What is Round Tripping?

Round tripping occurs when one company sells assets to another party in order to generate sales, and later buys back the assets. The intent of doing so is to artificially boost a firm’s reported sales. This can be quite useful for a publicly-held business, since investors will see the revenue increase and bid up the price of the firm’s shares accordingly. For example, a real estate company sells several condominiums to a related party for $4 million and then buys them back a year later for the same price. Doing so generates sales not only for the original seller, but also for the related party when it sells the condominiums back. In these arrangements, there is minimal net long-term change in a firm’s profits.

Since round tripping is being used to engage in reporting fraud, every situation noted here is subject to prosecution.

Why Use Round Tripping?

There are several reasons why a business might use round tripping, which are as follows:

Increase the stock price. Round tripping can be used to artificially inflate the reported amount of a company’s sales. Management may feel that this practice is necessary in order to meet analyst expectations for sales, which can lead to a higher stock price. For this reason, round tripping is more common in publicly held companies, since their shares are being publicly traded, and so may increase rapidly if a false sales figure is reported.
Increase a buyout offer. Round tripping can be used to boost reported sales when a company is about to be sold at a multiple of sales. By doing so, the buyer will increase the price it is offering, under the false assumption that the acquiree’s sales are booming.

Round Tripping and Money Laundering

Round tripping can be used to launder money, which can be quite useful for avoiding income taxes and capital controls. As an example, Jeffrey wants to bring money back into his home country that he earned elsewhere. To do so, he sets up a shell company in a Caribbean tax haven, disguising his ownership of it. He then wires $5 million from his offshore account into the account of this shell company. Jeffrey then sets up another business in his home country and has the shell company wire the money to the new business, characterizing it as a foreign direct investment. In effect, there is no direct investment, just a movement of Jeffrey’s money back into his home country in a manner that will not alert the tax authorities.