SECRETS ABOUT SHELL COMPANIES

 

SECRETS ABOUT SHELL COMPANIES

Shell Companies are used for legitimate purposes but can be used for tax evasion, tax avoidance, money laundering, or to achieve a specific goal such as anonymity

SHELL COMPANIES IN INDIA

Shell Companies are also known as ghost companies, are quite popular among fraudsters, especially money launderers who wish to legitimize the source of their funds

TYPES OF SHELL COMPANIES

1) Anonymous shell companies

2) Shelf companies

3) Special Purpose Entities (SPE)

4) Letterbox companies

KEY TAKEAWAYS OF SHELL COMPANIES

1) Shell companies are often used to facilitate money laundering by obscuring the money trail and creating false invoices

2) Regulatory efforts have been implemented to increase transparency, identify shell companies used for money laundering and protect the integrity of the global financial system

3) Businesses must implement risk-based AML strategies such as beneficial ownership verification and transactional activity monitoring in order to detect and prevent misuse of shell companies and associated activities like money laundering

WARNING SIGNS OF MONEY LAUNDERING THROUGH SHELL COMPANIES

1) Unusual transaction patterns, such as frequent transfers of large amounts of money to and from the company

2) Inconsistent or incomplete documentation for transactions

3) Lack of physical presence or legitimate business operations

4) Complex ownership structures or nominee directors

CHECKS TO IDENTIFY SHELL COMPANIES

1) Probe for ultimate beneficiaries

2) Check if the company owns insignificant assets given its financial position

3) Check historic P & L statements for nil or marginal operations

4) Check if there are frequent changes in management

5) Check if the email is used to register the business is valid

6) Check if the target is a Struck off company

7) Check if the target is flagged as a defaulting company

8) Check if the target is flagged as a vanishing company

9) Check if the directors are flagged as defaulters

10) Check if the directors are flagged as proclaimed offenders

11) Check if the target is flagged as SFIO (Serious Fraud Investigation Office)

12) Check if SEBI has debarred any of the promoters

13) Check if SEBI has debarred the company previously

14) Check if the entity has been flagged as a shell company by SEBI if a listed entity

15) Check if the beneficial owners are associated with companies flagged by the SEBI as shell entities

16) Check if the entity has been prosecuted for GST fraud

17) Check if the number of employees through EPFO registration

18) Check if the entity has PEPs in the management

19) Check if the entity of beneficial owners is sanctioned by OFAC, UN or EU

20) Check if the entity has parent firms or subsidiaries in tax heavens

REAL EXAMPLES OF MONEY LAUNDERING SHELL COMPANIES

1) Danske bank scandal

2) Panama papers

3) Unitouch Group

4) Los Zetas Drug Cartel

ANONYMOUS SHELL COMPANIES

The ultimate beneficial owner is concealed behind the corporation or a network of connected shell companies in other jurisdictions, providing anonymity and control over company's resources

They are frequently connected to illegal activities

SHELF COMPANIES

It is a type of company that has previously been incorporated but has never done business

It is kept until sold to a buyer who can use it to launch a new firm using an already known company name, avoiding the process of starting a new corporation from scratch

SPECIAL PURPOSE ENTITIES (SPE)

This type of company primarily engages in group financing or holding activities, with few employees and little physical presence in the host economy

It's assets and liabilities include investments made abroad and are frequently used for aggressive tax planning

LETTERBOX COMPANIES

This type of corporation is registered in one state but operates in another state

This can be used to get around labour rules of the nation where the activity is taking place

MODUS OPERANDI OF SHELL COMPANIES

1) Create a shell company

2) Enter into fake transactions

3) Park the amount as investments

4) Evasion of taxes to hide illegal transactions

 

TAX HAVEN

A tax haven is a state or a country or territory where certain taxes are levied at a low rate or not at all while offering due process, good governance and low corruption rate

TOP TEN TAX HAVENS IN A YEAR 2017

1) The Bahamas

2) Hong Kong

3) Switzerland

4) The Cayman Island

5) Luxembourg

6) Malta

7) The Isle of Man

8) Monaco

9) Mauritius

10) Singapore

IMPACT OF SHELL COMPANIES ON THE STOCK MARKET

1) A margin funding crisis

2) Sensex and Nifty fell nearly 1%

3) Raising volatility Index

4) BSE midcap and BSE smallcap indices registered heavy loss

5) Loss of genuine investors and trustworthiness

6) Problems of raising funds by new enterpreneurs

ADVANTAGES OF SHELL COMPANIES

1) A shell corporation can help an individual to avoid paying taxes and gain access to new markets

2) It can help an individual to gain access to foreign stocks and exchanges

3) It helps an individual to avoid lawsuits, especially if the country is protected from the US

4) It can protect the owners identity, especially if the investors want to avoid scrutiny from the local authorities of their country

DISADVANTAGES OF SHELL COMPANIES

1) It can be risky for a company

2) Once caught, it damages creditability and potential for future business

3) Owning a shell corporation to avoid paying taxes can lead to criminal investigations from the country where taxes are owned

4) Trying to hide assets from the government's eye can be very expensive

COMPILED BY : SRI AVINASH KULKARNI

R V SECKAR , FCS , PCS , 7904719295