Time to tackle the shell companies

Hyderabad: Shell companies are becoming a common phenomenon globally and even in India. These companies are posing several challenges to governments and regulators for various reasons had been probing their involvement in large scale money laundering and tax avoidance cases.

A shell company is a non-trading organisation that does not engage in any activity but exists only as medium for another organisation’s business activity. These companies are usually listed on the stock exchange and are not illegal inherently; however a significant number of them are used as a means for illegal activities like tax avoidance or for trying to cover up a trail of money. Such companies exist only on paper and have no physical presence.
In the past, shell companies have been involved in tax evasion, bankruptcy frauds, fake services schemes, market manipulation and money laundering.

Modus operandi
These companies are floated primarily by people who hold large unaccounted money. These companies turn the illegally held money into legal for which tax has been paid and the source is accounted for.
After these companies are formed, the shares are sold at high premium to other businessmen or investors. Such investors are given coveted deals which may include land or such assets as reward for investing.
Companies which want to hide their actual profits buy and sell through shell companies that are based in one of the tax havens. Transacting through such shell companies ensures that the initiating company does not have to report its transactions and is thus successful in avoiding taxes. This kind of activity is largely seen in the infrastructure space. These companies are also used to deal with complex transactions, protecting trade secrets and as a tool in mergers.

Combating hidden companies
Countries globally have created special cells to address the issues relating to such companies. A 180-nation body Financial Action Task Force (FATF) was created in 1989 with India also being part of it to combat money laundering, terrorist financing and other related threats to the integrity of the international financial system.
India has seen a surge in shell company involvement in many recent scams such as Coalgate, 2-G Spectrum, CWG. Places such as Cayman Islands, Mauritius; Lichtenstein known for being tax havens are the hub for such activity.
Saradha Group in West Bengal duped a lot of investors with a promise of unusually high returns. The group tricked mostly small investor and siphoned of almost 17,000 crores. Bank of Baroda is facing a probe for an alleged Rs 6,000 crore money laundering where involvement of shell companies has come to light.
Often fake will exist only in paper and have no office or staff working for them. Researching their business activity should give adequate clues. One needs to suspect companies that promise unduly high returns in a short span