The due diligence process is a critical step in any acquisition to ensure that the acquiring company understands the financial and operational risks associated with the target company.
Laundering operations to boost valuations
Laundering operations to boost valuations generally refer to the practice of using illegal funds, often obtained through criminal activities such as drug trafficking or terrorism, to purchase assets or make investments that will make the funds appear legitimate and increase the valuation of the company or assets.
This is a form of money laundering and is a criminal offense. The goal is to conceal the illegal source of the funds and make them appear to be legitimate profits or investments. The term “laundering” refers to the process of making illegal funds appear “clean” or legitimate.
In the context of laundering operations to boost valuations, this can involve using illegal funds to purchase assets, invest in the company’s stock, or engage in other activities that will increase the perceived value of the company.
The goal of these laundering operations is to attract more investors and increase the company’s stock price, which can result in significant financial gains for those involved in the scheme. However, it is important to note that such practices are illegal and can have serious consequences for the company and its stakeholders if they are discovered by regulators or law enforcement agencies.
Role of Riskpro in Investigating
In this case, Riskpro was hired to conduct financial due diligence on a private limited company that was the acquisition target of a large software company.
During our on-field visit, we observed that the office premises had very few computers, which were also packed. Upon further investigation, we discovered that the software company had shown business worth Rs 500 crore with various foreign entities, but no actual business had been transacted.
In a fraudulent practice known as round-tripping, money from various countries was funneled into the company’s bank accounts to artificially inflate its valuation. This deceptive technique involves sending money out of a company, and then bringing it back in as revenue, creating the impression of strong financial performance.
In reality, it is just a manipulation of financial statements and an attempt to deceive investors. This practice is illegal and unethical, and can have serious consequences for the company and its stakeholders. If discovered, it can lead to legal action against the company and its executives, and it can also damage the company’s reputation and trust with investors. Therefore, it is essential that companies operate with transparency and integrity and comply with legal and ethical standards.
Our team documented these findings in a detailed report, which was shared with the acquiring company. We also recommended a thorough review of the target company’s financial statements and practices to avoid any potential legal or financial repercussions. By identifying this fraudulent practice, we helped the acquiring company make an informed decision and avoid a potentially costly acquisition.
