Round-tripping (finance)

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Round-tripping, also known as round-trip transactions or "Lazy Susans", is defined by The Wall Street Journal as a form of barter that involves a company selling "an unused asset to another company, while at the same time agreeing to buy back the same or similar assets at about the same price." Swapping assets on a round-trip produces no net economic substance, but may be fraudulently reported as a series of productive sales and beneficial purchases on the books of the companies involved, violating the substance over form accounting principle. The companies appear to be growing and very busy, but the round-tripping business does not generate profits. Growth is an attractive factor to speculative investors, even if profits are lacking; such investment benefits companies and motivates them to undertake the illusory growth of round-tripping.

Round trips are characteristic of the New Economy companies. They played a crucial part in temporarily inflating the market capitalization of energy traders such as Enron, CMS Energy, Reliant Energy, and Dynegy.

In international scenarios, round tripping is used for tax evasion[1] and money laundering as well.[2]

Other companies making unconventional round-tripping deals include AOL with Sun Microsystems and Global Crossing with Qwest Communications. It is alleged that when some telecommunications companies swapped capacity, they booked the value of the incoming capacity as revenue and the value of the outgoing capacity as an investment. These transactions had the effect of inflating profits. The SEC ruled that booking revenues from swaps in telecommunications capacity was improper.

Many such companies have used round-tripping to distort the market by establishing false revenue benchmarks, aiming to meet or beat the numbers put out by Wall Street stock analysts. As a result of abusive round trips, barter between publicly held companies has become discredited among professional investors.

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References[edit]

  1. ^ Michelle Hanlon, Edward L. Maydew, and Jacob R. Thornock: Taking the Long Way Home: Offshore Investments in U.S. Equity and Debt Markets and U.S. Tax Evasion; presented at 2010 National Tax Association meeting, EIASM 2011 Workshop on Current Research on Taxation at the University of Münster, 1 Sep.2011.
  2. ^ Aswath Rau and Pallabi Ghosal: “Entering the Tiger’s Den: Foreign Investment in India through Mauritius or Singapore”; Singapore Law Gazette, Feb.2012.

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