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Need for public registration of all shell companies

EAS Sarma, the former secretary to GoI suggested that the MCA evolve a system to trace dubious investment or shell companies involved in money laundering

EAS Sarma, former Secretary to the Government of India, has suggested that the ministry of corporate affairs (MCA) evolve a system in consultation with the Securities and Exchange Board of India (SEBI) and Reserve Bank of India (RBI) to trace and bring to book shell companies involved in money laundering through a web of tax havens.

 

Mr Sarma, in a letter to Naveed Masood, Secretary, MCA pointed out that “Throughout the world, money-launderers are known to operate through complex webs of shell companies linking the host countries with tax havens in a circuitous way. There are politicians, civil servants, industrial houses and others involved in this. Most of India's black money generated through corruption is routed through such webs via tax havens such as Mauritius.”

 

The former secretary cited a New York Times report by Ravi Somaiya (dated 9th June) describing how anti-corruption activists have urged President Obama to pursue efforts, backed by the UK and several other countries, to “publicly register owners of shell companies” in order to “thwart corrupt government officials, tax evaders and money launderers who rely on an opaque financial system”.

 

Mr Sarma said in his letter, that several recent scams in India too, including Satyam, the 2-G spectrum allocation, coalgate, the CWG scam, Indian Premier League (IPL), ongoing investigations into Jagan Reddy’s disproportionate assets, have clear links to tax havens like Mauritius, the Cayman Islands, Isle of Man, Singapore and Lichtenstein. This problem has resurfaced with the various MLM and Ponzi scams that Moneylife has been writing about extensively.

 

Shell companies have become an oft-used tool to convert illegally held money to neatly laundered, tax paid wealth. Shell companies are created by the party holding money that is not accounted for and then sold to complicit businessmen at a stupendous premium, erasing even the need for benami holding as the transaction is above board and legal. Businessmen who buy shares in these shell companies are rewarded with plum deals and concessions, often related to mines or large tracts of land.

 

Somaiya’s article quotes Jack A Blum, lawyer and Chairman of Tax Justice Network USA as saying “These anonymous shell companies are used by everybody who steals money”. Somaiya says the issue, backed by PM David Cameron of Britain, was communicated to President Obama through a series of emails from groups of activists earlier this year. It is set to be raised again at the Group of 8 summit meeting of industrialized countries later this month.

 

Mr Sarma called for the MCA to evolve a system in consultation with SEBI and RBI that will ensure that as soon as a company is registered, links to its ultimate owners are clearly established, so that it becomes easy to trace money trails. “This has assumed a great deal of importance as some of these links point to terrorism, drug and arms trade etc.” he said.

 

Last month, the former secretary suggested that the MCA constitute a task force consisting of Serious Frauds Investigation Office (SFIO), Enforcement Directorate (ED), State Police and other investigating agencies to identify multi-level marketing (MLM) schemes in their early stages, before any significant damage can be caused.

 

In the letter, Mr Sarma had said “The moment any company is found to be either registered or unregistered, offering unduly high incentives, it should trigger action on the part of the task force. As an immediate measure, the examples I have given, especially, MMM India and Q Group of companies, should be investigated speedily,”

 

The MCA has finally decided to hand over the probe of chit-funds, MLM, Ponzi and pyramid schemes to a special task force under the Serious Fraud Investigations Office (SFIO).

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