Govt to crack down on shell cos used to launder money during note ban

The government on Friday announced a crackdown on shell companies, used largely for tax evasion and money laundering after government agencies reported large scale misuse of such firms over the last few months during demonetisation exercise.

The government also announced the setting up of a task force to track these companies and take action against deviant companies. It has also threatened to invoke provisions of the new law against benami property against the entities and their directors.

Over 550 people laundered nearly Rs3,900 crore through shell companies after the government banned high-denomination notes on 8 November, the Serious Fraud Investigation Office (SFIO) told the Prime Minister's Office on Friday.

A small sample analysis has revealed deposit of Rs1,238 crore cash into these entities during November-December. Separately, an official statement said that 559 beneficiaries had allegedly laundered Rs3,900 crore with the help of 59 professionals.

The task force is co-chaired by secretaries in the revenue department and corporate affairs ministry will help weed out the shell companies.

"A database of such companies and their directors would be built by pulling in information from various agencies," the government said.

In order to create a credible deterrence a 'whole of government approach' will be adopted through coordinated efforts and by leveraging technology.

It has also been decided that appropriate red flag indicators would be used for identifying shell companies, and the database will also capture Aadhaar number of individual directors in the companies," an official release said.

The Serious Fraud Investigation Office (SFIO) has also filed criminal prosecution for cheating the exchequer after investigation by it showed that entry operators, who accept cash and route it through several companies to avoid detection, were involved in running a group of 49 shell companies.

Shell companies have nominal equity base with low turnover and assets but have high reserves and surplus as they issue shares at a premium, invest in unlisted companies, do not pay dividend while the shares are closely held with nominal expenses.

"Income tax department has reopened completed assessment in these cases and ED has initiated action under Prevention of Money Laundering Act (PMLA), 2002. ICAI has also initiated disciplinary proceedings against its members. Winding up process has been initiated in respect of 49 shell companies," the statement said.

Official data show that there are around 1.5 million registered companies but only 6 lakh file their annual returns.