Regulations
SEBI targets illegal fund-raising by real estate companies

The firms against whom SEBI passed orders, were found to be engaged in fund-raising activity that was classified as Collective Investment Scheme, but did not have required clearances from the regulator

 

In the month of December itself, the Securities and Exchange Board of India took action against 26 entities for illegal money pooling activities. This was followed by a recent set of orders from SEBI, barring 260 entities for suspected tax evasion and money laundering. 
 
In the first set of cases, there seems to have been a clear focus on companies engaged in the real estate business or raising funds under the aegis of infrastructure projects or real estate projects. Some of the companies barred by SEBI were Garima Real Estate & Allied Limited (“GREAL”), Raghav Capital & Infrastructures Limited (“RCIL”), M/s Vee Realties India Limited (“VRIL”) & Arise Bhoomi Developers Limited (“ABDL”). SEBI ordered these companies “not to collect any fresh money from investors, not to launch any new schemes and has injuncted the companies from alienating or disposing any properties and assets and funds raised from public,” Securities Law Newswire reported.
 
The real estate industry is known to be among the biggest movers of unaccounted for cash and when fund-raising takes place under the radar or in an unregulated manner, there is a lot of scope for fraud or the ballooning of ponzi schemes.
 
“In India, this sector despite being of key importance has always faced financial crunches. To cover up finance needs, various new methodologies are adapted and tested by the Real Estate sector to meet the business requirements. Of late, this sector has evidenced a large number of investment schemes floated by real estate companies for accessing public money and offering returns to the investors either in cash or kind (i.e. by paying an adjustable amount or offering share in the land/ project),” the report said. 
 
These orders by the SEBI have been made possible since the passage of the new Securities Laws Amendments Act. With this law, the government enhanced the powers of SEBI to take action against illegal money-pooling activities involving Rs100 crore or more. 
 
“For example, if the "applicant"/investor is investing in "One time Installment plan" for an amount of Rs12,500/- for a plot size 25 yards, he/she will get the Income/return in the form of "adjusted amount" amounting to Rs25,000/- after 5 years and 11 months. The "adjusted amount" will further increase with the passage of time and Rs87,500/- will be given to the investor at the completion of 15 years,” the report added.

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Indian market trends
The Sensex fell 5% and the Nifty fell 4% during the fortnight ended 18th December. ML Micro-cap Index and ML Mid-cap Index also fell 5% each, while ML Large-cap Index fell 4%. ML Mega-cap Index dipped 3%.
 

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US Court allows IRS to issue summonses to eight entities for records of tax evaders

The Court authorised IRS to issue John Doe summonses on FedEx Express, FedEx Ground, DHL, UPS, Western Union, the FRBNY, Clearing House and HSBC USA for records relating to US clients who used a shell company to conceal offshore accounts

 

US District Judge Vernon S Broderick has authorised the Internal Revenue Service (IRS) to issue summonses to courier companies among others requiring them to produce information about US taxpayers who allegedly evaded federal taxes by using the services of Sovereign Management & Legal Ltd (Sovereign).
 
The court authorised the IRS to serve what are known as “John Doe” summonses on Federal Express Corp (FedEx Express), FedEx Ground Package System Inc (FedEx Ground), DHL Express (DHL), United Parcel Service Inc (UPS), Western Union Financial Services Inc (Western Union), Federal Reserve Bank of New York (the FRBNY), Clearing House Payments Company LLC, and HSBC Bank USA National Association (HSBC USA).
 
Preet Bharara, the US Attorney for the Southern District of New York, in a statement said, “This action demonstrates our Office’s commitment to pursuing tax evaders who use offshore service providers to avoid their US tax obligations. By issuing these John Doe summonses, we continue our joint efforts with the IRS to identify and hold accountable those who conceal their foreign assets in order to dodge their legal responsibility to pay taxes.”
 
The IRS uses John Doe summonses to obtain information about possible tax fraud by individuals whose identities are unknown. 
 
The John Doe summonses direct these eight entities to produce records that will assist the IRS in identifying US taxpayers who, from 2005 to 2013, used Sovereign’s services to establish, maintain, operate, or control any foreign financial account or other assets; any foreign corporation, company, trust, foundation or other legal entity; or any foreign or domestic financial account in the name of such foreign entity.
 
Sovereign is a multi-jurisdictional offshore services provider that offers clients, among other things, the formation and administration of anonymous corporations and foundations in Panama as well as offshore entities. 
 
As a result of a Drug Enforcement Administration (DEA)’s investigation of online narcotics trafficking known as Operation Adam Bomb”, the IRS learned that Sovereign was involved in assisting US clients with tax evasion. During the IRS’ investigation of Sovereign’s conduct, one taxpayer, making a voluntary disclosure of tax non-compliance to avoid prosecution, reported that Sovereign helped the taxpayer form an anonymous corporation in Panama that the taxpayer used to control assets without appearing to own them.
 
The IRS investigation also determined that Sovereign uses Federal Express, UPS, and DHL to correspond with US clients, and Western Union to transmit funds to and from clients in the US. In addition, the IRS learned that the wire services operated by the FRBNY and Clearing House, and the US correspondent bank accounts that HSBC USA holds for Sovereign’s banks in Panama and Hong Kong, are likely to have records of financial transactions between Sovereign and its clients in the US. By obtaining information from these entities through John Doe summonses, the IRS expects to be able to identify Sovereign’s US clients who may be avoiding or evading taxes.
 
Federal law requires US taxpayers to pay taxes on all income earned worldwide. US taxpayers must also report foreign financial accounts if the total value of the accounts exceeds $10,000 at any time during the calendar year. Wilful failure to report a foreign account can result in a fine of up to 50% of the amount in the account at the time of the violation.
 

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