De-registered firm faces money laundering probe

Context

• Just before the launch of GST tax regime, one lakh companies have been de-registered post for being part of suspicious transactions after the follow through of demonetization
• Now these de-registered firms will be facing investigation in attempt of money laundering

Read more about GST here: Critical analysis of Goods and Service Tax

Background

• Allegedly, 300,000 companies have been identified by the government as indulging in unlawful transactions since demonetization
• Out of these 300, 000 companies, 100,000 have been de-registered.
• And another 37,000 shell companies has been identified that has been involved converting black money in to white
• These steps are part of the Government’s action to ensure regular flow of data from the Swiss national bank to keep check fraudulent transactions.
• The attempt is to restrict Chartered Accountants to come up with ways of helping their clients but to be diligent in their accounting.

An Overview

• The trend of registration of companies (month-wise) showed that after a high of 10,000 in May 2016, it had gradually fallen to about 6,000 in November 2016 — the month when demonetization was announced.
• The registrations started shooting up to touch around 11,500 in March 2017. Barring a fall in January, the new registrations had surged.

The Possible Probe

• If companies de-registered have been found to be involved in money laundering, they would be brought under the probe radar of the Enforcement Directorate (ED)
• The ED, which deals with Prevention of Money Laundering Act (PMLA) provisions, will soon be called in to look at the companies recently struck off the register.
• Concurrently, the Ministry of Corporate Affairs (MCA) decided to send show-cause notice to over three lakh more firms for striking off their names from the ‘register of companies’
• The MCA has acted against the companies for nit filling returns.
• It will further approach banks with the list of companies where action has been taken to ensure that they are unable to operate their bank accounts or access loans.
• Also the ministry is writing to the Financial Intelligence Unit (FIU) to scan for any violation of provisions of the Prevention of Money Laundering Act.

Enforcement Directorate

• The ED can take actions of attaching and confiscating a property if the same is determined to be proceeds of crime derived from a Scheduled Offence under PMLA.
• The ED can also launch prosecution against those involved in money laundering.

The Cause behind the Probe

• Tax consultants and government sources pointed out that the action against companies are initiated under the Companies Act
• The scrutiny was stepped up in the wake of demonetization and as part of the action against black money.
• These measures are the trails of on operation that was launched post-demonetization to expedite action against companies that:
• failed to start business within one year of incorporation or
• were not carrying on any business for two immediately preceding financial years or
• have not applied for dormant status.
• The series of actions intensified in April, when the Registrar of Companies (RoC) in several States/Union Territories issued show cause notices to over two lakh companies for striking off their names.
• The notice issued stated that the firms are being given 30 days to submit their response. If the reply was found to be unsatisfactory, the corporate entity’s name would be removed.

RoC’s Notice can be Challenged

• Section 252 of the Companies Act points out that persons aggrieved by the RoC order — notifying a company as dissolved under Section 248 of the Act — may file an appeal to the National Company Law Tribunal (NCLT) within three years from the RoC’s order.
• If the NCLT finds that the removal of the company’s name was unjustified, it may order its restoration in the register.

What the Move Implies?

• First, the step would act as a deterrent for the companies not filing returns
• Till now, companies evading tax were comfortable in manipulating the figures. Such scrutiny and the subsequent de-registration will not leave them with the choice of evading and manipulating taxable income
• These would clear the channel and ensure smooth and fair flow of taxes and hence revenue for the government
• This would be a straight blow to the means of perpetuating corruption and channels of black money operation.
• If the prescribed actions are implemented efficiently and neutrally, it will ensure the formation of a fair and transparent tax system.
• Such stringent steps pose a direct threat to the companies and individuals involved in money laundering.
• Mitigation of money laundering will not only lead to the existence of a fair and stable tax generation framework, but will also assist in fair and equal distribution of income and leave no scope of converting illegitimate funds into legitimate financial system

Conclusion

• The MCA and the revenue department are jointly working to crack down against shell companies, with the PM’s office keeping close watch over the developments.