Beyond 331 Names – Stock Market Money Laundering Techniques


techniquesSecurities Exchange Board of India announced the names of 331 entities which were referred to the Ministry of the Corporate Affairs by the Indian IRS during the investigations related to the various tax evasion schemes. List of all the 331 companies can be obtained on the website of BSE. But there is a need to go beyond the list of these 331 entities and get into the details of the laundering operations.

Techniques of Laundering

There are many methods of laundering the money through the stock markets. One such method is discussed in the video here. However, there are some more methods which involve tax evasion. There is a possibility that Securities Exchange Board of India penalised these 331 companies for possible tax evasion schemes through the stock markets.

SEBI Rules Violations

Typically, the scheme begin with a stock purchase transaction entered through the broker for purchasing sizeable number of shares of an illiquid script. These are the scripts where the transactions rarely happen as retail investors donot find them worth investing. The transaction is completed at say for an example Rs 10 per share.
The buyer pays purchase consideration in cheque and shares are transferred to the demat account of this buyer. Everything is perfect till the investments in illiquid scripts.
Over a period of 12 months, the stock price is rigged up typically by big brokers and operators acting on the instructions of the promoters of the company to say Rs 100.
Here investors sell the shares he bought at Rs. 10 for the artificially manipulated price of Rs.100. This money is received back in the bank account of the investors. However, here the laundering operation starts. The money, in this case Rs. 88 (Rs.100 Sales price-Rs.10 Cost price-Rs.2 as service fee), which is received by the investors is paid back to the promoters in cash. Indian real estate and infrastructure companies need this cash to buy the land and incur the expenses in cash.In some cases even to buy the
SEBI comes in picture because these cash generation techniques could potentially lead to the violations of insider trading norms, if the nexus between investors, operators and promoters can be proved.

Income Tax Evasion

Once the stock market price starts growing up, pink news papers would rush to cover the news with flashy headlines. Now the investors who generated Rs. 88 as gain on paper will file his tax returns under the shadow of the long term capital gains. Which attracts no or very little taxation in India. This causes damage for the government treasury. This is the probable reason why Indian IRS departments went further and co-ordinated their efforts to penalise the companies who

  1. Indulged into the generation of cash
  2. Evading the taxes and causing the damage to the treasury
  3. Indulged into the Insiders trading
 However, this is just the first part of the story. The same script can be used for laundering the dirty cash collected out of the corruption money.

Watch out the video below and more techniques would be revealed.

How GST is helping Money Laundering Activities


Just few days back the Goods and Services Tax (GST) was made live in hush. GST was termed as the most important reform of the Modi Government. But inadvertently this tax reforms is helping money laundering activities in some sectors like the Gold Imports.

Import Trends

Post implementation of GST, India witnessed significant growth in the Gold Coin Imports. Most of these exports are associated with the South Korea alone.
Importers are importing coins as they offer a greater scope for over-invoicing than gold bars. Through over-invoicing, it is easier to  illegally take out foreign currency out of the country.

How GST is Boon for Gold Laundering ?

Goods and Services Tax on the Gold is now reduced to 3%. Goods and Services tax replaced all the existing indirect taxes including customs duty. This opened the floodgates of the opportunities for the importers of the Gold. India signed treaties with other countries under Free Trade Agreements and Comprehensive Economic Partnerships which allows gold to be imported without paying customs duty.

How Gold Laundering Works ?

Indian Gold importer registers an Gold export company in Korea. This company source coins from manufacturers. These manufacturers source the raw gold from the Indian company’s UAE, Hong Kong or Singapore arm.
The cost of manufacturing a coin is about 0.3 per cent of the gold value, and the manufacturer adds a markup of 2 per cent to the manufacturing cost. This invoice is sent to the Indian importer’s Korea- registered company.
The exporting firm ships the gold coins to its Indian sister company by adding another 2 per cent.
As there is room to value the exporting gold is very wide, given the 10 per cent duty difference for gold imports, it is easy for the Indian importer to over-invoice and make the payment officially through a valid banking channel.

