Enforcement Directorate Probes Commodity Brokers For Exploiting Remittance Scheme

The Enforcement Directorate is investigating commodity brokers with subsidiaries in Dubai for their alleged exploitation of the Reserve Bank of India’s overseas remittance scheme. Five such brokers are being probed by the ED, moneycontrol.com reported citing sources.

The commodity brokers had allegedly evaded taxes by misusing the liberalized remittance scheme (LRS). According to senior official from ED, the agency has initiated preliminary investigations against five commodity brokers who are based in the country, but have started offices in another country. “We have clues this was just for evading taxes.” the official said, according to Moneycontrol.

The publication quoted another source who was following the development as saying: “In the initial investigation, we found these commodity brokers executed one trade in the domestic market and undertook trades of the same value in a tax haven country, mostly Dubai. Trades were executed in a way that the overseas trades showed a profit, and the domestic ones showed a loss. That way, there will be no need to pay taxes. These trades are a violation of the Foreign Exchange Management Act (FEMA) and are under the net of the ED.”

The LRS scheme states that all resident individuals, including minors, can freely remit up to $250,000 per financial year (April-March) for any permissible current or capital account transaction

The Foreign Exchange Management Act (FEMA) states that an individual or company is prohibited remittance from India to cover margins or margin calls of overseas exchanges or overseas counterparty. The Act further says that there is no provision of remittances for the purchase of foreign currency convertible bonds Indian companies issue in the overseas secondary market or for trading in foreign exchange abroad.

The Commodity Futures Trading Commission (CFTC) spotted such trades last month by a company named Arab Global Commodities (AGC), a proprietary trading firm based in Dubai with several trading offices in India. The firm was involved in a disruptive trading practice called “spoofing” in the copper futures contract traded on the Commodity Exchange, Inc. (COMEX) between March and August 2016.

The CFTC order says that AGC engaged in this activity through one of its employees (say Trader A) who generally spoofed after business hours from home. Over the course of several months, the order goes on to state, Trader A repeatedly traded by using the same spoofing pattern — placing one or more large orders (typically more than 100 contracts) on one side of the book, while he had a small resting order (typically fewer than 10 contracts) on the opposite side of the book. After his small order was filled, he immediately cancelled the large order(s). CFTC found that some times Trader A used another AGC trader’s account to hide his spoofing.