There has been a raging controversy in India these past months around 'recovering black money' stashed abroad. All kinds of legal and political battles are being fought on the size, significance and ownership of black money kept abroad by Indians. Do NGOs have black money? Do international flows to development NGOs include black money? Does Indian development sector create black money? Does it get stashed abroad?

Firstly, the problem of black money in India is essentially Indian, domestic. The size of the parallel, black economy is estimated to be about equal to the size of the 'white' economy in the country. Movement of cash, payments of cash in purchase of real estate and storage of cash in large amounts are all indicators of widespread generation and use of black money in the country.

Second, donations to development NGOs in India come largely through bank transfers and such instruments. However, a large percentage of donations to religious trusts (like the TirupatiTemple Trust) are made in cash. Transactions made in cash, including gold/silver etc, are much likely to be forming a part of the 'black' economy than those made through instruments of checks, drafts and bank transfers. Such donations to religious trusts are seen to be helpful in 'washing away sins'.

Third, it has been reported that more than two thirds of all private educational institutions (from nursery to universities) are set up by builders and politicians; these two sources of investment in educational infrastructure are also alleged to be the main sources of possession and generation of 'black' money. This approach converts black into white in more ways than one, since colleges end up producing white-collar employees.

Then, there is the widely held view amongst officials of tax departments that non-profit Trusts are set up by businessmen to 'siphon off' some part of the profit from the business to a 'personally available cash'. It is precisely because of this worldview that Income Tax authorities in India start by treating Indian NGOs 'guilty unless proven otherwise'.

What about flow of funds from 'foreign' sources? Recall that a lot of international concern was expressed after 9/11 attack on twin trade towers in New York about the flow of funds to terrorists. Also recall that 2-3 international non-profits were found to be 'transferring charitable donations to certain entities in countries suspected of 'funding' terrorism. Following this finding, the US government made all private foundations (like Ford, Rockefeller, etc) to agree to an anti-money-laundering provision in their contracts.

Under the aegis of the United Nations, a treaty to prevent money-laundering has since been signed, and now being enforced in India too. Under this treaty's obligations, the banks in India regularly ask NGOs to sign up to anti-money-laundering commitments.

However, receipt of any foreign 'donation' to Indian NGOs is monitored through the Foreign Contribution Regulations Act (FCRA) housed in Ministry of internal Security. All such transactions are routed through a designated bank account, and regularly reported to both the ministry and the regulator. In that sense, it is rather unlikely that Indian NGOs would be able to 'bring in' any black money from abroad.

However, the larger question in this debate is the nature of regulatory framework in a country like India. The legal frameworks available for incorporation of a non-profit entity are limited, and more than a century old in their design and mechanism. In the absence of any meaningful differentiation at the stage of incorporation itself, all entities registered as Trusts or Society can be suspect, since they also include religious, educational and other types of charitable institutions.

Many efforts have been made by development NGOs to ask the national government to create a more modern legislation with differentiated mechanisms for different types of entities; none have succeeded so far. Attention to NGOs, their incorporation and financing gets attention only when debate on 'black or white' occurs. There surely can be a more 'relaxed' time for serious policy-making for development NGOs?

Rajesh Tandon
November 16, 2014