black-money

What is letterbox companies?

DAINIK NATION BUREAU

When officials of the Registrar of Companies (RoC) raided a tiny office in Hyderabad’s Jubilee Hills area in July, they found 25 employees running 114 companies out of a single room. Most of the entities were owned by family members of B Ramalinga Raju, the man behind India’s biggest corporate fraud — the Satyam Scam.

Kolkata is notorious for such operations. The city tops the list of most companies registered at a single address. Last year, Registered Companies, an analytics firm specialising in corporate due diligence, crunched the government data and found that 1,410 companies were registered in different blocks of the 9/12 Lal Bazar Street area with 84 of them based in Room No. 10 in one block. A little over 11,281 firms were registered at 148 addresses, an average of 76 each.

Often called “letterbox companies”, shell companies exist only on paper. These companies launder money through fake transaction and invoices. They weave a complex web of accounting to help other companies evade taxes.

The Narendra Modi government has found a smart way to tackle the problem of shell companies — geo-tagging. The Ministry of Corporate Affairs (MCA) might ask companies to geo-tag the location of their registered offices in the statutory filings with the RoC, Mint reported. Geo-tagging will help the government identify cases in which one building houses hundreds of shell companies.

The Special Investigation Team on black money headed by retired Supreme Court judge MB Shah had asked the government in 2015 to ensure greater vigilance on multiple companies having the same address and directors. “Use of shell companies to provide accommodation entries to launder black money has been observed in a number of high-profile cases investigated or under investigation in the recent past,” the SIT said in a report.

However, many companies operating from one address is not a violation in itself. There is no limit on companies that can be registered at the same address. Consultants typically house the registered offices of companies for which they handle compliances, a practice common in Singapore and Mauritius as well.
the government believes a large number of such companies are used merely for money laundering. Geo-tagging will help the government pin down such shell companies.

The Narendra Modi government has been fighting a relentless war against shell companies. Last year, MCA deregistered about 250,000 companies which had no operations or zero turnover for two consecutive years. Most of them were suspected to be shell companies. According to an MCA estimate, around the same number of companies which had no operations or zero turnover for two consecutive years. Most of them were suspected to be shell companies. According to an MCA estimate, around the same number of companies could be de-registered in the current fiscal as well.

Corporate Affairs Secretary Injeti Srinivas has said that one of the key issues hampering the investigations and prosecutions against entities involved in financial irregularities has been lack of a proper and uniform definition for ‘shell companies’. Obscured ownership, excessive leveraging, rotation in transactions with no apparent business purpose, majority of shares held by other companies and disproportionate investment in shares of other companies are among the criteria to define a shell company, according to Injeti. ET

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