Impact on Indian Banks

Though the whole transaction is orchestrated to remit the money out of the country without having the effect of taxes, banks become victim of the whole process. Unknowingly banks are becoming party to this money laundering activity as they are not equipped to understand the repercussions of the gold trade and have very limited resources to exercise due-diligence in such transactions.


The deep roots of shell companies in India

Shell companies

Problem of Shell companies is widespread.Identifying these companies have became a challenge for the enforcement and investigative agencies as they are used in the wider money laundering activities.

The layers of these paper companies help the money launderers to disguise the root of the transaction from the enforcement agencies.

During the month of May’2017 there was a news that Central Bureau of Investigation (CBI) busted a complicated network of 339 shell companies used for allegedly diverting funds worth Rs 2900 crore illegally. Out of these 339 shell companies 9 were claimed to be from the NSEL Scam.

Companies Related to FTIL

CBI in its probe of bank frauds has found that NSEL run by FTIL was allegedly using nine shell companies namely

  1. Brinda Commodity Pvt Limited
  2. Tavishi Enterprises
  3. Mohan India
  4. PD Agro Processors
  5. Dunar Foods
  6. White Water Foods
  7. ARK Imports
  8. Vimaladevi Agrotech
  9. Yathuri Associates

Riskpro TechnologyAccording to the study conducted by the Riskpro Technology group there are more than 45 Individuals who directly or indirectly played role in the NSEL scam. These individuals are associated with at-least 189 distinct companies.

While CBI has prosecuted these companies on charges of cheating and corruption, it will also share its findings with specialised agencies like SFIO, Income Tax and Enforcement Directorate among others.

What do the Intelligence Reports Say ?

The problem however is not as small as it looks. There are many companies which are identified as the shell companies by using the different parameters by the team of Riskpro. The total number of the shell companies may be as much as 50% of the legitimate companies registered in India.


Professional Shell Company operators


In the month of March’2017, there was a news that almost 54 Chartered Accountants have come under the radar of the Income Tax department and the Enforcement Directorate over money laundering through shell companies.

Professional Chartered Accountants are always found to be the center of various shell company related transactions. The money movement is masterminded by the Chartered Accountants and is part of the practice of some of these accountants. Out of these 54 Chartered Accountants, who are being investigated by the Enforcement Directorate, 2 prominent Chartered Accountant brothers are Virendra Jain and Surendra Jain.

Jain Brothers

The news item revolved around the arrest of two Jain Brothers  Virendra and Surendra Jain (Not to be confused with the Jain Hawala Case) in connection with the case.  Search of Virendra Jain or Surendra Jain on the MCA website yields hundreds of the results and many of them may not be involved in the actual laundering case. Following observations may be helpful for the professionals in the intelligence and compliance space to understand more about these Chartered Accountants who were also on the board of many privately floated companies.

What do the Riskpro Intelligence Reports Say ?

Riskpro has built its own proprietary tool called Biznexxus, which establish the nexus between the heightened risk professionals with the Indian companies. Here are few highlights of the Riskpro Intelligence Reports

  1. Virendra Jain is the elder brother and is found to be associated with more than 46 companies
  2. Surender Kumar Jain, the younger brother is found to be associated with 14 companies.
  3. More than 90% of the companies where Virendra and Surendra are associated were incorporated in Delhi.
  4. The most important finding of our intelligence study is that  Virendra and Surendra Jain aka Jain brothers were found to be directly or indirectly associated with the leaders from Bahujan Samaj Party from Uttar Pradesh. This indicates that there is a likelihood of the political money being systematically transferred through the layers of the bank accounts.
  5. It was also observed that one of the companies represented by the Jain brothers, who are alleged of laundering thousands of crores from 2004 – 2015, have raised more than Rs. 400 crores from the Public Sector Bank.

This article is one of the first articles in the series of Riskpro Intelligence Articles based on the biznexxus database.