Shell companies: Task Force to prosecute offenders

Special task force has also sought creation of new red flag indicators by banks

A government task force on action against shell companies has decided to prosecute about 10 lakh such firms and prepare an Aadhaar-based KYC registry to check future black money generation through them.

The special task force, with members from various central probe and enforcement agencies, has also sought creation of new 'red flag indicators' by banks so that the elite Financial Intelligence Unit (FIU) can effectively identify their transactions and activities and alert investigators.

Officials privy to the task force, created on directions of the Prime Ministers Office (PMO) last month, said various agencies have been asked to provide information and cases of detection of shell firms, under the exclusive laws they enforce, to the Income Tax department so that it can register cases against them under the new Benami Transactions Act and the Income Tax Act and initiate prosecution cases in courts.

Cases which lead to black money stashed abroad will be booked under the new anti-black money Act and the Prevention of Money Laundering Act, they said.

They said all the agencies have been asked to identify such firms by this month-end so that the tax department can subsequently take action.

"Preliminary estimates state that 10 lakh such firms, out of the total 15 lakh, are in the dubious activities category. Some whose KYC is strong and activities look to be normal are also under the scanner.

"The idea is to identify them on a case-to-case basis and either order for their shutdown or initiate prosecution action under the new Benami act," sources said.

They said the task force is also mulling to create an Aadhaar-based Know Your Customer (KYC) registry of the Directors of such firms under the Corporate Affairs Ministry so that either black money routing could not be attempted by any company from the beginning itself or if done, investigators can join the dots and reach them to initiate legal action.

The task force, they said, has already made it clear in a statement that a 'whole of government approach' will be adopted through coordinated efforts and by leveraging technology to combat the menace of money laundering and tax evasion perpetrated by shell firms.

"The focus as of now is to ascertain those companies who have been very active in transacting funds post demonetisation. The outcomes of the analysis of such firms will help agencies in checking black money generated post the notes ban and even before that," they said.

Shell companies, the statement had said are characterised by nominal paid-up capital, high reserves and surplus on account of receipt of high share premium, investment in unlisted companies, no dividend income, high cash in hand, private companies as majority shareholders, low turnover and operating income, nominal expenses, nominal statutory payments and stock in trade and minimum fixed asset.

Government, post the first meeting of the task force last month, had said a "sample analysis" of such companies has found that Rs 1,238 crore cash has been deposited in these entities during November-December, 2016.

It had also been said that "harsh and punitive action" will be taken against the "deviant" shell companies which will include freezing of bank accounts, striking off the names of dormant companies and invocation of Benami Transactions (Prohibition) Amendment Act, 2016.

"There are about 15 lakh registered companies in India and only six lakh companies file their annual returns. This means that large number of these companies may be indulging in financial irregularities," it had said.

The I-T department is the nodal department to enforce the Benami Act in the country and it empowers the taxman to confiscate and prosecute both the depositor and the person whose illegal money he or she has "adjusted" in their account.

The Benami Act provides that the benamidar (in whose accounts illegal money is parked), the beneficial owner and any other person who abets or induces the Benami transaction, shall be punishable with rigorous imprisonment for a period ranging from 1-7 years.

Any benami amount identified in the bank account deposited post demonetisation can be seized and confiscated and the accused will also be liable to fine which extends up to 25 per cent of the fair market value of the benami property, as per the Act.