The maze runners | Shell companies


The century-old building is falling apart as if in pain and shame, having lost not only its glory but also its honour. Once home to families of freedom fighters, Nagindas Mansion on JSS Road in Mumbai, is now a symbol of the biggest corporate fraud in India. It is from here that fugitive diamantaire Nirav Modi ran his flagship companies—Firestar Diamond Inc and Diamond R Us—which are at the centre of the Rs11,400-crore Punjab National Bank scam.

Income tax departments across states are facing a shortage of officers who can conduct raids and investigate cases. Same is the case with SFIO.

GST has helped reduce unaccounted transactions, forcing manufacturers, traders and consumers to enter the legal loop.

The Enforcement Directorate has a list of around 40 other companies of Modi that are registered at this address, such as Moon Valuers Pvt Ltd, Moola Consultants Pvt Ltd, Ghazalah Investments Pvt Ltd and Bentley Realty Pvt Ltd. The ED believes these are shell companies formed for routing unaccounted money. Some of them have been forced to shut shop after their names were struck off by the Registrar of Companies; some others have changed name and address.

The proliferation of shell companies in cities big and small has become one of the biggest threats to the economic stability of India. “There has been a practice of creating some non-compliant companies, commonly known as shell companies or proxy companies, to route the financial transactions and money from the main frontman companies,” said P.P. Chaudhary, Union minister of state for corporate affairs. “The government has struck off approximately 2.26 lakh companies in its first drive against non-compliant companies. We have written to the chief secretaries of states that the properties of these 2.26 lakh companies should not be allowed to be transferred or sold. In the second drive, the government issued notices to approximately 2.25 lakh non-compliant companies. The ministry is examining the responses of these companies. Till now we have struck off the names of around 1 lakh non-compliant companies of these 2.25 lakh.”

Nirav Modi’s Nagindas Mansion address can easily be overlooked. The lane bustles with nondescript hardware and auto parts shops, and there is no sign of Firestar or any diamond trader. But the panwala sitting in front of the mansion has a tale to tell. “There used to be movement of heavy boxes up and down the stairs of this building in the presence of private security guards, till the place was sealed by the government,” he said. “But, we could not imagine there was a diamond industry being run from here. Now I presume there were diamonds in those boxes.” Some local shopkeepers claim that they saw Nirav Modi once at the building, much before he hit the headlines.

The creaky stairs take you to a closed door on the fourth floor of the mansion. There are some two dozen notices stuck on it, and there is an overflowing letterbox. Several agencies and government departments communicated with this address—the ED, Income Tax Department, Serious Fraud Investigation Office, Registrar of Companies and even the Municipal Corporation of Greater Mumbai.

The sole resident of Nagindas Mansion is Siddharth B. Dave, who lives in an apartment on the second floor with his ailing parents. “My family has been living here from 1941,” he said. His grandmother was a freedom fighter.

“Flat number 8, 15 and 16 are in possession of Mr Modi, but he never lived here,” said Dave. “He ran his offices and diamond assorting and polishing units here; at least 200 people were working here every day. Flat number 15 on the fourth floor is above my flat, and illegal construction has been done there. Flats 15 and 16 have been joined and Mr Modi has covered the open terrace with concrete slabs without any permission from the municipal authorities. The balcony has been enclosed in the flat, and illegal lofts have been built. As a result, there is a lot of pressure on my house and the building. I have lodged complaints against Diamond R Us and Firestar to various authorities, but all the agencies have turned a blind eye.”

Nirav Modi’s lawyer, Vijay Aggarwal, said there was nothing illegal about various companies having the same address at the Registrar of Companies. “It is a common business practice and has been adopted by almost all big groups for cost-effectiveness, convenience and centralisation,” he said.

Floating a company is perfectly legal. But when these companies are used for laundering the ill-gotten money, they cross the boundary of legitimacy, said former ED chief Karnal Singh. He oversaw the investigations of the big bank fraud cases in the past three years, including the ones involving Nirav Modi, liquor baron Vijay Mallya, politician Chhagan Bhujbal and the Sandesara brothers of Sterling Biotech.

The ED’s charge-sheet against Mallya says that around Rs1,300 crore was laundered through 13 shell companies in the US, France, Ireland and Mauritius. In the Rs8,100 crore bank fraud case against the Sandesara brothers, it is accused that 249 shell companies were created using employees’ names and used for money laundering.

THE WEEK travelled through the maze of shell companies which crisscrosses the country—from Delhi to Mumbai and Kolkata—and found that not just businessmen and corporate houses, but politicians, too, have time and again used the system to clean ill-gotten wealth. The ED arrested Bhujbal, former Maharashtra deputy chief minister, in 2016. The agency alleged that he laundered kickbacks to the tune of Rs870 crore, and that some of this money was parked abroad and the rest was routed into the country through 212 shell companies.

