Indonesia and India have embarked on big, bold and historic hunts for hidden assets. The moves come amid a global shift in attitude toward tax avoidance and offshore holdings but the emerging economies have singular reasons for seeking undeclared riches. Each wants fresh cash for much-needed infrastructure projects and a chance for a fairer distribution of wealth.
JAKARTA/NEW DELHI In the last days of September, in the dark of 3 a.m., people began queuing outside a single government building in central Jakarta. They were clutching financial papers that in some cases exposed offshore accounts worth billions of rupiah. Two months earlier, President Joko Widodo had launched a massive tax amnesty campaign to repatriate hidden assets to Indonesia. As the first reporting deadline loomed, crowds swelled into the office that handles the tax affairs of the country's wealthiest individuals and companies.
More than 10,000 people a day answered the president's pitch in September: declare assets now and take advantage of a discounted tax rate -- as little as 2% compared to 25% -- and, in turn, be part of Indonesia's future. Revenue from the nine-month amnesty, continuing through March, is promised to build railway networks, ports and airports in a country whose prospects, politically and economically, have been on the ascent.
Widodo, who was elected in 2014, has cast the program as good for business -- and pivotal to the next generation. Twice before Indonesia tried amnesties to lure money back home but those efforts in 1964-65 and in 1984 failed, in part, due to poor incentives. Now Indonesia has calculated that political stability and a dramatic drop in the tax rate could help to bring in an estimated 11,400 trillion rupiah ($851 billion) parked overseas.
"We have a large amount of money outside," Widodo told a group of businessmen in Jakarta this summer. "What is most important now is to bring this money back to our country. We need your participation right now to build the nation."
Indonesia's call for revenue echoes across many countries in Asia where private wealth has risen steeply in the past decade. New wealth accounts for about 60% of the total wealth growth in the Asia-Pacific region excluding Japan and, by 2019, the region is expected to account for 26% of all global financial wealth, according to a recent Boston Consulting Group report. It is those potential taxpayers that emerging economies want to rein in as partners in their next phase of development.
India has taken more radical steps this year, starting with amnesty and then launching a wholesale assault on its shadow economy by banning high-denomination bank notes. Life in the cash-starved society has morphed into a kind of collective suffering. But both India and Indonesia see their experiments as helping to secure economic ballast at a critical time to attract domestic and global investment. Transparent accounting at home will help each country to prepare for tougher global standards for financial information that will go into effect next year.
Indonesia's hunt for revenue is spurred by ambition for this country of 20 million taxpayers. It has enjoyed 5% annual growth for the past few years. In order to keep this growth momentum, the country needs to build and improve its infrastructure such as airports and power grids. The government has estimated 5,500 trillion rupiah is needed through 2019 for infrastructure; the state budget can likely cover a quarter of that.
Amnesty became appealing first to trade associations, law firms and major developers that liked the lower tax rate -- and possibly saw future government contracts for big construction. Wealth managers said tax rates were locked in depending on how early declarations were made. That sparked the September rush. "Just with 2% or 4%, you can bring the 'dark' money under the sun," said a private banker in Singapore. "Once you declare amnesty, the money is no longer 'dark.'"
Hariyadi Sukamdani, chairman of the Indonesian Employers Association, said nearly all 15,000 members of his group joined, in part because of important assurances. Beyond the new low rates, amnesty doesn't require tax officials to trace the origins of the assets and it prohibits the disclosure of information, even to law enforcement.
Sukamdani said amnesty also prepares Indonesia for new global transparency standards, including regulations by the Organization for Economic Cooperation and Development known as the "automatic exchange of information." More than 100 countries, including Indonesia, Singapore and Switzerland, are committed to the regimen that goes into effect in January, with bilateral reporting following in 2018. "Of course, those who have bad intentions to hide things illegitimately, they will always find a way," said Sukamdani. "But they realize that one day the [AEOI] will be established. ... It will keep improving."
Lawyer Hotman Paris Hutapea said he had a personal reason for declaring his hidden income. He no longer wanted to play hide-and-seek with tax officers for dozens of properties he owns. "What I hid was cash," he said in a televised interview. He used the cash to buy properties but would mask the money, in required filings, as a loan from a bank. "Now we don't have to do all the tiring work of pretending to use loans."
An entrepreneur in his 20s who asked to remain anonymous said that his family had secret assets in Singapore. Many families sent their wealth there after the 1998 financial crisis, when tensions in Jakarta prompted the burning of Chinese-Indonesian businesses, he said. But now, he and his father, who run a large family business, agreed such risks had eased. The middle class had grown; so had business opportunities. He and his family were declaring accounts and would gradually bring back funds. "There will not be a complete exodus [from Singapore] but in reality, people will bring back money to Indonesia," he said.
The efforts to corral big assets unsettled Singapore, one of Asia's leading financial centers that is estimated to hold more than $200 billion in assets from Indonesians. Account holders who notified financial institutions in Singapore that they would apply for amnesty suddenly found the financial police involved. Singapore police and the Monetary Authority of Singapore, the financial industry watchdog, had informed banks there to file suspicious transaction reports whenever anyone sought to participate in tax amnesty.
Singapore's regulations require an STR whenever there is a prospective amnesty case. A spokesman for the Monetary Authority said that this is according to the international practice and is in line with other jurisdictions, and an STR did not necessarily trigger a criminal investigation.
According to financial sources, Singapore banks offered some of the wealthiest Indonesians better interest rates if they would declare but not repatriate their money. Sukamdani said it was perhaps a "natural reaction" by some banks to try to prevent money flowing out of the country but, as of late, such offers have subsided. "From polite ways to insolent ones, Singapore did it all," he said. "[But] they no longer do such things because all the big [Indonesian] taxpayers have completed their applications."
