The remittances were allegedly made in order to disclose huge losses in Indian incorporated companies

New Delhi: Overcoming covert pressure from vested interests active in cultivating officials, Central authorities have succeeded in cracking the whip on mega money laundering by PRC entities. The raid conducted by the Directorate of Enforcement (ED) against the Dongguan, China-based mobile manufacturer, Vivo, on Wednesday was done after the officials got “substantial documentary proof” of the company indulging in laundering money that it was earning in India and sending to China through multiple shell companies illegally. The shell companies were not directly connected to Vivo, but their workings were being supervised by the top Vivo officials, officials claimed.

The Sunday Guardian sent a detailed questionnaire to the corporate communication department of Vivo seeking a response on the matter, but none was received until the time the story went to press.

Initial investigations and the numbers put out by government officials suggest that Vivo had illegally laundered Rs 62,500 crore out of India in the last six years, using shell companies to avoid paying taxes on its earnings from India. However, this number is likely to increase substantially as many more shell companies are still undetected and the Ministry of Corporate Affairs (MCA) and ED will require more time to “catch” them.

As per the ED’s press release, it carried out searches at 48 locations across the country that belonged to Vivo and its 23 associated companies and seized Rs 465 crore from 119 bank accounts, including FDs of Rs 66 crore, 2 kg gold bars and Rs 73 lakh in cash. This was the second such action taken by the ED in recent times against Chinese mobile companies who have been earning crores of rupees from India.

In April, the ED seized Rs 5,551.27 crore of Xiaomi Technology under the provisions of Foreign Exchange Management Act 1999. This was done after ED initiated investigation in connection with the illegal remittances made by the company in the month of February this year. The company allegedly remitted foreign currency to three foreign-based entities, which include one Xiaomi group entity in the guise of royalty. “Such huge amounts in the name of royalties were remitted on the instructions of their Chinese parent group entities. The amount remitted to other two US-based unrelated entities were also for the ultimate benefit of the Xiaomi group entities. Under the cover of various unrelated documentary façade created amongst the group entities, the company remitted this amount in the guise of royalty abroad which constitutes violation of Section 4 of the FEMA. The Company also provided misleading information to the banks while remitting the money abroad,” the ED claimed.

According to officials, these recent steps were undertaken after reports from multiple quarters indicated how these entities had created a web of shell companies to carry out money laundering, tax evasion and transferring money on falsified documents and receipts. Vivo, which had bought the title sponsorship of the prestigious IPL cricket tournament for five years from 2017 to 2021 by paying Rs 2,199 crore, emerged as the top 5G smartphone brand in 2021 in India with a 19% share and an overall fourth position due to which its India’s revenue increased by 45% in 2020 from Rs 17,201 crore to Rs 25,060 crore in 2021.

The moneys invested by the company in India were useful in earning goodwill and access to Indian politicians, media personalities and bureaucrats. As per the data shared by Counterpoint Research, the revenue earned by companies that sell smartphones and allied products in India was Rs 283,666 crore in 2021 which also saw more than 1,690 lakh units of handsets being imported to India.

The top four most popular smartphone selling brands in India are all Chinese: Xiaomi, Vivo, Realme and Oppo. They are followed by Korean firm Samsung. Of these, three brands—Vivo, Oppo and Realme—are owned by one company, BBK Electronics Corporation, which was founded by Duan Yongping. It also owns OnePlus, another popular brand in India. BBK occupies nearly 43% market share in India. In 2019-20, BBK Group earned Rs 63,635 crore from India, just from Oppo and Vivo.

According to officials, one of the companies that was being used by Vivo to allegedly evade taxes and launder money was the Solan, Himachal Pradesh-registered “Grand Prospect International Communication Private Limited”, which was incorporated in December 2014 and filed its last balance sheet on 31 March 2020. All its three directors are Chinese nationals, with one of the directors, Hongcheng Yu, also the director of another Jammu-based company, Hongfu International Private Limited that also has three other separate Chinese citizens as directors, apart from one Indian national. All the three directors left India more than one year ago after setting up multiple such shell companies. Why and how this was allowed to happen has become a matter for examination.

The ED has so far identified at least 20 shell companies that were being used to transfer the profit that Vivo was earning from India, outside of India without paying taxes while terming them as an expense. These companies are registered across various cities of India to make them look genuine and are based in Ahmedabad, Hyderabad, Lucknow, Chennai, Bangalore, Jaipur, New Delhi, Mumbai, Kolkata, Indore, Gurgaon, Pune, Kochi, Guwahati, Patna, Raipur, Bhubaneswar, Nagpur, Aurangabad, Ranchi, Dehradun and Mumbai.

According to officials, “Grand Prospect International Communication” was recommended to be struck off by the Registrar of Companies in September 2019 under Section 455 of the Companies Act, 2013 for not carrying out any financial activities for two years preceding the submission of its last financial statements. Later, an internal inquiry conducted by the MCA had found that the company was created by submitting forged documents, following which an FIR was filed with the Kalkaji police station in South-East Delhi, which was subsequently taken over by the Economic Offence Wing (EOW) of the Delhi Police.

Investigations by the MCA and the follow-up by the ED have revealed that this company was created by a CA, Nitin Garg, against whom the MCA recommended action in February 2022 for creating another Chinese shell company, CRRC Pioneer Electric Private (Limited), which has three Chinese nationals as directors.

Official sources said that several such dummy companies, numbering in hundreds, if not thousands, have been opened by the Chinese nationals over a period of 6-7 years with the purpose of using them to launder money to evade taxes.

The MCA, sources said, has taken up a focus-based drive to identify such companies and those who helped in creating them, including accounting professionals; and more such actions by the ED in the coming days is expected.

The Sunday Guardian had recently revealed how some Indian company accountants and company secretaries had helped set up such shell companies in lieu of large amounts of money (Errant accountants help the Chinese military set up shell firms in India, 26 June). Official data shows that in the one-month time period ending April 2022, 15,905 companies were registered in India. This means that officials, on every working day of April that is of eight hours, helped in incorporating 733 companies every day for 22 days (with eight holidays in the month on account of Saturdays and Sundays). The total number of companies that were active in India at the end of April 2022 was 1,451,401.

Among the most vital documents needed to become an owner of a company is the Director Identification Number (DIN), for which one needs to submit a PAN card, address proof, residential proof and passport number (if foreign national). “Some CAs and CSs have a pool of such shell companies which they sell to people who are looking for them. In many cases, we have found that a company has existed on books for a couple of years and suddenly it gets a Chinese national as a director and then it starts getting business. The Ministry of Corporate Affairs has not succeeded in weeding out several such dummy companies, and in many cases has incorporated companies without carefully verifying the ID documents. Some claim that some CAs and CSs have links with a few officials in MCA who help them in incorporating these shell companies by taking a fixed amount of money,” a senior official with the ED told the Sunday Guardian.

In the present case, Hongfu International was incorporated by an Indian national in January 2019. Later, two Chinese nationals were added as its director in February 2020. Among the replies sought by The Sunday Guardian from the corporate communication team was why the company had stopped uploading its financial data on the company’s site from 2018.