THE WEEK traced a few of the shell companies allegedly belonging to Bhujbal. About a dozen addresses were in the crowded Kalbadevi in Mumbai. They were all fake. An address was an office in Vyapar Bhavan on P. D’Mello Road. Another was a gymnasium in Andheri West, and another a fancy residential apartment in Santa Cruz.

“For each shell company named in the charge-sheet, the onus is on the investigating agency to prove they were shell companies and that the company is linked to Bhujbal,” said Dr Sujay Kantawala, Bhujbal’s counsel in the Bombay High Court. “But if the agency itself cannot connect the dots, the case will fall flat in court.” Bhujbal and his nephew, Sameer, who is also accused in the case, got bail in April 2017, after spending more than a year in jail as undertrials.

A month ago, Delhi minister Satyendar Jain was booked by the CBI in a disproportionate assets case involving Rs1.47 crore, after the Centre granted sanctions to prosecute him. The CBI said Jain, who holds health and power portfolios in the Arvind Kejriwal government, gained 217 per cent more than his known source of income from routing of “ill-gotten money through shell companies”. The Jain family allegedly controlled stakes or had shares in four Delhi-based companies. He had resigned as director of three companies before the 2013 assembly elections, but his family continued to hold shares in them.

The CBI says these three companies received Rs1,53,61,167 as accommodation entries from Kolkata-based shell companies between 2015 and 2017. Jain was allegedly being assisted by two others to route money through these shell companies. “The disproportionate assets case against the accused has been worked out to Rs1,47,60,497,” said the CBI.

Kejriwal defended his minister, saying the case was a “conspiracy” against his government. Jain said that he had had nothing to do with the companies since 2011, when he entered politics. When contacted Jain refused to comment on the matter.

Interestingly, be it the Jain case in Delhi or the Bhujbal case in Mumbai, they all take you to Kolkata. Over the years, the city has earned the reputation of being the country’s biggest tax haven, where brokers and entry operators will help you launder money for the cheapest commission. “The commission is high in cities like Delhi, Mumbai or Ahmedabad,” said an investigator. “But in Kolkata, entry operators charge just 3 per cent from their clients. They have been doing this business for generations.”

The most notorious of the money launderettes in Kolkata is at 3 Mango Lane. The narrow lane has been a hub of shell companies. Packed with tiny one-man shops, it boasts nothing but dilapidated British-era structures. The entry operators fancy themselves as chartered accountants, and work in dingy rooms with just a desk and a computer. For a fee, the operators do everything from preparing financial statements to signing balance sheets and routing money through a web of companies. They are masters in round-tripping to avoid service tax and local duties, and even generate fake bills of entry for transfer of funds from India to countries of their clients’ choice.

The income tax department, SIFO and ED zeroed in on Mango Lane post demonetisation, to crack down on the underbelly of the corporate sector. The taxmen still conduct surprise raids. “The moment an IT or ED officer sets foot in the lane, informers alert entry operators. It is difficult to go to these places without a reason. The crowd can turn hostile,” said an investigator in Kolkata.

Mango Lane lost some of its charm after the implementation of the goods and services tax. Notices of the Registrar of Companies are seen on the doors of most rooms. Many of them have broken locks, and some look abandoned. In the few rooms that are open, chartered accountants and tax consultants are mostly jobless. “I used to have so many clients, but the numbers have gone down as people are shutting down companies,” said Satbir Mahato, a tax consultant, sitting in his fourth-floor office in the Mango Lane. “Earlier, companies could be registered in Kolkata, but now all paperwork has been shifted to the RoC in Delhi. Those running bogus companies want to shut shop as they cannot operate in the current environment. In this building itself, we have no idea how many companies were operating from each room. But after they came under watch, they shut shop. They did not want to live under the constant burden of notices being slapped on them by various authorities.” These days most of Mahato’s clients come for filing GST returns.

GST has helped reduce unaccounted transactions, forcing manufacturers, traders and consumers to enter the legal loop. That, however, might not be enough to clean up the system. And, the de-registration of two lakh plus companies cannot be called a crackdown on shell companies, because some of those were corporates who did not file the annual returns which got struck off, said Satish Saraf, a Hyderabad-based chartered accountant.

Shell companies make investigation into financial crimes a big challenge, as there is no specific definition of shell companies in India. “Shell companies used for illegitimate purposes do not have any real business operations,” said Amardeep Singh Bhatia, director, SFIO. “These companies are used to hide ownership, evade tax, channel money for siphoning, bribery or other illegal activities.”

It could be detrimental for the government to stop people from setting up companies, but it can put safeguards after the time of inception of the company. This includes closely watching bank accounts, real time gross settlement transfers (electronic payment) and foreign remittances, said Shariq Nachan, a Mumbai-based corporate lawyer. This points to the need to strengthen the banking systems so that they are able to detect a fraud.

