business

Updated: Feb 16, 2017 07:18 IST

Paan-stained and fraying, the basement cubbyhole is next to an open-air technology hub that is also known as one of the world’s biggest markets for pirated and counterfeit products.

Everything about B-8 too is fake, although it serves as the registered address of at least 75 companies. There are no employees, no assets and, in fact, no real business. It’s just a drop box address – one of 6,460 across Delhi that mask as the headquarters for 41,448 shell companies, official figures accessed by HT shows.

Shell companies, the backbone of any shadow economy, are back in focus after Prime Minister Narendra Modi pulled out 86% of the cash in circulation in an ambitious campaign to stamp out corruption and ‘black money’.

But many tax evaders avoided Modi’s dragnet using phantom businesses and converted slush funds into legal money, officials and experts said.

Read | What black money? Govt may be in for shock after demonetisation

“During demonetisation drive, these companies would have definitely been used to push the black money into the system. They are used to cover the money trail of crime proceeds by layering,” said Rani Singh Nair, ex-chairperson, Central Board of Direct Taxes, who supervised recently concluded voluntary disclosure scheme.

An HT investigation based on an analysis of 10.26-lakh entities with the Registrar of Companies (RoC) found at least 133,256 drop box companies from 16,634 drop box addresses in two cities alone—Kolkata and Delhi. A majority of these companies are registered in Kolkata.

“During demonetisation drive, these companies would have definitely been used to push the black money into the system.

The businesses incorporated are legitimate since they do not violate any law. Yet, shell companies, which are used as conduits to convert illicit money into legal cash, are the central piece of the country’s money laundering chain.

With new, stringent guidelines in place, the government had hoped that more than Rs 9-10 trillion would return to the banking system and the treasury would be able to wipe out Rs 5 trillion of illicit cash.

But that did not happen. Much of Rs 15 trillion taken out of circulation was returned to the formal banking channel.

Government officials and experts believe shell companies such as those listed at B8 Ansal Towers played a role in helping avoid detection of ‘black money’.

Read | Why govt’s demonetisation move may fail to win the war against black money

In the first case of organised money laundering registered after demonetisation against Axis Bank’s Kashmiri gate branch, the Enforcement Directorate (ED) found that “huge monies were transferred through RTGS transfers (online transfer) to some shell companies including a case where the director of such a firm was a ‘petty labourer’”.

Books of shell companies are well maintained. They have their accounts audited, tax returns filed regularly and a functioning bank account. In most cases, directors and shareholders are unrelated persons and often untraceable. Except their identities, they have no direct stake.

This brings in the element of deniability and anonymity, in case they are caught.

Absence of common data base of bank accounts, tax returns and company details make it easy for shell companies to comply with individual statutory agencies.

For instance, there is no violation of income tax act as long as they pay their tax dues. Unless there is a criminal case, there is no case of money laundering that ED can make out against them.

The utility of shell companies go beyond money laundering. They come in handy for skirting regulations, for big corporations in paying-off by covering their tracks and siphoning off loan.

Read | Economy to politics, banks to black money: What demonetisation did to nation

In law enforcement circles, domestic shell companies have a nick name, “Kolkata companies”. The city still is the epicentre of the shell-company industry.

Adjoining West Bengal’s seat of power, the Writers Building, the narrow bylanes of the Lal Bazar area is a mini tax haven in itself. From here, 180 drop box addresses and 11,120 companies are functioning.

“In every scam, shell companies are used for pay-offs and inevitably it involves Kolkata-based shell companies,” a senior ED official said.

(This story was first published on January 4, 2017)