Understanding Circular Transactions Crime: Everything You Need to Know

Circular transactions are a type of fraudulent activity that involves fake transactions between companies that are part of a single group or under single ownership control. This practice is illegal and can have serious consequences for the involved parties.

Circular Transactions Example

To better understand circular transactions, let's consider an example. Company A and Company B are both owned by the same individual. To manipulate their financial records, they engage in circular transactions by transferring funds between each other. These transactions create the appearance of legitimate business activity, but in reality, they are only meant to deceive external stakeholders.

Top Reasons Why Companies Indulge in Circular Transactions

There are several reasons why companies engage in circular transactions:

1. To Shoot up the Valuation of the Companies: Circular transactions can artificially inflate the value of the involved companies, making them appear more valuable than they actually are. This can attract investors and potentially lead to higher stock prices.
2. To Avail Higher Loans from Banks or Non-Banking Financial Corporations (NBFCs): By showing inflated financial figures through circular transactions, companies can secure larger loans from financial institutions.
3. To Avail Fake Input Tax Credit and Pay Less Tax: Circular transactions can be used to claim input tax credit fraudulently, reducing the tax liability of the companies involved.
4. To Pump in Black Money into the Legal Financial System: Circular transactions provide a way to convert black money into legitimate funds, allowing individuals to bypass legal restrictions and launder money.

The Impact of Circular Transactions on the Lending Institutions

Circular transactions not only harm the involved companies but also have significant consequences for lending institutions:

1. Increase in NPAs: Non-performing assets (NPAs) can increase for lending institutions if the companies involved in circular transactions default on their loans. This can lead to financial instability and losses for the lenders.
2. Loss of Reputation: Lending institutions that have been unknowingly involved in circular transactions can suffer reputational damage. This can erode customer trust and impact their business in the long run.
3. Lending Money for Bad Causes: Circular transactions can enable companies to secure loans for fraudulent purposes or illegal activities. Lenders unknowingly become accomplices in these activities, which can have legal and ethical implications.

It is important for lending institutions to closely review circular transactions to detect and prevent these fraudulent activities. With the help of AI-driven bank statement analysis software, lenders can identify suspicious transactions and mitigate the risks associated with circular transactions.

What Is Circular Trading?

In addition to circular transactions between companies, there is a related concept known as circular trading. Circular trading is a fraud scheme that creates artificial trading activity by passing shares among a closed group. This manipulates the market and can artificially inflate the price of shares.

How Circular Trading Works

Circular trading involves a group of individuals who buy and sell shares among themselves to create the illusion of high trading volume. This increased activity can attract other investors who believe that the stock is in high demand. As a result, the price of the shares increases, allowing the individuals involved in the scheme to sell their shares at a profit.

How Circular Trading Manipulates the Market

Circular trading manipulates the market by creating a false sense of demand for a particular stock. This can mislead investors into thinking that the stock is performing well and lead to inflated stock prices. Once the scheme is exposed or the participants decide to sell their shares, the price of the stock crashes, causing losses for unsuspecting investors.

Money Laundering Schemes: Common Criminal Strategies

Circular transactions and circular trading are often used as methods for money laundering. Money laundering involves making illicit funds appear legitimate by passing them through a series of transactions. Some common money laundering schemes include:

• Smurfing or Structuring: Breaking down large sums of money into smaller, less suspicious transactions to avoid detection.
• Round Tripping: Creating a circuitous route for funds to disguise their origin and make them appear legitimate.
• Shell Companies: Setting up fake companies to facilitate money laundering activities and hide the true owners of the funds.
• Money Laundering Through Cryptocurrency: Utilizing cryptocurrencies to transfer and conceal illicit funds.
• Trade-Based Money Laundering: Manipulating international trade transactions to move funds across borders and disguise their illicit origin.
• Gambling: Using casinos or online gambling platforms to convert illicit funds into legitimate winnings.
• Reselling Assets: Purchasing assets with illicit funds and then selling them to make the money appear legitimate.
• Unusual Transaction Patterns: Conducting transactions that deviate from normal business practices and raise suspicion.
• Large Amounts of Cash or Wire Transfers: Moving large sums of money in cash or through wire transfers to avoid detection.
• Transactions from Countries with Weak AML Laws: Taking advantage of jurisdictions with lax anti-money laundering laws to disguise the origin of funds.
• Transactions Involving High-Risk Industries or Products: Using industries or products that are known for money laundering, such as casinos or luxury goods.
• Frequent and Unexplained Changes to Accounts or Beneficiaries: Altering account details or beneficiaries frequently to confuse investigators and hide the true source of funds.

These money laundering schemes are constantly evolving as criminals adapt to new technologies and regulations. Law enforcement agencies and financial institutions must remain vigilant to combat money laundering effectively.

Consequences for Lenders: Why Lenders Must Review Circular Transactions Closely Before Making Lending Decisions

Lenders play a crucial role in preventing circular transactions and money laundering. It is essential for lenders to closely review circular transactions before making lending decisions due to the following reasons:

1. Raise Funding: Lending money to companies involved in circular transactions can inadvertently support fraudulent activities or illegal operations.
2. Launching IPO: Companies engaged in circular transactions may seek to raise funds through an Initial Public Offering (IPO). Lenders must be cautious when evaluating such requests to avoid being part of a fraudulent scheme.
3. Money Laundering: Circular transactions are often used as a means to launder money. By lending money to companies involved in circular transactions, lenders become potential accomplices in money laundering activities.

Understanding the risks and consequences associated with circular transactions is crucial for lenders. Implementing robust bank statement analysis software powered by AI can help lenders detect suspicious transactions and make informed lending decisions.

The Takeaway

Circular transactions and circular trading are forms of fraudulent activities that can have severe repercussions. It is essential for companies, lending institutions, and law enforcement agencies to be vigilant and take necessary measures to prevent and detect circular transactions and money laundering. By staying informed and utilizing advanced technologies, we can collectively combat these crimes and safeguard the integrity of our financial systems.