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

shell

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.

Impact of Demonetization on CAME Profession

demonetization

Demonetization efforts of the Indian government are likely to see a increased demand for the Certified Anti Money Laundering Experts. The anti-money laundering (AML) function for financial institutions, such as banks and broker-dealers, is among the largest functions in a compliance department.

The major Indian Banks are likely to employ several hundred or more Certified Anti Money Laundering Experts as AML officers at all levels, with the largest concentration at the analyst or associate level due to the changed compliance norms during the Demonetization process.

Traditionally, most of these AML officers would be responsible for the core AML functions of transaction monitoring and client on-boarding, both of which are incredibly time-consuming and require substantial resources in order to manage the expansive franchises of the major institutions.

All financial institutions have an obligation to monitor for and detect suspicious activity, and then report suspicious activity to the Financial Intelligence Units via the Suspicious Activity Report. It is fair to say that a majority of the Certified Anti Money Laundering Experts in the banks would be assigned to some aspect of the transaction monitoring process.

The current standard approach to identify the Suspicious transactions is to employ an automated system that scans all transactions in order to detect potential suspicious activity.

The definition of the suspicious activity changed on multiple occasions during the process of demonetization. Reserve Bank of India, Income Tax Department and the Ministry of Finance issued notifications introducing new thresholds and limits on the banking transactions.

Though the currency circulation would be restored in 2017, it would have long term impact on the compliance systems of the banks.

Additionally, no software in the world is perfect, it catches genuine transactions as suspicious. The system’s output needs to be investigated further by those with experience in detecting suspicious activity. This is a time-consuming task that requires tremendous resources, especially in a major financial institution that handles thousands of transactions per day.

Financial institutions have a prescriptive menu of elements that need to be obtained before any client can be on-boarded. During the period of Demonetization one of the most popular method of combating the demonetization was opening the multiple accounts. Many of these newly opened accounts lacked the substance. Certified Anti Money Laundering Experts are expected to play a crucial role in the Post KYC Compliance and identifying the suspicious transactions.

Thus, the AML compliance function in the Indian Banks is likely to take the approach of “throwing more resources at it,” due to the incredible volume of transactions marked “suspicious” during the demonetization process.

Aggressive hiring will probably continue, providing a great opportunity for junior individuals with business degrees, accounting degrees, law degrees, etc., and those who have a good measure of industry knowledge, and can be easily trained.

During the process of Demonetization the process of enforcement has changed significantly. Revenue and regulatory bodies emphasized on making sure about elimination of the false positives – The agencies detected and reacted in the manner they’re supposed to. include the information they’re supposed to, and are reasonably effective.

All banks were required to provide the information about the deposits made during the process of demonetization to Income Tax Authorities. During the process of Demonetization the process of enforcement has changed significantly. Revenue and regulatory bodies emphasized on making sure about elimination of the false positives. The agencies detected and reacted in the manner they’re supposed to.

With the growing emphasis on the digitization, financial institutions are increasingly looking at ways to potentially incorporate the rise in available data to help them to be more predictive in these areas. With the right people, this is a realistic goal.

Ultimately, in order to keep up with this rigorous new era of regulations and regulatory enforcement in the AML arena, Indian Banks need to find a way to marry the technology and data experts with the substantive Certified Anti Money Laundering Experts. They’re better together !

Statistics on Heightened Risk Entities

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Riskpro Technology, which compiles the data on heightened risk entities recently published their factsheet. There are more than 175000 individuals flagged as Heightened Risk Individual in the specially designed database called Biznexxus.

Riskpro Technology