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Last Updated : Sep 12, 2016 10:41 PM IST | Source: Moneycontrol.com

Some 'angels' treading startups space to launder black money

The routing can happen as a seed stage or pre-series A funding round. Now to embezzle the funds, from that startup money you can buy a luxury car, pay yourself, your kin huge sums as directors. There are other assets that can be bought with that money in the company‘s name.

Harsimran Julka
moneycontrol.com

I recently spoke to a reputed startup lawyer (let us name him ‘A’) in the capital who has worked with startups including two well known hotel room aggregators, a funded media startup and few e-commerce firms.

He is also involved in deals with a well known real estate group in the country who is trying to dabble into tech startups. He gives a shocking revelation: “Startup investing has become a means to bring black money by some businessmen parked overseas into India.”

Here is how the scam works, A explains:

“Suppose you have US$10 million cash parked in Cayman Islands or Mauritius. You look for tech startups where you can take a majority control or create an entity which can put together a website, an app and a small team in place.

You incorporate that company as a private limited entity and also register an overseas subsidiary. Once a legal structure is in place – you start routing the overseas money into that technology company.

The routing can happen as a seed stage or pre-series A funding round. Now to embezzle the funds, from that startup money you can buy a luxury car, pay yourself, your kin huge sums as directors. There are other assets that can be bought with that money in the company’s name. You run that company for a period of two years or more till you’ve routed all the money into India. Once done, you can simply close that startup, declaring the company bankrupt and paying off creditors and share-holders which might be your own companies.”

There are some businesses which love to deal in cash. Even if they have not routed the money overseas, dabbling in startups by opening up incubators or mentorship firms has become an easy and sometimes a glam route to use that money legally.

“Am not saying all such firms are using startups as a means to turn black money into white but this glamorous route has started to be misused in India,” says A, a managing partner the law firm, requesting anonymity.

A disclosure: this kind of diversion of funds can only happen in early rounds. Later rounds require success of a company and institutional investors who look for cleaner structures to put their money.

“A large diversion of funds towards an entity and eyebrows are definitely going to be raised,” he adds.

Startups used to turn black into white

Another lawyer (let us name him lawyer B) who is brokering deals for a Gurgaon based fashion app and another small hotel rooms aggregator ratifies it. His firm which specializes in transaction advisory for tech startups says that there are many ways uncouth businessman launder.

“An unsavory investor can actually fly his family (who can be board members of that startup) overseas on grounds of a business visit. We have also seen other companies of the same group acting as vendors to that startup and quoting ridiculous prices for that service or product.”

However both lawyers tell me that these instances are few and far between.”These are some unsavoury investors who look at startups as a means to an end. We advise genuine entrepreneurs and startups to stay away from such investors,” lawyer A tells me.

How to spot a scammy angel investor

So what are the signs that a businessman might use my startup as a money laundering business?

“These are investors who might ask for too much equity and control of your startup (often over 70%).They wish to keep their kin on board or in management and even appoint their own company as vendors to your startup,” lawyer B discloses.

Clearly India’s young tech entrepreneurs need to be cautioned against such angel investors.


First Published on Sep 12, 2016 10:19 am
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