up to the threshold that won’t trigger an investigation; the claimant who uses four Social Security numbers; or the auto-repair shop that bills the insurance company for new parts but installs used ones.
In 2016, the speed of investigations will seem lightning fast in comparison with current methods. Once a suspicious individual or business is discovered, the investigator will be able to drill down with just a few clicks to put the case together. The old days of hitting the streets will be replaced with hitting the device. And in 2016, investigations will be as mobile as the personal communications routines of today.
• Point-Of-Sale Perimeter Defense
A decade ago, insurance applicants came into the office to apply for a policy, and the agent could actually get to know the applicant. Today, the personal interaction is being replaced by an online application—and what’s frequently lost is the ability to evaluate the applicant in a personal way. In five years, applicants will still be applying online, but the decisions of agents and underwriters will be supported by rigorous prescreening technology.
From the moment applicants begin to research an insurance product online, the screening system will begin to analyze their identities and their insurance and loss histories. The system will also look at other available records, such as whether there is a criminal or insurance-related fraud background. By the time the application is submitted, the system will already have gathered and scored information to know much about individual applicants and the risk of fraud. Insurers will be able to stop would-be fraudsters well before they become actual policyholders.
• Implications
In the next five years, developments in communications, information acquisition and analytic techniques will allow underwriting and claims staffs to collect better data perform better analytics and make better business decisions. The implications for insurance-claims handling and fraud fighting will be both exciting and challenging. Companies that move forward with technology but still maintain a collaborative relationship among the underwriting, claims and investigations staffs will have a leg up on the competition.
Source: Thomas Mulvey
Monday, May 2, 2011
Sebi favours self regulation for wealth managers
In its new set of rules for an estimated $1 trillion wealth management industry, Sebi is planning to set up an intermediary regulatory body with representation from among the wealth managers themselves.
In the proposed self-regulatory model, the market watchdog will put the onus entirely on wealth managers for compliance to the regulations and the new entity to be created under Sebi's guidance would work as the first-stage regulator as also market development authority, a senior official said.
The decision to set up a self-regulatory organisation for wealth managers has been taken with a twin objective of regulating them without hampering the growth prospects of this burgeoning segment of financial services sector, he added.
The SRO model, where the wealth managers or investment advisors would be asked to develop a stringent code of conduct in consultation with Sebi, would be complemented with stern penalty measures for erring entities.
Sebi would provide an initial funding of Rs 10 crore for setting up of this SRO for wealth managers, after which the industry would have to pool in their own resources.
The proposed move is in line with similar measures earlier taken for mutual funds and merchant bankers, whose industry bodies AMFI (Association of Mutual Funds in India) and Ambi (Association of Merchant Bankers in India) serve as first-stage regulators.
The new body would also serve as a medium for Sebi to implement its various initiatives for the wealth managers.
The new rules would cover entities offering wealth management or investment advisory services across various asset classes irrespective of the different financial markets.
These would include stocks, commodities, fixed deposits, derivatives, insurance, mutual funds, private equity, pension funds as also alternative investment products such as funds investing in art works, antiques, coins and stamps.
For past few months, Sebi has been in consultation with the government, RBI and other financial regulators for framing a new set of rules for the wealth managers.
Given the size of the industry, and therefore a higher risk of large-scale frauds or manipulations, the new rules would also allow Sebi and RBI to impose strict penalties.
Although there are no official figures for it, the size of wealth management industry is pegged at about USD 1 trillion -- nearly double the size a couple of years ago.
While RBI and Sebi would be primarily responsible for compliance of the rules, help would be sought from other regulators, namely commodity regulator FMC, insurance watchdog Irda and pension fund regulator PFRDA, whenever needed.
The proposed rules are also being discussed by the Financial Stability and Development Council (FSDC), a high-level regulatory body chaired by Finance Minister.
The need for new norms was felt after an estimated Rs 400-crore fraud allegedly perpetuated by a relationship manager at Citibank and initial probe into the matter pointing towards various loopholes in existing regulations.
