Roadmap for Answer Writing
Introduction
- Define shell companies as entities without active business operations or significant assets.
- Mention their exploitation for money laundering, despite not being illegal in themselves.
Body
1. How Shell Companies Facilitate Money Laundering
- Fabricated Transactions
- Fact: Shell companies can claim monetary transactions on behalf of clients. Criminals deposit cash, then transfer it to their accounts using fake invoices, creating an illusion of legitimate income (Ministry of Corporate Affairs).
- Layering
- Fact: Multiple layers of shell companies obscure the source of funds, making tracking difficult for regulators (Economic Times).
- Hiding Ownership
- Fact: Shell companies can disguise ultimate beneficial ownership, allowing money launderers to evade sanctions and anti-money laundering checks (India Today).
2. Measures to Limit Their Use
- Task Force Creation
- Fact: In 2017, a task force was formed under the Ministry of Corporate Affairs to combat shell company malpractices (Ministry of Corporate Affairs).
- MoU for Tax Information
- Fact: The Ministry of Corporate Affairs and CBDT signed a MoU for regular exchange of tax information to curb the misuse of corporate structures (Business Standard).
- Operation Clean Money
- Fact: Over 200,000 shell companies were acted against as part of this initiative (Hindustan Times).
- Finance Act 2015
- Fact: This act redefined residency criteria for companies, enabling better regulation (Ministry of Corporate Affairs).
- SEBI Initiatives
- Fact: SEBI requires exchanges to verify fundamentals of suspect companies, allowing for delisting if credibility is lacking (Financial Express).
Conclusion
- Summarize the key points regarding the facilitation of money laundering and the measures taken to address these issues.
Model Answer
Introduction
Shell companies, defined as entities without active business operations or significant assets, are often exploited for illicit activities like money laundering. While not inherently illegal, their misuse raises significant concerns.
Mechanisms of Money Laundering
Measures to Limit Shell Companies
In conclusion, while shell companies pose significant risks for money laundering, ongoing regulatory measures aim to mitigate these threats effectively.