Shell corporations or Shell companies are entities that do not have active business operations but are set up to achieve specific business objectives such as reducing tax liabilities, shielding an entity from legal risks, raising capital, and oftentimes, for illegal purposes such as laundering money, hiding beneficial ownership from law enforcement or circumventing sanctions. To put it in simpler terms these are companies that exist only on paper. At present, neither the Companies Act, 2013 nor the Companies Act, 1956 nor any other act in India provides a definition for what constitutes a shell company.

Shell Companies And Money Laundering

1. The Panama Papers, which were published in 2016, and the recent Pandora papers revealed the degree to which shell corporations were being used to launder money in various countries across the world.
2. Shell companies pose a serious anti-money laundering threat: leaked documents uncovered that shell companies were set up in various low-regulation jurisdictions, including the British Virgin Islands and the Cayman Islands.
3. The anonymity associated with shell companies and the deliberate efforts by criminals to avoid regulatory scrutiny can make Anti Money Laundering (AML) compliance challenges.

Steps Taken By The Government To Tackle Money Laundering

India is among the high-risk areas for money laundering. The Basel AML index for 2019, has ranked India in the 51st spot. Therefore, the Indian government has taken many Anti-Money Laundering measures. 1.The Prevention of Money Laundering Act 2002 (The PML Act), and its rules, rules, and regulations prescribed by regulators such as the RBI and the SEBI, set out the broad framework for the anti-money laundering laws in India. 2.PML Act and rules: The PML Act not only criminalizes the offence of money laundering but also puts in place preventive measures.

1. The PML act provides for provisional attachment of ‘proceeds of crime’, which are likely to be concealed, transferred or dealt with in a manner that may obstruct proceedings.
2. Obligations are imposed on banks, financial institutions, and intermediaries to maintain records and furnish information regarding certain types of transactions.
3. The PML Act provides for the appointment of authorities to administer and enforce the provisions of the PML Act. These authorities are vested with powers, similar to those vested in a civil court.
4. The PML Rules issued by the central government set out the process to be adopted by banks, financial institutions for identifying and verifying their clients before commencing a business relationship with them.

3.RBI KYC Master Directions: These directions are applicable to banking companies and NBFCs regulated by the RBI. These directions prevent banks and NBFCs from being used for money laundering or terrorist financing activities. 4.The SEBI AML Guidelines: These guidelines are applicable to SEBI-registered intermediaries. They require that intermediaries must put in place policies and procedures to combat money laundering. 5.Role of Directorate of Enforcement (ED): ED has been given wide powers under the PML Act to conduct search and seizure when it believes that a person has committed any act constituting money laundering, or is in possession of proceeds of crime. 6.Officers empowered to act in cases of money laundering: Section 54 of the PML Act provides that certain officers are empowered to assist authorities under the PML Act. These include officers of RBI, SEBI, Police, Income tax authorities, etc. 7.Financial Intelligence Unit-India (FIU-IND): (FIU-IND) will review and analyze suspicious financial transactions. It is responsible for the fight against the financial crimes of India. Businesses with AML obligations report to the Financial Intelligence Unit. Apart from these domestic measures, India is also a member of FATF, an intergovernmental organization established to combat money laundering and terror financing, and also a member of the Asia-PAcific Group on money laundering. Moreover, India’s FIU has signed MoUs with numerous other countries, to exchange intelligence, and develop cooperation regarding suspected financial activities.