The investigation into the shell companies is being coordinated by the Ministry of Corporate Affairs, which has identified some 16,000 potentially bogus firms in cooperation with the income-tax department, the Serious Fraud Investigation Office, the Central Bureau of Investigation, and the Enforcement Directorate. About 100 brokerages are also being investigated for their role in money laundering by shell companies.
In several instances, the management of these companies has used them to create a front to channel illegal funds, by showing them to be the firm’s profits. The brokers also participate in this activity by using illegal funds to engage in fraudulent trading in shares at artificially inflated prices. There are exceptions to this of course. In some instances, the senior management of the companies might not be aware that their employees are engaging in such practices. In other cases, the lack of appropriate systems might be to blame for the inability to clamp down on illegal activities.
For firms that are engaging in genuine business activities, it is important to ensure that their operational and IT systems allow them to stay compliant with the latest government regulations, as well as any mandates from SEBI. Fraud monitoring and Anti-Money Laundering (AML) systems are becoming an integral part of the business operations of large corporates in the Indian market, and now is the ideal time for medium and small sized firms to invest in such platforms to ensure they are not blind-sided by government investigations.
For example, eight companies including Parsvnath Developers Ltd and Kavit Industries Ltd that had been banned by the SEBI were later allowed to trade by the Securities Appellate Tribunal (SAT). However, if these companies had utilized some of the capabilities being offered by the leading AML systems and ensured that their compliance was of the requisite standard, trading in their shares might not have been banned in the first place.
Kapronasia has recently unveiled a report on the leading Anti-Money Laundering vendors in the Asia-Pacific. The report compares the offerings of the leading vendors that are serving the financial services space. Leading Indian corporates and capital market firms can also use these platforms to increase their monitoring capabilities, while satisfying the regulatory requirements at the same time.
The use of such systems goes hand in hand with the rigorous implementation of the know your client (KYC) norms within each financial firm, especially the brokerages that are regulated by SEBI. In several cases, it was found that the illegal activities were closely associated with the violation of KYC norms, which allowed the brokerages to deal with firms that had not met the standards mandated by the SEBI and the Government. Automation of KYC requirements is a part of most leading AML and Fraud Monitoring systems, and hence their use allows for a higher level of due diligence in financial firms and corporates.
The Indian Government and regulators are becoming more proactive and are clamping down on money laundering activities. This was more the case for banking earlier, but is now also true of the capital markets. It has been shown that money laundering is closely connected with financing of terrorism as well. Hence, it is important that the capital market participants, be it the firms being traded or the brokerages themselves, should become more alert in ensuring compliance in their operations, especially through the use of the latest technology that is on offer for such requirements.