Subsequently, the government roped in all the financial sector regulators to formulate the all-encompassing and stricter wealth management guidelines, given the huge surge in the size of assets managed by them.
The new set of rules would collate all the existing practices and regulations for wealth management space from the different regulators and thereafter seek to do away with the loopholes, if any.
Wealth managers, who mostly act as investment advisors for HNIs, are currently regulated by different regulators as per the sectors in which they are offering their services.
However, there are no comprehensive rules to regulate the wealth managers for services across various sectors such as banking, markets, insurance, commodity and pension funds.
After the Harshad Mehta scam in 1992, RBI banned banks' portfolio management services. Since then, banks are limiting their wealth management business to advising their wealthy clients without taking custody of the capital or assets.
Sebi does not allow brokers to insist on PoAs from their clients and might suggest the same for bankers and others. As such, the portfolio management services in the capital market are regulated by Sebi, but these regulations do not cover asset classes such as fixed deposits and other banking products, insurance, commodity and pension funds.
Source: The Business Standard
In the proposed self-regulatory model, the market watchdog will put the onus entirely on wealth managers for compliance to the regulations and the new entity to be created under Sebi's guidance would work as the first-stage regulator as also market development authority, a senior official said.
The decision to set up a self-regulatory organisation for wealth managers has been taken with a twin objective of regulating them without hampering the growth prospects of this burgeoning segment of financial services sector, he added.
The SRO model, where the wealth managers or investment advisors would be asked to develop a stringent code of conduct in consultation with Sebi, would be complemented with stern penalty measures for erring entities.
Sebi would provide an initial funding of Rs 10 crore for setting up of this SRO for wealth managers, after which the industry would have to pool in their own resources.
The proposed move is in line with similar measures earlier taken for mutual funds and merchant bankers, whose industry bodies AMFI (Association of Mutual Funds in India) and Ambi (Association of Merchant Bankers in India) serve as first-stage regulators.
The new body would also serve as a medium for Sebi to implement its various initiatives for the wealth managers.
The new rules would cover entities offering wealth management or investment advisory services across various asset classes irrespective of the different financial markets.
These would include stocks, commodities, fixed deposits, derivatives, insurance, mutual funds, private equity, pension funds as also alternative investment products such as funds investing in art works, antiques, coins and stamps.
For past few months, Sebi has been in consultation with the government, RBI and other financial regulators for framing a new set of rules for the wealth managers.
Given the size of the industry, and therefore a higher risk of large-scale frauds or manipulations, the new rules would also allow Sebi and RBI to impose strict penalties.
Although there are no official figures for it, the size of wealth management industry is pegged at about USD 1 trillion -- nearly double the size a couple of years ago.
While RBI and Sebi would be primarily responsible for compliance of the rules, help would be sought from other regulators, namely commodity regulator FMC, insurance watchdog Irda and pension fund regulator PFRDA, whenever needed.
The proposed rules are also being discussed by the Financial Stability and Development Council (FSDC), a high-level regulatory body chaired by Finance Minister.
The need for new norms was felt after an estimated Rs 400-crore fraud allegedly perpetuated by a relationship manager at Citibank and initial probe into the matter pointing towards various loopholes in existing regulations.
Subsequently, the government roped in all the financial sector regulators to formulate the all-encompassing and stricter wealth management guidelines, given the huge surge in the size of assets managed by them.
The new set of rules would collate all the existing practices and regulations for wealth management space from the different regulators and thereafter seek to do away with the loopholes, if any.
Wealth managers, who mostly act as investment advisors for HNIs, are currently regulated by different regulators as per the sectors in which they are offering their services.
However, there are no comprehensive rules to regulate the wealth managers for services across various sectors such as banking, markets, insurance, commodity and pension funds.
After the Harshad Mehta scam in 1992, RBI banned banks' portfolio management services. Since then, banks are limiting their wealth management business to advising their wealthy clients without taking custody of the capital or assets.
