Thursday, August 1, 2013

How shell companies turn black money into white and vice versa ???

How shell companies turn black money of India Inc, politicians into white and vice versa - The Economic Times:

A manual that the Gujarat income tax department prepared for its officers, and which devoted an entire chapter to such companies, summarised the tried-and-tested way of doing so: "The method...entails breaking up large amounts of money into smaller, less suspicious amounts. In India, this smaller amount has to be below Rs 50,000 as deposit of cash below this amount does not require providing PAN of the depositors. The money is then deposited into one or more bank accounts either by multiple people or by a single person over an extended period of time. Also, even larger amounts are deposited in the banks with PAN numbers of individuals who are mostly illiterate and work for these...operators for small salary or commission. The money is then routed through paper companies controlled by these operators."

These paper companies then invest this money into the target company as share capital. Money laundered. And while this last step seems a tad labour-intensive, even this process can be speeded up and costs cut, if bank officers are amenable enough (a recent investigation by Cobrapost revealed the role banks had to play in money laundering). And it is the operators who will carry out this last step for their customers. This, in a nutshell, is how the process works. At the start and end of the process are 'customers' who have opposing aims. Between them sits the operator who brings the two together.

On February 14, 2008, Seventeen companies, many of them belonging to wellknown industrial groups, injected a total of Rs 121.24 crore into Jagathi Publications, the flagship media company owned by Jagan Mohan Reddy, son of former Andhra Pradesh chief minister YSR Reddy. Ultimately, according to news reports, the CBI would go on to investigate a total of over Rs 1,100 crore worth of investments into Jagathi over a period of years.

At the heart of this business, and what ensured its survival and growth, is the reality that the Indian economy has a kind of dual personality, split as it is, into the 'white' and the 'black' economy, with cash transactions (though not always of an illicit nature) dominating the latter. But these economies don't exist separately from each other. They drive each other, and feed off each other, and money flows from one into the other, depending on the economic cycle and entrepreneurs' 'animal spirits'.

The Kolkata company, and thousands of others like it across the country, sit squarely at the junction between white and black. They perform what is an essential function รข€” that of converting, or laundering, black money to white. But they do the reverse as well, converting white money to black. And in the same way that a stockbroker brings together buyers and sellers of a share, and 'makes' markets, such companies, and the people who operate them, bring together buyers and sellers of another, much sought-after commodity.

It's worth noting that all of these are transactions that occur only on paper, with no real cash flow or assets backing them.

But what the operator has done is infuse capital, on paper, into a set of companies that are now ready and waiting for a new set of owners. Such companies will be sold off to anyone looking to launder black money, converting cash they have into an asset that has documentation backing it, and can be audited by anyone who cares to look.

A buyer starts off by buying the shares of such a company at a steep discount to the 'paper' value of the company. He pays, say, one rupee for a share, which on paper, is worth fifty rupees. This is the white money leg of the transaction, and in effect, is the commission paid to the operator (in this case the commission is 2%). All that remains is for the black money to be brought in.

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