Govt plans crackdown on shell companies to counter money laundering

A task force with members from regulatory ministries and enforcement agencies has been constituted to monitor action against shell companies


The Serious Fraud Investigation Office has filed cases against 49 shell companies, as much as Rs3,900 crore have been laundered by 559 persons with the help of 54 professionals.
The Serious Fraud Investigation Office has filed cases against 49 shell companies, as much as Rs3,900 crore have been laundered by 559 persons with the help of 54 professionals.

New Delhi: The government on Friday announced a crackdown on shell companies that were used to launder money in the aftermath of the 8 November invalidation of high-value currency notes.

Bank accounts of such entities will be frozen and the benami law invoked as part of the drive, said a government statement issued after a meeting of investigative agencies at the prime minister’s office, or PMO.

The Benami Transactions (Prohibition) Amendment Act, 2016, gives the government powers to confiscate benami assets—those held in the name of another person or under a fictitious name to avoid taxation and conceal unaccounted-for wealth.

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Names of dormant companies will be struck off and steps taken to build a comprehensive database of such companies and their directors, whose Aadhaar numbers will also be captured, said the statement.

A task force comprising members of various ministries and enforcement agencies has also been set up to monitor the action taken against such entities and the professionals who aided in the creation and operation of such shell companies that do not have any operations in India and engage in money laundering.

According to data with the tax department, of the 1.5 million companies registered in India, only around 600,000 file their annual tax returns, leading to the inference that a large number of these non-filers “may be indulging in financial irregularities”.

The coordinated crackdown comes after instances of massive money laundering were identified by the government agencies after Prime Minister Narendra Modi on 8 November announced scrapping of Rs500 and Rs1,000 notes in a drive against black money, tax evasion and terror finance.

After monitoring a small sample of these shell companies, it has been found that Rs1,238 crore has been deposited in the accounts of such entities in the November-December period.

Further, 49 shell companies and other proprietorship concerns have been identified wherein it was found that 559 beneficiaries laundered money amounting to Rs3,900 crore with the help of 54 professionals including chartered accountants.

The Serious Fraud Investigation Office (SFIO) has filed for criminal prosecution of these entities and initiated the process for winding them up.

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The shell companies are being identified using data such as nominal paid-up capital, high reserves and surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income, high cash in hand, private companies as majority shareholders, low turnover and operating income, nominal expenses and minimum fixed assets.

“A meeting in the PMO was held along with senior officers of various departments to review the functioning of shell companies in India, so as to prevent their misuse for money laundering and tax evasion, especially in the context of unearthing black money post demonetization…,” said the government statement.

“In order to create a credible deterrence, a ‘whole of government approach’ will be adopted through coordinated efforts and by leveraging technology,” the government statement added.

The income-tax department has identified 10.9 million bank accounts where deposits ranging from Rs2 lakh to Rs80 lakh were made, with the average deposit size being Rs5.03 lakh.

Around 148,000 bank accounts received deposits of more than Rs80 lakh, with the average deposit size being Rs3.31 crore, according to figures given by the government in the union budget.

Suspecting that many of these may be deposits from illegal, unaccounted-for income, the income-tax department is using data analytics for matching the permanent account numbers (PAN) of depositors with information in various databases and isolating deposits with a common address, mobile number, email address, bank branch and business relationships to identify instances of tax evasion, Mint reported on 8 January.

“Large-scale money laundering has taken place post-demonetization. The noose is tightening around the money launderers,” said B.M. Singh, former chairman of Central Board of Direct Taxes (CBDT).

“The creation of a database is a good idea, but the challenge will be to prove that these entities are shell companies. It is also possible that the directors have got Aadhaar cards under fictitious names,” Singh added.

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