Sebi does not allow brokers to insist on PoAs from their clients and might suggest the same for bankers and others. As such, the portfolio management services in the capital market are regulated by Sebi, but these regulations do not cover asset classes such as fixed deposits and other banking products, insurance, commodity and pension funds.
Source: The Business Standard
Step back from regulating corporate governance
How regulatory systems should deal with corporate governance came to the fore at the annual conference of the International Organisation of Securities Commissions last week in Cape Town.
Opinion across securities regulators seemed to be evenly mixed.
A section of the opinion was for adopting a “light-touch” approach to corporate governance instead of a prescriptive regime, others felt that general statements of principle will never work with people fundamentally “unprincipled”.
What was evident is that every regulatory regime is grappling with how to regulate listed companies in relation to corporate governance.
Hand on heart, each regulator understands that there is no ideal framework to ensure best behaviour by companies listed in its market, although the approach of the regulators could vary from a completely prescriptive one to a system based exclusively on moral suasion of directors of listed companies.
In India, regulation of corporate governance in listed companies has come to stay with Clause 49 of the listing agreement prescribed by the Securities and Exchange Board of India (“SEBI”).
This framework essentially revolves around the composition of the board of directors having to include a certain component of independent directors with the hope that the independent directors would have some fear of reputation and litigation risk, and therefore, act as a check and balance.
Such an approach muddles its way around the subject. By appointing the specified number of independent directors one could claim to have attained technical compliance with the prescribed norm. However, every director, including the independent director, holds office at the pleasure of the shareholders.
Indian listed companies entail substantial concentrated shareholding in the hands of promoters, who therefore would have.
Therefore, Clause 49, through its various amendments, has become confused between whether it should target being a check and balance on the promoter, or on the company’s management.
The Reserve Bank of India’s (“RBI”) approach to corporate governance in banking companies, which may seem “light-touch” in approach (with statements of principles from the RBI on matters to which the banks’ boards should apply their minds to) the RBI has over-arching statutory powers to veto even the appointment of a single director to the board of a bank.
The RBI has the power to supersede the entire board of directors of a bank. Indeed, SEBI too reads such powers as part of its omnibus power to issue directions “in the interests of the capital market” under Section 11B of the SEBI Act.
In the past, SEBI has directed specific individuals not to associate with listed companies in any manner, which is nothing but a ban on becoming a director of a listed company.
Against this backdrop, the question regulators should ask themselves is what their real intended object is in the area of corporate governance.
It may be useful to introspect whether having a wider chest and broader shoulders with ever-increasing powers is a matter of pride, or whether facilitating private parties to settle disputes is a more effective approach.
One radical solution, particularly in common law jurisdictions such as India, is for governments to focus on cleaning up inefficiencies in the judicial system so that shareholders and stakeholders can settle scores with corporates and their managements in a judicial forum.
Fear of having to face expensive litigation and suffering a reputation risk alone would deter mis-governance and spur logical decision-making by corporate boards. Indeed, SEBI has instituted a scheme to fund class action suits by shareholders, and that is a foundation it should build on.
If trial of a suit for damages were capable of resolution within a reasonable period of time, regulators would be saved much time and energy spent in measures that make them look like chasing their own tails. Therefore, regulatory energy would be better spent in pushing governments to make courts work better.
The fraud by Satyam management provides us with a classic example. Satyam investors in the United States have been able to extract a settlement from the company for the accounting fraud committed by it and have been able to lay hands on real money.
In contrast, investors in India have and will lag behind, although the fraudster is Indian and the issuer of securities is Indian. SEBI may issue regulatory directions to individuals allegedly involved in the fraud under Section 11B of the SEBI Act “in the interests of the capital market”.
However, apart from giving the regulator the pride of having inflicted injury on an alleged wrong-doer, SEBI’s jurisdiction would enable it do precious little for the pockets of the investors.