Repatriation itself has been slow but even early critics -- including the OECD, which had described the amnesty as rewarding tax cheats -- concede that Indonesia's effort has encouraged transparency. As of Dec. 19, 141 trillion rupiah had been committed for repatriation, just 14% of the target. The number of participants declaring assets, though, has been far more encouraging. From July to mid-December, there were 508,000 participants and a total of 4,035 trillion rupiah of assets declared, equal to 30% of the country's gross domestic product. The government collected 101 trillion rupiah in revenue as of Dec. 19, about 60% of the target. That could translate -- in real terms -- into thousands of miles of new highway and two rail projects proposed for underdeveloped regions in eastern Indonesia.
Indonesia's director general for taxation said that the next phase of the tax amnesty will be challenging. Small and medium-sized businesses -- part of the informal sector that had been barely exposed to the tax office -- will be encouraged to reveal their accounts. "Compared with other countries, we're better, in terms of the revenue and the amount of asset declared ... [but] we don't think it has met our hopes," said Ken Dwijugiasteadi, the director general.
While Indonesia has pursued a single, clear and well-publicized program to find hidden assets, India has launched a multifaceted assault to find revenue in a country where only 1% of the 1.25 billion population pays income tax.
Demonetization -- a ban of 500- and 1000-rupee notes that the government said were the favored currency used by terror and crime groups -- has been the most visible part of its effort. But Indian Prime Minister Narendra Modi said he gathered 10 months ago with a small group of confidants to plan a rolling campaign to root out "black money," assets and cash that previously escaped taxation, as well as to stanch illicit cash flows.
It has made for a tumultuous year for nearly every Indian household.
From June to September, the government embarked on a much-publicized program for people to self-declare secret assets. The first such tax amnesty in nearly 20 years drew in a disappointing 673 billion rupees ($9.93 billion) from 71,726 people. Soon after, Modi authorized raids of high-net-worth individuals' homes and offices.
In October, investigators uncovered documents from at least one law firm suspected of coordinating offshore schemes. The information helped them track additional possible scofflaws, a source told the Nikkei Asian Review. Two months later, Rohit Tandon, the managing partner of prominent New Delhi firm T&T Law, was taken for questioning by police who said that they had found 135 million rupees in his office "stashed in cupboards, suitcases and cartons." Days before the questioning, the lawyer told the Nikkei Asian Review that allegations of any impropriety were false. "Most of it is just a bunch of lies," he said.
Nov. 8 was the ultimate game changer. From midnight, the government banned high-denomination notes, sucking out 86% of the currency in circulation by value from a predominantly cash economy. People were given until Dec. 30 to deposit the banned notes into their bank accounts.
Modi, who had pledged a crackdown on hidden wealth during his 2014 election campaign, described the quick switch as a short-term evil. The ban was aimed at tax evaders, he said, as well as groups who deal in counterfeit money including Pakistan-based terror groups that fund activities against India.
Instant demonetization, though, quickly convulsed the lives of India's working class.
Mom-and-pop stores couldn't make change. Brides had no cash to buy prenuptial gold. Realtors couldn't clinch deals. Banks struggled with customers lining up for hours to withdraw cash. Political parties, too, were dealt a blow. According to media reports, many apparently had unaccounted-for cash in their war chests to fuel campaigns for crucial assembly polls in 2017 and suddenly found themselves much poorer.
The chaos fueled some innovation in a country where 80% of the people live on $2 a day. This month, small shop owners were expanding use of credit cards and learning how to accept digital payments. Digital wallets such as Paytm found ready customers. Money launderers seemed to survive -- with television channels broadcasting daily reports of police seizing millions in new notes and stories of bank employees offering to trade in old notes for a cut of the transaction. People without the means or technology to adapt, though, faced hard times. "I have run out of smaller bank notes, and it has become very difficult to buy household essentials," said Sushila Kukreti from northern Uttar Pradesh state. She had walked away from a bank where more than 100 people stood in line ahead of her.
Analysts predict the currency ban will affect broad sectors of the economy, including industry, agriculture and services in the near term. Fitch Ratings lowered India's GDP growth forecast for the fiscal year ending in March 2017 to 6.9% from 7.4% to reflect "temporary disruptions" in economic activity. Former Prime Minister Manmohan Singh, an economist, said the national income could decline by 2%. "This is an underestimate, not an overestimate," he said.
India's experience has made some wonder about the stakes in the hunt for hidden assets. Analysts have cautioned that tax amnesties alone often result in short-term gains for the government and, if repeated, encourage companies and individuals to thwart authorities until they can take advantage of favorable rates. The efforts by India and Indonesia couldn't be timelier and, in some ways, are admirable. But there are few illusions about how they will be challenged by wealth experts.
Wealth management firms have been expanding this year in Hong Kong and Singapore with a growing market for more lightly regulated trust products and private trusts. Economist Gabriel Zucman, in his 2015 book, "The Hidden Wealth of Nations," said both cities benefited from Europe tightening information sharing on foreign residents in 2009. The search by some global wealth-management groups and banks, he said, has been "a simple shell game" to locate jurisdictions with the most advantageous laws.
Sophisticated investors and wealthy families will always be searching for privacy and confidence in how their money is secured and governments will be hard pressed to keep pace. "Thinking of Indonesia in 1998 or India's latest currency reform gives you a good idea as to why people in these two countries want a safe foreign place for their money," said Jason Sharman, professor of governance and public policy at Griffith University in Australia. "Offshore is often told as a story of greed, which it often is, but it's even more a story of fear. Often justified fear."
Nikkei staff writers Mayuko Tani in Singapore and Joyce Ho in Hong Kong contributed to this story.