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The Companies Act, 2013, makes it mandatory for companies with a net worth of over Rs 5 bn or annual revenue of Rs 10 bn or net profit of Rs 50 m to formulate a Corporate Social Responsibility (CSR) committee. The committee will ensure that atleast 2% of the average profits of the preceding three years are spent on CSR activities.
CSR include activities such as promoting rural sports, nationally recognized sports, setting up homes and hostels for women, orphans and senior citizens, preventative healthcare, sanitation etc.
However, few corporates are using the CSR tool to convert white money to black. You must be wondering how?
The CSR activities are undertaken by the company itself or through any external trusts. In case the company carries out the CSR activities through external trusts there is an easy way to convert the white money to black.
Firstly, CSR spends are not required to be audited by the statutory auditors. Secondly, financials of charitable trusts also come under little scrutiny. As per an article in Economic Times, trusts are the most preferred route to launder the black money because they are not adequately governed. Unless there is specific legitimate information on the wrong doings of the trusts they are rarely scrutinized. This provides a perfect opportunity to abuse the new CSR norms. We will explain this with the help of an example.
Suppose a company has to spend Rs 1 bn on CSR activities. The company appoints an external charitable fund to undertake the CSR activities. The company will endorse the cheque in favour of the trust and the funds will flow to the trust through a legitimate banking channel. However, the charitable trusts will return the money to the company or promoters in cash after charging a commission. There is a win-win situation for both the parties. The company converts its money into black and the charitable trust gets its commission.
In one of our recent article we had explained the impact of the black money on India's Gross Domestic Product. Such activities are a big set-back for the government who wants to eliminate black money from the country. The government will have to come up with new provisions to amend the CSR law to eliminate such flaws.
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