In 2015, the CBI found that 59 current accounts had been opened in the name of 59 directors of companies in Bank of Baroda’s Ashok Vihar branch in Delhi. The Rs6,000-crore scam came to light in an internal audit, and the subsequent probe by the CBI found that two bank officials allegedly connived with some businessmen to route black money through shell companies. The investigation found that illegal remittances were made from the bank branch to more than 350 accounts in Hong Kong and Dubai in 2014 and 2015 in the guise of advance import remittances and remittances towards purported software imports. Nothing was imported, and to remit the money the operators submitted fake documents before the bank, said ED officials.

Fake voter IDs and PAN cards were used to open the 59 accounts, with addresses in remote villages. Many of the directors of these companies were living in slums; some were autorickshaw drivers and some car drivers. These people were paid Rs10,000 to lend their names as directors of the companies. The amount remitted in each transaction would be kept below $1,00,000, as for transactions above this amount, banks need to submit a report to the Reserve Bank. “The amount was remitted as advance for import, and in most cases the beneficiary was the same,” said the CBI in its charge-sheet.

Three years later, however, all those who were arrested are out on bail, and the CBI and ED are grappling with the investigations. While the CBI has not been able to marshal up enough evidence under the Prevention of Corruption Act, the ED is fighting the bail applications of the accused.

The government has taken certain steps to prevent bank frauds, such as allowing foreign remittances only if the bank account is at least two years old, asking banks to file regular reports to the RBI and giving online access to the RBI into the electronic data process of the customs department, which has bills of entry of all the ports in the country.

The Institute of Chartered Accountants of India (ICAI) has suggested to the corporate affairs ministry to amend the Companies Auditors Report Order (CARO) to require a statutory auditor to certify if the company concerned is a shell company. The ICAI is looking into the role of 26 chartered accountants whose reference came from the SFIO for their alleged links to shell companies, said Vinod Rawal, a Delhi-based chartered accountant.

The parliamentary standing committee on corporate affairs, headed by former corporate affairs minister Veerappa Moily, has also asked the government to define shell companies. Moily has criticised the government for suggesting that the de-registration of companies from RoC is a crackdown on shell companies.

The government surely cannot rest after striking off names of some companies, as hundreds of companies are created every day. Currently, there are 18,10,813 companies registered in India, and 11,16,362 of them were active as on October 31, 2018. And, scamsters are fast changing their modus operandi—they have started using “shelf companies”, or dormant companies that have been created for the purpose of money laundering and routing funds when the need arises.

After the implementation of GST, there has been a spike in bogus billings to evade tax. And, income tax departments across states are facing a shortage of officers who can conduct raids and investigate cases. Same is the case with SFIO. So, rather than focusing on defining ‘shell’ or ‘shelf’ companies, the government, the banking regulator and the law enforcement agencies need to sharpen the existing mechanisms and rules to weed out corruption, safeguard genuine business interests and ensure healthy growth of the corporate sector.

Money can be stashed anywhere. Three chimpanzees in the Alipore zoo in Kolkata—Basanti, Chhotu and Mastan—attract hundreds of people every day. They are also closely watched by ED sleuths. It took a while for investigators to figure out that these chimpanzees had links with shell companies. It all began when the customs department seized some exotic birds, marmosets and chimpanzees from the residence of a suspect in Baguiati near Salt Lake in 2014. The Wildlife Crime Control Bureau was called to identify the birds and animals. The man was using a forged trade licence and permission to exhibit the animals.

During the investigation, it was found that huge amounts of cash had been deposited into the accounts of the man and his wife, and shell companies were used to deposit the money. This was when the ED got involved in the case. The man claimed that his grandparents brought some chimpanzees from Africa and these chimps were born here. Each chimpanzee’s value is estimated to be around 06 lakh. The customs case did not stand the scrutiny in the court and the charges were dropped. But the ED took over the case and is almost done with the investigation of the money laundering angle and use of shell companies. But the agency now has a unique challenge before it. It will soon be moving court to attach the proceeds of crime, which, for a change, are not fancy apartments or shops at plum locations, but three playful chimps.

Home to too many

More than 18,000 companies are using Ugland House, a five storey building in the Cayman Islands—a British territory in the western Caribbean sea—as their registered office. In 2009, former US president Barack Obama described Ugland House as “the largest tax scam in the world”.

Finding the fraudsters

A 2018 report from the corporate affairs ministry says that only 66 per cent of 18.1 lakh registered companies in India are active. The ministry struck off 2,26,166 inactive companies from official records during financial year 2017-2018 invoking Section 248 of the Companies Act, 2013.

Hero behind the veil

The Panama Papers in 2016 revealed details of more than 2.14 lakh offshore companies involved with Panamanian law firm Mossack Fonseca. The data was leaked to the International Consortium of Investigative Journalists by an anonymous informant. The Panama Papers featured the names of over 500 Indians.



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