Round Tripping of Funds
A Global and Indian Regulatory Perspective
Round tripping of funds, particularly through Special Purpose Vehicles (SPVs), is a financial practice where money is moved out of a country and reinvested back under the guise of foreign direct investment (FDI) or foreign portfolio investment (FPI). While round-tripping can sometimes be legitimate, it is often used for tax evasion, money laundering, capital flight, and stock market manipulation.
Globally, countries like China, Russia, India, and the U.S. have encountered significant round-tripping concerns, particularly through offshore financial centers such as Mauritius, the Cayman Islands, the British Virgin Islands (BVI), Luxembourg, and Singapore.
Understanding Round Tripping via SPVs
How It Works
- Domestic Firm Creates an Offshore SPV: A company or an individual sets up an SPV in a tax haven (e.g., Mauritius, Cyprus, or the Netherlands)
- Capital Outflow to SPV: The domestic entity transfers funds to the SPV, classifying it as an investment in a foreign entity
- SPV Invests Back in Home Country: The SPV re-routes the funds back to the home country as FDI/FPI or corporate debt investment
- Regulatory & Tax Benefits: The entity may evade taxes, artificially inflate stock prices, or conceal beneficial ownership
- Laundering of Illicit Funds: Criminal enterprises use round-tripping to convert black money into white money under the cover of legitimate investments
Regulatory Framework Governing Round Tripping
1. FATF Recommendations on Round-Tripping & SPVs
The Financial Action Task Force (FATF) has issued several guidelines to counter illicit financial flows through offshore vehicles:
- Recommendation 10 (Customer Due Diligence – CDD): Mandates verification of the ultimate beneficial owner (UBO) of SPVs and shell companies
- Recommendation 22 (Transparency of Legal Arrangements): Requires jurisdictions to maintain publicly accessible registers of company ownership
- Recommendation 24 (Corporate Transparency Rules): Calls for increased scrutiny on SPVs used in cross-border financial transactions
2. OECD’s Base Erosion and Profit Shifting (BEPS) Framework
The OECD’s BEPS Action Plan seeks to combat tax avoidance through artificial profit shifting. Some key actions include:
- Action 5: Harmful Tax Practices (prevents misuse of tax treaties)
- Action 13: Country-by-Country Reporting (CbCR) (requires firms to disclose profits, taxes paid, and business locations)
- Action 15: Multilateral Instrument (MLI) (modifies tax treaties to prevent abuse by shell companies)
3. Global Regulations on SPV Structures & Round Tripping
| Jurisdiction | Regulatory Action |
|---|---|
| United States | Foreign Account Tax Compliance Act (FATCA): Requires disclosure of offshore investments to the IRS |
| European Union | Anti-Tax Avoidance Directive (ATAD): Limits artificial financial flows via offshore entities |
| China | Restricts outward investments to tax havens without economic substance |
| Russia | Imposes strict capital controls to prevent offshore fund movements |
EU ATAD Overview: https://taxation-customs.ec.europa.eu/anti-tax-avoidance-package_en
Round Tripping Regulations in India
1. Foreign Exchange Management Act (FEMA), 1999
- Regulates capital movement in and out of India
- RBI approval required for offshore SPVs investing in India
- New FEMA rules (2023) restrict Mauritius/Singapore route investments to prevent round-tripping
2. Prevention of Money Laundering Act (PMLA), 2002
- Mandates reporting of cross-border transactions above ₹10 crore ($1.2M)
- Requires financial institutions to disclose beneficial ownership of offshore accounts
PMLA Act: https://dea.gov.in/pmla
3. SEBI’s FPI Regulations (2023 Update)
- Strengthened disclosure norms for Foreign Portfolio Investors (FPIs) using SPVs in tax havens
- Requires high-risk investors to disclose ultimate ownership structures
Additional Reading:
- FATF Beneficial Ownership Guidelines: https://www.fatf-gafi.org/publications/corporatetransparency/
- OECD Anti-Tax Avoidance Directives: https://taxation-customs.ec.europa.eu/anti-tax-avoidance-package_en
- SEBI FPI Regulations: https://www.sebi.gov.in