Glossary term
Tunneling
Subject: Financial Crime, Money Laundering, Typologies and Asset Recovery
Also known as: Tunnelling, Asset stripping by insiders
Tunnelling is when controlling shareholders or managers siphon a company's assets or profits to themselves or their other firms, leaving minority shareholders and creditors worse off.
Explanation
The term describes insiders digging a channel from a company to themselves. It usually works through deals that look legal on paper: selling assets to the owner's other firms at a low price, buying from them at a high one, lending money that is never repaid, or paying excessive fees. Control without a matching share of the profits tempts a majority owner to take value out rather than share it. Tunnelling is most associated with companies that have one dominant shareholder or a family group, and with weak protection for small investors. Auditors and regulators look closely at related-party deals and unexplained loans to group firms. Outside shareholders and lenders are left holding a hollowed-out business, which is why related-party approvals draw so much scrutiny.
Example
A listed manufacturer owned 60% by one family sells a profitable plant to another family company for half its valuation. A year later it takes a loan of 20 million from the same company at an interest rate far above the market. Minority shareholders complain, the audit committee asks for independent valuations, and the regulator opens an inquiry into the related-party deals.
Not to be confused with
- Embezzlement
- Embezzlement is theft by someone trusted with the funds. Tunnelling usually runs through apparently lawful deals made by those in control.