Criminals are employing many schemes, techniques and mechanisms to obscure their ownership and control of dirty acquired assets. Identifying the true beneficial owner(s) and/or individual(s) exercising control over assets and businesses is a big challenge for financial institutions, law enforcement agencies, prosecutors and intelligence practitioners across the world.
There are many companies operating in the world without any physical presence and/or control of assets, making them suitable for money laundering and terrorist financing.
This article aims to throw light on the features of shell companies and how they can be exploited by criminals to launder their ill-gotten money.
Research conducted by the Financial Action Task Force (FATF) demonstrates that legal persons, especially shell companies, are a key feature in the techniques and schemes used to disguise the real ownership of firms (beneficial ownership). A shell corporation is a corporation without active business operations or significant assets – simply put, a company without any physical presence and assets.
A distinction can be made between Shell, Front and Shelf companies. A Front company is a fully functioning company with the characteristics of a legitimate business, serving to disguise and obscure illicit financial activity. A Shelf company, however, is an incorporated company with inactive shareholders, directors and secretaries, and is left dormant for a long period even if a customer relationship has already been established.
With regard to a Shell company, it is an incorporated company with no independent operations, significant assets, ongoing business activities or employees. A shell corporation’s existence is confined to documents and has no physical presence or employees. Shell corporations are not illegal businesses, but can be used for illegal purposes such as tax evasion and money laundering. they can also be used to achieve a specific goal to hide the original owners of companies who want to shield their personal assets from authorities or others. Most of the time shell companies are used as trustees for a trust, or a vehicle for business transactions, without having any significant assets or operations.
Companies wanting to use tax laws to their advantage use shell companies to avoid payment of taxes. This is mostly done by utilising favourable transfer pricing strategies.
Countries where shell corporations thrive and are domiciled include Ireland, Liechtenstein, Luxembourg, Switzerland, Isle of Man, Guernsey, Jersey, Bahamas, Barbados, Bermuda, Cayman Islands, Virgin Islands, Panama, Hong Kong and Singapore.
Shell companies are considered vulnerable to money laundering due to their anonymity. They offer protection and secrecy for the owners’ and/ or controllers’ identities by keeping them private; especially so, when the Shell company is incorporated in a tax haven country. Requests for information about beneficiary owners of the company is restricted. They might use fictitious directors or shareholders, intricate ownership structures and/or offshore jurisdictions with rules that permit greater anonymity and privacy. Shell companies offer the opportunity for foreign and domestic firms to move funds from one country to another without having to disclose identities of the business owners and nature of the transactions’ purpose.
The ease with which shell companies are formed also makes them vulnerable to money laundering. It is not expensive to set up and operate a shell company, especially in a tax haven country. This was noted in a money laundering threat assessment conducted by the FinCEN in 2015, and an FATF report ‘The Misuse of Corporate Vehicles, Including Trust and Company Service Providers’ in 2016.
Criminals use shell companies to acquire, manage and hide their assets from authorities. They are used to raise funds, hold stocks or serve as limited liability trustees for criminals without the identity of their true owners being disclosed. Shell companies are also used to finance the activities of terrorist organisations. One of the challenges with shell companies, which is attractive to criminals, is that they can be difficult to trace since they don’t have a physical presence.
Tax evasion is one of the reasons for shell companies’ formation. Because criminals don’t want to pay taxes on their incomes and assets, they set up shell companies in jurisdictions with lower tax rates or lax regulations. This is done through the criminal transferring his/her income and/or assets to the shell company, which then acts as a holding company or investment vehicle.
Given the severity of this threat to the financial system’s integrity, businesses must acknowledge the Anti Money Laundering (AML) risks associated with shell companies and identify clients attempting to launder ill-gotten money through them. Some red flags to look out for when dealing with clients/ customers include:
The secrecy surrounding shell corporations
The purposeful withholding of information by criminals.
Transactions involving products and services do not correspond to the businesses sending or receiving them.
Several high-value transactions between well-known shell firms
Difficulties in receiving information regarding the transaction’s transferees or beneficiaries.
A business that engages in transaction activity that is out of line with its business models, such as unusually large transaction volumes or irregular bursts of activity.
Transactions involving two different businesses with the same registration address or corporations that disclose their registered agent’s address.
Payments in which there is no clear or declared purpose, or for which there are no recognisable products or services.
Transactions with a large percentage of beneficiaries in high-risk jurisdictions or off-shore financial centres.
One way to combat the use of shell companies by criminals in furthering their criminal activities is by the enactment and implementation of laws that regulate the formation, operations and activities of shell companies. These laws will require greater transparency in the ownership structure of these businesses. Implementation of a beneficiary ownership registry would go a long way to identify the actual owners of companies. Making information on the beneficiary ownership registry available to law enforcement agencies will help in their investigations and subsequent prosecution of criminals behind the shell companies. Also, international standards and guidelines for combatting the use of shell companies for financial crime activities should be adopted and followed.
Proper due diligence and KYC principles need to be instituted by financial institutions if they are to onboard any shell company. The financial institution should have the necessary tools and knowledge to monitor shell companies’ transactions.
Despite these dangers and controls stated, the use of shell companies for financial crimes continues to be a challenge. As technology, digitalisation and globalisation make it easier to move money around the world easily, individuals and corporations are finding new ways to hide their assets and income from authorities. It will require continued vigilance and cooperation among law enforcement agencies, financial regulators and international organisations to combat the use of shell companies for financial crimes.
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