Have you ever been asked to buy something as a favour for someone else? If that was a transaction meant to bypass regulatory requirements, then you can be acting as a straw purchaser.
While Straw Buying may appear as a simple favour on the surface, it can have serious consequences. Whether done accidentally or on purpose, it can violate legal and compliance rules, and in many cases, may be a criminal offence!
What is Straw Buying?
Straw Buying takes place when an individual buys something for another person who may not be legally allowed to purchase it by themselves. While this concept is often related to firearms purchase, it can occur in many sectors, including pharmaceuticals, luxury and consumer goods, and in financing contracts.
This practice is coined with different terms in various countries. In the United States, it is commonly referred to as Straw Buying, particularly for firearms and financial products. In some financial and online services globally, it is also named Profile Fraud, where someone uses another person’s identity to purchase something they are not legally allowed to. Whereas, in India, a similar concept has existed as a Benami Deal, where a property is purchased in one’s name while another person funds it; or a factory is run in the name of an employee to avoid showing related party transactions; or a company is set up with such Directors and used for taking bank loans or for GST fraud.
Straw Buying and Benami Transactions
In India, straw buying is not formally known, but the practice is commonly known as a Benami transaction in India, where property is bought in one person’s name while the other person actually pays for it/is the owner. This is strictly prohibited under the Prohibition of Benami Property Transactions Act, 1988, which allows regulatory bodies to seize such properties and impose penalties.
We submit that Benami Transactions in India can be considered as Straw Buying, but not all activities under Straw Buying are Benami transactions.
Sectors Prone to Straw Buying
Sectors that are prone to straw buying generally involve high-value goods, age-restrictions, or those with stronger regulations. The main sectors include:
- Financial Products: Individuals may exploit banking and financial services entities by applying for loans or credit cards on behalf of someone who does not qualify. This is to bypass credit score requirements, income verification, or other regulatory requirements.
- Real Estate: Fraudsters use straw buyers to purchase high-end properties in their name, which the other party, who may face restrictions, provide the funds.
- Firearms: The most well-known sector where an individual who is legally allowed to purchase firearms buys one for someone who is prohibited from doing so to promote illicit behaviour. It leads to social harm, criminal activities, and unregulated possession.
- Pharmaceuticals: Purchase of prescription drugs or other controlled substances is made on behalf of others who cannot legally obtain them, such as minors or those without a valid prescription.
Strengthening Compliance
To prevent straw buying and its long-term consequences, organisations and individuals must adopt stronger compliance practices. This must include identity verification, background checks, monitoring of high-risk transactions, and regular audits to detect unusual patterns.
Beyond legal compliance, mitigating the risk of straw buying also protects society by reducing black-market activity, deterring criminal behaviour, and maintaining trust in regulated industries. Through these measures, businesses not only reduce the financial and reputation risk but also contribute to a safer and more transparent environment.
Need help in reviewing your current compliance processes today? Talk to our experts to know how.
Conclusion
Straw Buying may seem like a kind act, but it carries serious legal, ethical, and financial consequences. From real estate to firearms, the practice can put both individuals and organizations at risk. Awareness, strong compliance measures, and ethical decision-making are key to preventing accidental or deliberate straw purchases. By understanding the regulatory structure and taking responsible actions at all stages, individuals and businesses can protect themselves while promoting transparency and trust in all transactions.