Money Laundering Via Listed Shares

 Under the Indian tax law, long-term capital gains on listed equity shares (capital gains when there is at least a year’s gap between the time a share is bought and when it is sold) is tax-free. This fact is used to launder money as explained by Prashant Kumar Thakur in his book ‘Tax Evasion through Shares’.For example,a broker and his client could strike a deal whereby the broker sells shares in a penny stock to his client for a low price, say a few rupees.The catch here is that the contract note issued to the client is backdated to a year earlier. In the interim, the broker has manipulated the price of the stock up through circular trading — two or more brokers circulate the stock between them each selling at a higher price than earlier. After the client has bought the shares for a few rupees each, he transfers physical cash to the broker who then routes it through a range of accounts. In the final step, the broker ‘buys’ the shares back from his client at the higher price, locking in a long-term capital gain. Essentially, the broker has routed the client’s own money back to him, with the advantage that the client can show this as a legitimate capital gain in his tax return — a gain which is tax free.For this purpose,many CAs control a clutch of listed companies each.  Read more of this post