Soon, criteria to spot shell companies that launder money

NEW DELHI: As part of its effort to curb black money, the National Democratic Alliance (NDA) government is seeking to finalise a list of 10 criteria to identify shell companies that are being used for tax evasion and money laundering, and trying to put in place an automated system to tackle such entities, two officials with knowledge of the matter said.

First off, the government will attempt to define a shell company, a term that is used for entities that are typically thinly capitalized and have minimal assets, employees and operations, but a definition for which doesn’t exist so far . Such entities, which are used mainly for financial transactions, are different from dormant and defunct companies, one of the officials cited above said on condition of anonymity.

Other potential red flags include the share capital of a company not being proportional to its revenue, the bank balance not matching the revenue it generates , and inflows of money being immediately followed by outflows..

The government has been cracking down on shell companies as part of its larger effort to tackle black money, or income that is unaccounted for and hidden away from the tax department. In 2016, the government invalidated high-value banknotes and enforced a tougher law to deal with benami properties, or assets whose real beneficiaries purchase them in the name of someone else or a fictitious name.

A task force set up u in February 2017 has struck 226,000 companies off official records for not filing annual tax returns for a period of two years or more. The government recently said that it had identified another set of 225,000 companies that have not filed returns since 2015-16.

This task force was created after the demonetisation drive of November 2016 to check the menace of shell companies and speed up action against them.

Once the criteria for identifying shell companies are in place, “the rules will be fed to an automated system that is being developed,” a second official said.

“Once a suspects’ list is created, enforcement officials will begin a probe,” the official said.

The government is also working to create a system that will enable seamless exchange of information between the ministry of corporate affairs,the tax department and the enforcement directorate (ED) to identify and probe shell companies created solely for tax evasion and money laundering.

“Once the Registrar of Companies (RoC) identifies these dubious companies created to evade tax and launder money, the information will then be sent to the tax department or ED to conduct the probe and begin prosecution,” said the first official cited above.

While the RoC can scan the books of companies under section 206 of the Companies Act, 2013, it does not have the powers to probe tax evasion and money laundering, which are vested with the the tax department and ED, respectively. “Defining shell companies is a much needed move to regularise the system. OECD (Organisation of Economic Cooperation and Development) is looking at identifying harmful tax practices around the world and India’s definition of shell companies will definitely lead the way in checking...paper companies,” said Girish Vanvari, founder of Transaction Square.