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.