The Panama Papers exposure and proliferation of offshore shell companies in countries like Bermuda, Luxemburg and Switzerland, has renewed interest in shell companies. The legitimacy of shell companies is now being debated because of its high exposure to regulatory and financial risks. Despite being a legal entity, its misuse has made them a regulator’s nightmare as increasingly shell firms are being considered a grey area. Jurisdictions from around the world are thus closely monitoring the use of shell firms, as was seen recently in the case of the Monetary Authority of Singapore’s crackdown on Singapore’s onshore shell firms.
Money launderers worldwide are becoming more and more creative in disguising the proceeds of crime. They are found to use an elaborate corporate structure of shell companies and layers of ownership to evade detection of beneficial ownership and source of funds. Company structure, possession and transactional information are concealed from regulators and law enforcement agencies. This has brought shell firms within the ambit of anti-money laundering and counter-terrorist financing laws.
What is a Shell Firm?
A shell firm is a legally incorporated company that typically has no physical presence other than a mailing address. It conducts almost no independent operations or business activities, except for financial transactions. Shell companies, as a rule, have no major assets other than financial assets. So they do not generate revenue or hire employees.
Traditionally, shell firms 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, protect assets from lawsuits and invest 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 firms are being abused by financial intermediaries for personal financial gains as well as 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 firms in such a manner that it doesn’t count as 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 gains.
Access to lucrative foreign marketplaces has lured individuals to use offshore shell companies as ways for money laundering and terror financing. Financial institutions are thus expected to be vigilant and prevent the use of such entities as laundromats for concealing illegal gains and activities like bribery, corruption, human trafficking, and drug smuggling. The association of shell companies to both legitimate financial systems and criminal activities means financial institutions need to implement stringent measures to curb risks from shell firms.
Various factors are considered red flags for the risk assessment of shell firms:
– 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 which has no liabilities.
– Multiple high-value payments with no specific stated purpose or against goods or service, with only an invoice number as a reference.
– Involvement with other agents or more shell firms.
– Connection with high-risk customers.
– Transactions with entities sharing the same address as that of 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.