Shell companies are those companies which exist in an aim to launder money, with the intention of fraud or tax evasion. Such companies are entities that have no active business present and may have no employes and no production. These are just dummy companies or shell companies.
Money laundering is the process of obtaining money from illegal activities and making it legitimate money through investing.
There are many shell companies which have generated fictitious long-term capital gains for individuals. Earlier this month, SEBI barred 260 entities, including individuals and companies, from the securities markets.
Shell companies are usually used to hide personal assets under false business names in order to avoid tax liabilities, similar to the purposes in bankruptcy fraud.
In regards to market manipulation, shell companies are used to stage fake stock offerings to outside investors.
Consider a example of a person who may set up a fake business which can be obtained by necessary and proper documents to open a bank account in the business name.
The dirty money is then put into the bank account, making it seem as though it was obtained legitimately.
A person may open various accounts across the United States or overseas and use shell companies as a means to shield their true identities.
Anti- Money laundering
The process to stop the activity of generating income through illegal means ca be termed as anti-money laundering. In India, The Prevention of Money-laundering Act, 2002 (PMLA) came into act from July 2005. Where Reserve Bank of India has taken several measures to avoid money laundering.
As per RBI guidelines, banks should always follow KYC policies incorporating the following four key elements:
- Customer Acceptance Policy;
- Customer Identification Procedures;
- Monitoring of Transactions; and
- Risk Management
The punishment for offenses under the said Act is rigorous imprisonment for a term from three years to seven years and a fine which may extend to five lakh rupees.
Recently, the Reserve Bank of India imposed penalty on ICICI Bank and Bank of Baroda for violation of its instructions on Know Your Customer (KYC) and anti-money laundering (AML) norms. ICICI Bank was asked to pay Rs 50 lakh and Bank of Baroda Rs 25 lakh as penalty charges.
Government has constituted a Special Investigating Team (SIT) to implement the decision of the Hon'ble Supreme Court on large amount of money stashed abroad by evading taxes or generated through unlawful activities.