Awareness For Illicit Companies that are Self-Titiled as “Shell Company”

Awareness For Illicit Companies that are Self-Titiled as “Shell Company”

Author: Shrishti Singh, Amity University.

Abstract

This article studies about a gist of a shell company & provide a brief historical overview .  Following that this article will have the main objective of a shell company , factors that are related to shell company , how it used for illegitimate as well as for legitimate purpose , laws that are violated by shell companies ,  steps taken by  government for removal of shell companies  , its impact on the society and country at large and at last I will be concluding my article by referring a case and inserting my views to it .

Shell Company :

Let us understand briefly about shell companies , although at present we doesn’t have any actual definition of it officially, but through observing its characteristics & the purpose of it we can nearly say that the shell companies are the company that only exits on the paper without any active business operation or significant assets. It neither have any office nor it has any employees of it and its legitimacy has been questioned every now & then due to heightened regulatory and financial risk in the lack of ownership transparency , chances of tax evasion and the ease to conceal illegal financial activities.

These companies not necessarily used for illegitimate purpose but also for legitimate purposes ; for instance, it basically disguise the identities of the real owners and origin of the property for illegal purposes namely; money laundering, tax evasion, conversion of black money to white & many other illegal financial activities.  It has been observed that nearly large number of these shell companies are set up at the offshore venues where the taxes are imposed very less and such places are popularly known as “ Tax Havens”.  In these places financial institutions are also used for illicit purposes such as money laundering or tax evasion.

 On the other hand it does used for legitimate purpose as well; such as for holding or storing money temporarily to hide its dealing with other companies, it is also been used to gain access to foreign markets , but majorly these companies are used  for illegal purposes.

Objective of shell companies :

  • Companies form various layers to disguise the identities of real owner & origin of the property.
  • Tax evasion or money laundering , siphoning off the black money . This is the main reason these shell companies suddenly being discovered during demonetization in November 2016.
  • Fraudster uses these companies for defrauding people by creating Ponzi scheme so that when fraud discover the company remain and the people behind it would escape.

Laws that are violated due to shell companies :

  • The Companies Act & in specific the companies ( restriction on number of layers ) rules 2017
  • Securities & Exchange Board of India Act & rules made under them
  • Prevention of Money Laundering Act ,2019
  • Black Money & Imposition of Tax Act, 2015
  • Indian Penal code
  • Income Tax Act ,1961 and in specific PoEM guideline issue by CBDT

Steps taken by government for removal of shell companies:

  • The government has instructed banks to ensure that the directors or their authorized signatures are restricted from operating the bank accounts of the companies that were struck off. Director were also warned of tough action if they have siphoned off any money even before the banks were alerted
  • The new step is to improve statutory compliance by unlisted companies and to check abuse of the corporate structure for money laundering and tax evasion
  • Cooperation between Ministry of Corporate Affairs and Income tax Department to nab shell companies .The data sharing agreement is aimed to curb the menace of  black money , black money and misuse of corporate structure by shell companies. Shared data and obtained information will also be used for carrying out scrutiny, inspection investigation and prosecution
  • Enactment of the Black Money and Imposition of Tax Act ,2015 to more effectively tackle the cases involving black money  stashed abroad
  • Enactment of the Benami Transactions(Prohibition ) Amendment Act, 2016 to deal with domestic black money cases
  • Special Investigation team were introduced for black money
  • Constitution of Multi – Agency Group for coordinated and effective investigation in Panama paper leaks and Paradise Leaks cases
  • Task force on Shell companies under the joint chairmanship of revenue secretary and secretary in February 2017
  • Various other anti –evasive legislative measures were taken

Impacts on the society :

Shell company necessarily do not present risk but it depends on the anonymity , circumvention of the posting of workers and treaty abuse  and can be misused and create a serious risk of tax evasion or money laundering. Such misuses not only effect economy but society as whole ,with economic security and social consequences.  It can lead to broader the political and social impacts such as the development of criminal activities, a rise in inequalities and decreased trust in public institution.

Conclusion :

We can’t deny to the fact that these companies are exhaustively debatable and questionable every now & then , we can obviously see that these shell companies are unethical practices to maximize the profit . Even though shell companies has done many blunder but we hoping to overshadow this and prevent this as much as possible for the benefit of nation because this is one of  the important reason of deep rooted corruption & abuse of power .

[1] P. Chidambaram vs Directorate Of Enforcement on 15 November, 2019

M/S Amit Polyprints Pvt Ltd vs Dy Commissioner Of Income Tax on 7 May, 2018

M/S. Natural Ores Pvt Ltd. Raipur vs Principal Commissioner Of … on 25 October, 2016

                                                    

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