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India
08 May 2017

Black money crackdown - CBI investigation uncovers shell company network

Network of shell companies channeling black money: CBI

The Central Bureau of Investigation (CBI), in its ongoing three-year long investigation into black money, uncovered evidence of a clandestine web of 339 shell companies used to channel funds up to Rs. 290 crore.

According to CBI sources, the companies were used in round-tripping and diversion of loan funds along with creating fake invoices.

CBI can now charge fraudulent companies under various laws.

In context

Network of shell companies channeling black money: CBI

What is round tripping?

Round tripping is a means of tax evasion and black money generation. Under round tripping money is usually sent to tax havens under the pretext of payment for imports and then channelled back into the home country as foreign investment.

What are shell companies?

Background

What are shell companies?

Shell companies are corporations with no active operations. Although not illegal per se, shell companies are used for illegitimate purposes including tax evasion.

They are characterized by a small amount received from shareholders and low turnover, with the investors usually being companies with no profit.

According to an analysis, Indian shell companies have laundered an amount worth Rs. 3900 crore in 2016.

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Introduction

War on black money

The Modi government has been orchestrating a systematic crackdown against black money since coming to power in 2014.

Along with law enforcement, government has taken measures including demonetization and push for digitization through Aadhaar to crackdown on black money.

Revenue secretary Hasmukh Adhia had indicated that 9 out of 15 lakh registered companies which were not filing returns could be shell companies.

CBI investigation on financial fraud

About

CBI investigation on financial fraud

The discovery was made as a part of an ongoing CBI investigation into bank fraud cases involving 28 public and private sector banks along with probing about 200 cases involving funds worth Rs. 30,000 crore.

It has looked into fraudulent activities of companies including the Century Communications Group which previously ran the Mahua channel and Zoom developers for swindling funds worth Rs. 2600 crore.

Details

What has the CBI discovered?

Sources claim to have exposed shell companies and gathered enough evidence to implicate them under various laws.

It further noted that these shell companies are also spread in tax haven countries, rendering the investigation complex.

While in one case, a bank was falsely informed of the construction of a dental college, peons and cooks were shown as shell company directors in many others.

What could happen now?

Conclusion

What could happen now?

CBI intends to prosecute these companies for corruption and other associated offences. It also plans to refer cases to appropriate authorities set up under laws including the Companies Act, Benami Transactions (Prohibition) Act and the Income Tax Act.

Fraudulent shell companies can further expect to face harsh action including freezing of bank accounts and disciplinary actions for professional malpractice in assisting deviant shell companies.

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