A U.S. one dollar note is frozen in a block of ice. (Photographer: Alastair Miller/Bloomberg News)

‘Shell Companies’, MCA’s New Form, And The Colour Of Money


“The only way to stop the flow of this dirty money is to get tough on the bankers who help mask and transfer it around the world. Banks themselves don’t launder money, after all: people do.”

Robert Mazur, the former U.S. federal agent who worked as an undercover money launderer, speaking in January 2013 after the HSBC fine.

‘Shell companies’. Legitimate entities. Less than legitimate uses. Create a maze to route money with a view to masking the legitimacy of money as well as mask the people behind the money. Evade taxation and/or foreign exchange rules.

The problem is never the ‘shell companies’ per se. They are mere vehicles in the journey of transporting money with a view to masking ownership and/or evade taxation.

Trade and money flow across borders with minimal fuss. However, laws are local and do not cross borders. Every country zealously creates legal systems designed to bring and hide as much capital as possible. Look at the money that escapes developing nations and hides in economies like the United Kingdom and the United States. Of course, we all think that only Mauritius, British Virgin Islands, St. Kitts, and other tax havens help mask ownership and money flows. It is not true at all. In the UK, it is impossible to trace property ownership. And now we have local states within the U.S. competing to attract capital that wants a hiding place.

Starting with demonetisation, there has been a concerted effort to choke the parallel economy and bring it into the mainstream. There are three possible ways in which to tackle this problem. One is by tracking money flows, investigating companies and balance sheets and bringing the culprits to book. The other is to identify common vehicles and choke them. The third one is to use a combination of both. To me, it looks like the government is trying to weed out the empty ones which can serve as vehicles for disguising money flows. And it is being done with speed and suddenness, which is causing discomfort as well as some anger. The focus seems to be on choking the routes available for domestic entities.

Also read: Shell Crackdown: Companies Now Need To Prove They’re Alive. But To What Effect?

Intentions are good. The problem, sometimes, lies in the execution. Some of them (the recent one which talks about uploading of a photo of a signatory in the office premises which is shown as the registered office and of the building where the office is located) are annoying and at some point, seem humourous.

After all, based on the returns filed, one can make out if a company has a business or is a ‘shell’ company.

In the old days, forming a company would take forever. This would act as a hold-up when an enterprise needed a special vehicle to handle some business. It became a practice to follow the boy scout motto and keep a few ‘shell’ companies in the bag. And ownership and shareholding were post-facto determinations, so the companies would be incorporated with some office executive in the lead and, with minimum paid-up capital.

Nowadays, the Ministry of Corporate Affairs is willing to speed up things. However, we do not have a guarantee that a company can be incorporated in a day or two. This is something that the MCA should be able to guarantee.

Now we come to the real business. When I want to hide from the taxman, what do I do? I consult the ‘experts’ – my chartered accountant and my lawyer. They are happy to show me ‘structures’ – offshore or onshore or both, depending on where my source is and where I would like to take my wealth. There are also ‘foreign’ experts who represent ‘wealth management’ businesses with investment banks or broking firms as well as representatives of foreign ‘enablers’. Today, I could probably set up a masked chain of entities by simply using the internet. Ergo, if I want to take capital overseas or own assets offshore, the MCA will not be able to do anything.

I can go to London, spend a couple of hundred pounds and buy companies with addresses and directors. I can buy property in London which I will control and own, but no trace will be available. The Indian government cannot pierce the corporate veil in the U.K. Or America. Or any other country.

I can use global trade to move money wherever I want. This route is fertile and extremely difficult to rein in.

Money can cross all geopolitical barriers. So, plugging spaces here is not going to be of much use.

What is needed is better intelligence to tackle the flow of money. Forensic accounting and checking are the need of the day.

Money is moved through banks, whatever be the underlying cause. The world has yet to learn to sniff at banking transactions which are the primary facilitators. If every registered company and every bank transaction is tagged, at some stage it should be possible. The only thing is that given the speed of money flows and the sheer number of transactions, it becomes a herculean task. Add to that the emergence of virtual currencies like Bitcoin, the crook is always one step ahead of the law.

Using simple things like PIN code checks to complex algorithms that can measure bank flows to capital, loans, acquisitions, preference share capital structures etc. will reap rich rewards. Putting procedural or compliance checks will probably help, but not be a deterrent. Imagine a few lakh companies filing all the forms. It will still need intelligence and subjectivity to trace and track funds flows and ownership. And once money crosses borders, our laws do not work there.

These new regulations will reduce the options domestically available. There are stories of hundreds of companies at the same addresses. That, did not need the new form. A simple reverse match, starting with the PIN code, can throw this up. A photograph of a building or an interior that needs to be updated, can easily be generated out of any address. Yes, the person who now signs on as a director has to be careful. Big names will back away from being on boards. A lot of hapless employees will continue to be directors on these kinds of companies.

Today, when returns are filed, it is possible to dig out which ones are shell companies. And which dormant ones got suddenly activated. It did not need the additional details in the new forms.

The forms seem to have been designed to make compliance more complex and expensive rather than deter money laundering.

The world over, white-collar crime does not carry punishment that deters. And given the niceties of the law, the white-collar criminal generally escapes. It is estimated that less than one percent of global flows of illicit money/assets are ever traced. Politics, power, and money. These are an unholy trinity. Their nexus is strong and the best of intentions and the most complex of forms are not a show stopper. The owner of the wallet always owns the law.

R Balakrishnan is an independent consultant and has been in financial services for over three decades.

The views expressed here are those of the authors and do not necessarily represent the views of Bloomberg Quint or its editorial team.