Godmen or Conmen? How India’s Religious Trust Laws Facilitate Money Laundering Empires

In the past two decades, India has witnessed the rise of so-called “godmen” (and “godwomen”), charismatic religious leaders who have amassed enormous fortunes. To take just a few of the most eye-popping examples: when the godman Sathya Sai Baba died in 2011, his holdings were valued at more than $9 billion. Another godman, Asaram Bapu, has a trust with an annual turnover of $49 million—which may seem like a lot, but pales in comparison to the over $1.6 billion in annual revenue earned by a company called Patanjali, controlled by yet another godman, Baba Ramdev. It would not be hard to supply many other examples. The godmen and their supporters will tell you that these empires are built on a combination of legitimate contributions and business savvy, and that the funds are used to support spiritual and charitable activities. But in fact there is ample evidence that the fortunes of these supposedly religious figures are tainted by extensive corruptiontax evasion, and money laundering.

One of the most common functions that godmen perform in the illicit economy is the conversion of so-called “black money” (unaccounted off-book money, often from illegal sources) into “white money” (or goods or services), in exchange for a hefty fee. Godmen are able to get away with this due to unfortunate features of India’s religious trust laws, which are opaque and riddled with loopholes, and leave religious trusts largely unchecked and unsupervised. Here’s how some of the godmen’s illicit schemes work:

  • Suppose you’re a crooked politician who has a lot of black money – from bribes, embezzlement, or illegal campaign donations – that you want to hide. A godman and his religious trust can help you. First, you make an anonymous cash donation to the trust. Religious trusts are allowed to take substantial cash donations without reporting the identity of the donor, so the trust can record the donation in its books—for them it’s “white” money, even if it was black for you. The trust then takes a hefty commission and transfers the money back to you. This can happen in a few different ways. First, the trust might exaggerate its legitimate expenditures (for example, inflating the amount it spent on food handouts to the poor) and give you the difference. Or the trust might hire you or a company you control to perform services for the trust, and pay you an inflated amount. (Although Section 11(5) of the Income Tax Act prohibits a trust from using trust income or property to benefit large donors, this rule cannot be applied in the case of anonymous donations, for which the donor is supposedly unknown.) Or the trust might purchase real property, allegedly for the organization or for charity, but actually allow you to collect rent from tenants. As long as nobody looks too closely, both you and the religious trusts can characterize these income streams as legitimate “white” money, even though their origin is criminal activity. 
  • Now suppose you, the crooked politician, are preparing to run for reelection, which is an expensive undertaking. You’d like to raise a lot of money from private interests (who will demand or expect favorable treatment in return) and use that money to buy votes by giving handouts to voters. India’s laws on campaign finance, political spending, and vote buying pose an obstacle, but here too your friend the godman and his religious trust can help. The first step is, again, an anonymous donation of the black funds to the religious trust. The trust then uses the money (after, of course, taking its cut) to provide handouts to voters—cash, food, TVs, etc.—at your direction. While the trust would make it quite clear to the voters that you, the politician, are the one responsible for the handouts, on the trust’s books these expenditures can be characterized as legitimate charitable expenditures.
  • Now suppose that, instead of a crooked politician, you’re a crooked executive at a large Indian corporation. India’s 2013 Companies Act requires sufficiently large or profitable companies to spend at least 2% of the firm’s average annual profit from the preceding three years on corporate social responsibility (CSR) activities. Donations to religious trusts can qualify as CSR expenditures. So, you can have your company write a check to your preferred godman’s religious trust; the godman takes his cut, and then discreetly returns the money in cash. 

Such unlawful conduct is pervasive in India, largely due to several weaknesses in India’s legal framework, especially as it pertains to religious trusts: 

  • First, India’s law does not sufficiently regulate anonymous donations to religious trusts. There is no way to guarantee that a donation is genuinely anonymous, in the sense that the trustees really don’t know who the donor is. For regular trusts, the trustees would have a strong incentive not to treat a donation from a known donor as anonymous, because while a trust pays a low tax rate (sometimes zero) on income received as donations from known sources, anonymous donations are taxed at the much higher rate of 30%. But religious trusts are specifically exempted from this rule. Thus, a donor can make anonymous donations to a religious trust, and the trust can accept the donation tax-free.
  • Second, there are few meaningful restrictions on how religious trusts can spend the money they receive. Under India’s Trust Law, as long as 85% of the donations received by a religious or charitable trust (excluding donations to the fund’s “corpus,” or permanent fund) are disbursed for the purposes for which the trust was established, the trust doesn’t have to pay tax on any of its donations. Thus, not only can 15% of a trust’s tax-exempt income be spend on any purpose, but even for the remaining 85%, the lack of a statutory definition of “purpose” means that there’s not much limit on the sorts of expenditures a religious trust could plausibly characterize as legitimate. Anyone can espouse faith in a godman, and thereby be a beneficiary of the largesse of that godman’s trust. A godman can justify expenditure anywhere, for the purpose of propagating religious beliefs, in a way that an educational trust or even a temple trust cannot. Religious expenditure can include luxury cars (for transport) to jewelry (for adorning deities) to property (to expand elsewhere). Furthermore, so-called corpus donations, which are tax-free for the trust and need not be utilized for a religious purpose, are even more vulnerable to corruption. A politician could “donate” to a trust’s corpus to get a building constructed, then directly collect rent from the building’s tenants in cash.
  • Third, the structural lack of oversight encourages violations of the law. Public trusts are not governed by a nationwide law. Most states have made their own laws, resulting in a fragmented scheme. Since income tax is collected by the central government, states have little incentive to monitor trusts’ activities. Although trusts must file annual accounts with the state charity commissioner, that only applies in states where such an office exists. If there is no state charity commissioner, the only annual filing is income tax returns, which are rarely scrutinized in the absence of a central database on trusts, or statutory scrutiny requirements. Devoid of oversight, trusts are not filing required forms, and are misusing tax exemptions. Furthermore, corporations’ CSR expenditures, in contrast to other types of company spending, do not require statutory auditors.

These weaknesses make religious trusts lucrative money laundering vehicles for the godmen who run them. Unfortunately, fixing this problem is complicated by an additional challenge: India’s leading godmen have large numbers of blindly faithful followers, who vote as a block and may even threaten violent repercussions for any action taken against their leader. This gives the godmen, and others who benefit from this corrupt system, a significant political advantage—sometimes known as “saffron protection,” so called because saffron is the color traditionally associated with Hinduism. Until this saffron shield can be overcome, and the problems with India’s legal (non-)regulation of religious trusts addressed, godmen will be able to continue to amass fortunes by helping crooked politicians and businessmen.

1 thought on “Godmen or Conmen? How India’s Religious Trust Laws Facilitate Money Laundering Empires

  1. Very interesting read on distrustful trusts. The corruption functions of these trusts resemble the use of markets for antiques and master paintings as money laundering business. The works of the famous artists are essentially bought and sold at unknown prices to an unknown bidders simply to hide or convert black money into white.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.