It is only the court system that can use its jurisdiction to assess and award damages for wrong-doing. Our law-makers and regulators should strive towards making the private litigation and dispute resolution system efficient instead of expending tax-payer’s resources in regulatory interventions that do nothing for the bottomline of the investors.
Source: The Business Standard.
Opinion across securities regulators seemed to be evenly mixed.
A section of the opinion was for adopting a “light-touch” approach to corporate governance instead of a prescriptive regime, others felt that general statements of principle will never work with people fundamentally “unprincipled”.
What was evident is that every regulatory regime is grappling with how to regulate listed companies in relation to corporate governance.
Hand on heart, each regulator understands that there is no ideal framework to ensure best behaviour by companies listed in its market, although the approach of the regulators could vary from a completely prescriptive one to a system based exclusively on moral suasion of directors of listed companies.
In India, regulation of corporate governance in listed companies has come to stay with Clause 49 of the listing agreement prescribed by the Securities and Exchange Board of India (“SEBI”).
This framework essentially revolves around the composition of the board of directors having to include a certain component of independent directors with the hope that the independent directors would have some fear of reputation and litigation risk, and therefore, act as a check and balance.
Such an approach muddles its way around the subject. By appointing the specified number of independent directors one could claim to have attained technical compliance with the prescribed norm. However, every director, including the independent director, holds office at the pleasure of the shareholders.
Indian listed companies entail substantial concentrated shareholding in the hands of promoters, who therefore would have.
Therefore, Clause 49, through its various amendments, has become confused between whether it should target being a check and balance on the promoter, or on the company’s management.
The Reserve Bank of India’s (“RBI”) approach to corporate governance in banking companies, which may seem “light-touch” in approach (with statements of principles from the RBI on matters to which the banks’ boards should apply their minds to) the RBI has over-arching statutory powers to veto even the appointment of a single director to the board of a bank.
The RBI has the power to supersede the entire board of directors of a bank. Indeed, SEBI too reads such powers as part of its omnibus power to issue directions “in the interests of the capital market” under Section 11B of the SEBI Act.
In the past, SEBI has directed specific individuals not to associate with listed companies in any manner, which is nothing but a ban on becoming a director of a listed company.
Against this backdrop, the question regulators should ask themselves is what their real intended object is in the area of corporate governance.
It may be useful to introspect whether having a wider chest and broader shoulders with ever-increasing powers is a matter of pride, or whether facilitating private parties to settle disputes is a more effective approach.
One radical solution, particularly in common law jurisdictions such as India, is for governments to focus on cleaning up inefficiencies in the judicial system so that shareholders and stakeholders can settle scores with corporates and their managements in a judicial forum.
Fear of having to face expensive litigation and suffering a reputation risk alone would deter mis-governance and spur logical decision-making by corporate boards. Indeed, SEBI has instituted a scheme to fund class action suits by shareholders, and that is a foundation it should build on.
If trial of a suit for damages were capable of resolution within a reasonable period of time, regulators would be saved much time and energy spent in measures that make them look like chasing their own tails. Therefore, regulatory energy would be better spent in pushing governments to make courts work better.
The fraud by Satyam management provides us with a classic example. Satyam investors in the United States have been able to extract a settlement from the company for the accounting fraud committed by it and have been able to lay hands on real money.
In contrast, investors in India have and will lag behind, although the fraudster is Indian and the issuer of securities is Indian. SEBI may issue regulatory directions to individuals allegedly involved in the fraud under Section 11B of the SEBI Act “in the interests of the capital market”.
However, apart from giving the regulator the pride of having inflicted injury on an alleged wrong-doer, SEBI’s jurisdiction would enable it do precious little for the pockets of the investors.
It is only the court system that can use its jurisdiction to assess and award damages for wrong-doing. Our law-makers and regulators should strive towards making the private litigation and dispute resolution system efficient instead of expending tax-payer’s resources in regulatory interventions that do nothing for the bottomline of the investors.
Source: The Business Standard.
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