A shell company is a company/corporation without active business operations or significant assets. These types of corporations are not necessarily illegal. However, the term shell company is mostly used for illegal shell companies, the purpose of which is to divert money for tax evasion, money laundering or to disguise business ownership from law enforcement or the public.

Shell companies are used to launder money in the following ways:

• In order to launder money, shell businesses typically claim monetary transactions on behalf of their clients. Then, money launderers deposit cash into the business, which is then transferred to the criminal’s account by means of fabricated invoices. Such a transaction creates the appearance of propriety and clean money. Sometimes they use additional layers of shell companies thus making it difficult to verify the identity of shell companies for anti-money laundering purposes. Having multiple transactions lowers the possibility of tracking down the original recipient and increases anonymity.
• Shell companies use tactics like layers of corporate structures to conceal the trail of unlawful gains and make it more challenging for regulators, using different financial zones to increase the the complexity of tracing corrupt money and hiding ultimate beneficial ownership to dodge sanctions and anti-money laundering checks.

Despite no legal definition for shell companies under the Companies Act 2013 and the absence of a specific law to deal with shell companies, the government has taken various steps recently to curb the activities of shell companies:

• A task force on shell companies under the Joint Chairmanship of Revenue Secretary and Secretary, Ministry of Corporate Affairs was constituted in 2017 to effectively tackle the malpractices by shell companies in a comprehensive manner.
• The Ministry of Corporate Affairs and CBDT have signed a MoU for automatic and regular exchange of tax information. The purpose of the MoU is to curb the menace of shell companies, money laundering, and black money and prevent misuse of corporate structure by shell companies for various illegal purposes.
• The Government has initiated action against more than two lakh shell companies as part of Operation Clean Money. Also, the Serious Fraud Investigation Office (under MCA) is creating a database of shell companies.
• The Government introduced the Finance Act 2015, according to which a company would be treated as a resident in India if its Place of Effective Management in the previous year was in India.
• SEBI has been actively asking exchanges to verify the credentials and fundamentals of suspect companies by appointing an independent auditor. If exchanges do not find appropriate fundamentals about the existence of the company, the stock can be delisted.

Additionally, the government can consider enacting a law that is specifically related to shell companies, which can provide a clear definition of shell companies based on parameters such as revenues, assets, employee strength, and filing returns.