Shell Companies

The Panama Papers exposure and proliferation of offshore shell companies in countries like Bermuda, Luxemburg, and Switzerland has renewed the interest of countries in shell companies. The legitimacy of shell companies is now being debated because shell companies often enable financial crime, including tax evasion, concealment of beneficial owners and laundering the proceeds of a crime. Despite being a legal entity, its misuse has made them a regulator’s nightmare as shell companies are becoming an increasingly grey area. Jurisdictions worldwide are thus closely monitoring the use of shell companies, as was seen recently in the case of the Monetary Authority of Singapore’s crackdown on Singapore’s onshore shell companies. 

Money launderers worldwide are becoming more and more creative in disguising the proceeds of crimes. They often use shell companies in complex ownership structures, which are created with several layers of ownership. The ultimate purpose is to evade the detection of beneficial ownership and thus conceal the source of funds. This has brought shell companies within the ambit of anti-money laundering and counter-terrorist financing laws. As a result, many countries have prohibited the establishment of shell companies while others are allowing them, but at the same time looking to mitigate the associated risks. 

What is a Shell Company? 

A shell company is a legally incorporated company that is created only with the use of a mailing address. It conducts almost no independent operations or business activities, except for financial transactions. Shell companies, as a rule, have no significant assets other than financial assets. As a result, they do not generate revenue. In most cases, they have limited or no employees. 

Traditionally, shell companies were used for business start-up activities like registration and fundraising, or to take advantage of lesser regulations in an offshore financial centre or country. They are also used for staging hostile takeovers, protecting assets from lawsuits and investing in foreign markets. 

However, in addition to legitimate business purposes, shell companies are being used to facilitate illicit activity, including money laundering and tax evasion. 

Why shell firms are considered high-risk?

Shell companies are being abused by Politically Exposed Persons (PEPs) for personal financial gains but also by tax evaders and criminals to conceal the money trail of illegal activities or dubious incomes. 

Shell corporations are often used for illegal activities, including: 

•  Money laundering: Concealing the source of money and structure of ownership. 
• Tax evasion: Channelling or hiding earnings through a complex structure of shell companies so that the earnings are not considered personal income. 
• Illicit activity: drugs, extortion, bribes, corruption. 
• Terror financing activities: supply of arms, sponsoring riots, financing terrorists. 
• Market manipulation: artificially boosting stock prices for personal gain. 

Access to lucrative foreign marketplaces has lured individuals to use offshore shell companies as ways for money laundering and terrorist financing. Financial institutions are thus expected to be vigilant and prevent using such entities as laundromats for concealing illegal gains and activities like bribery, corruption, human trafficking, and drug smuggling. Financial institutions require stringent measures to mitigate risks from establishing relationships with shell companies. 

Taxonomies

Various factors are considered red flags for the risk assessment of shell companies: 

–  Presence of suspicious activity.
–  Country/countries of registration and operation that are deemed high-risk financial centres or sanctioned regimes.
–  Beneficial Ownership information and exposure to ML/TF risks.
–  Adverse Media or negative news about the Shell Company or its directors.
– Whether any Director of the Shell Corporation belongs to a Disqualified Directors 

–  Size and complexity of financial transactions. 

–  Fake financial transactions or transfer of financial assets to a new company with no liabilities. 

–  Multiple high-value payments with no specific stated purpose or against goods or services, with only an invoice number as a reference. 

–  Involvement with other agents or more shell companies. 

–  Connection with high-risk customers. 

–  Transactions with entities sharing the same address as the shell firm. 

–  Variety of beneficiaries receiving wire transfers 

–  Suspicious wire transactions and activity history that do not match the company profile. 

–  Shares of the firm sold at a high premium. 

–  Buyers of the firm or its investors gave coveted deals in coal, energy, etc., as a reward.