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.

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About the author

Apurva Joshi is the forensic accounting evangelist. She authored couple of books on the subject. She is a director in Riskpro Management Consulting. She is also an independent director of Quickheal, leading anti virus company in India

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