What is round-tripping?

Round-tripping describes a set of transactions in which money or value travels in a circle and comes back to where it started, but arrives looking like something new: foreign investment, customer revenue, a loan or a commercial receipt. The purpose of the circle is to change how the money appears in the books, in regulatory filings or in a tax return, without any real economic activity behind it.

The term is used in three overlapping contexts in India: foreign exchange regulation, financial reporting and taxation. It is also a common technique in money laundering.

How does round-tripping work?

A typical cross-border example: a resident Indian moves funds to an overseas entity, which then invests the money back into an Indian company as foreign direct investment. The investor gains apparent foreign capital, may obscure the true source of funds and may obtain tax or regulatory advantages.

A typical accounting example: a company pays an advance to a related party or a shell company, which passes the money through one or two intermediaries and returns it as a "customer receipt" against a fictitious sale. Revenue and cash collections both look genuine, but the company has simply recycled its own money. This is a recognised pattern of financial statement fraud.

Circular trading in goods or securities works similarly: the same goods or shares move between connected parties to create turnover, inflate prices or generate input tax credits.

What is the Indian regulatory context?

Foreign exchange. Under Rule 19(3) of the Foreign Exchange Management (Overseas Investment) Rules 2022, a resident may not make a financial commitment in a foreign entity that has invested, or invests, into India where the result is a structure with more than two layers of subsidiaries. Banking companies, NBFCs, insurers and government companies are exempt. The 2022 regime replaced the earlier approach to round-tripping with this layer test.

Taxation. India's general anti-avoidance rule treats an arrangement as lacking commercial substance where it involves round-trip financing, meaning funds transferred among the parties through a series of transactions with no substantial commercial purpose other than obtaining a tax benefit. This was s. 97 of the Income-tax Act 1961 and is now s. 180 of the Income-tax Act 2025, which applies from 1 April 2026.

Financial reporting and securities law. Fictitious revenue makes financial statements false. Knowingly making materially false statements in documents required under the Companies Act 2013 attracts liability under s. 448 read with s. 447. For listed companies, the initiation of a forensic audit aimed at detecting misstatement or diversion of funds is a deemed-material event under the SEBI LODR Regulations.

Money laundering. Where the funds are proceeds of crime, projecting them as untainted through circular transactions can fall within s. 3 of the Prevention of Money-laundering Act 2002.

What are the red flags of round-tripping?

• Customers who are also suppliers, lenders or investors, especially related parties.
• Money paid out as advances, loans or capital and returning within days as sales receipts or share capital.
• Foreign investors in tiny or newly formed overseas entities with no other business, whose own funding comes from India.
• Revenue spikes near the reporting date that reverse in the next period through credit notes or write-offs.
• Sales with no matching transport, warehouse or delivery records.
• Counterparties sharing directors, addresses, auditors or bank branches.

How is round-tripping investigated?

Investigators follow the money rather than the documents. A forensic audit maps fund flows across bank statements of the company and its counterparties, links entities through registry data to establish common beneficial ownership, and tests whether each transaction had commercial substance. Our article on data analytics for fraud detection covers the ledger tests that typically trigger this work.

How does round-tripping differ from related terms?

Layering in money laundering is broader: it is any series of transactions that distances illicit money from its source, whether or not the funds return. Related-party transactions are lawful if approved and at arm's length; round-tripping is about disguised substance. Circular trading is a form of round-tripping focused on goods or securities rather than funds.

Spectra Forensics' forensic accounting and data analytics service covers fund-flow tracing and revenue testing for suspected round-tripping.