Criminals are employing so 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 so many companies that operates in the world without any physical presence and control of assets, making them vulnerable to money laundering and terrorist financing.
This article aims to throw light on the features of shell companies and how they could be exploited by criminals to laundering 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 of Shell, Front and Shelf companies. Front company, on one hand is a fully functioning company with the characteristics of a legitimate business, serving to disguise and obscure illicit financial activity. Shelf Company, on the other hand, is an incorporated company with inactive shareholders, directors, and secretary and is left dormant for a longer period even if a customer relationship has already been established. With regards to Shell Company, it is an incorporated company with no independent operations, significant assets, ongoing business activities, or employees. Shell Corporation’s existence is just confined in documents and has no physical presence and employees. Shell Corporations are not illegal businesses but can be used for illegal purposes such as tax evasion and money laundering. It can also use to achieve a specific goal to hide the original owners of companies who will want to shield their personal assets from authorities or others. Most at times, Shell companies are use as trustee for a trust or a vehicle for business transaction without itself having any significant assets or operations.
Companies wanting to use the tax laws to their advantage uses Shell Companies to avoid the payment of taxes. This is mostly done utilizing the favorable transfer pricing strategies.
Countries where Shell Corporations thrive and domicile are Ireland, Liechtenstein, Luxembourg, Switzerland, Isle of Man, Guernsey, Jersey, Bahamas, Barbados, Bermuda, Cayman Islands, and Virgin Islands, Panama, Hong Kong and Singapore.
Shell Companies are considered vulnerable to money laundering due to its anonymity. It offers protection about the owners’ and/ or controllers’ identities secret by keeping the identities private, especially so, when the Shell Company is incorporated in a tax haven country. Request for information about the beneficiary owners of the company is restricted. They might use fictitious directors or shareholders, intricate ownership structures, and offshore jurisdictions with rules that permit greater anonymity and privacy. Shell companies offers opportunity for foreign and domestic firms to move funds from one country to another without having to disclose the identities of the business owners, nature of purpose of the transactions
The ease at which Shell Companies are form 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 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 the authorities. They are used to raise funds, hold stocks, or serve as limited liability trustees for these criminals without the identity of the true owners being disclosed. Shell companies are also used to finance the activities of terrorist organizations. One of the challenges with shell companies, which is attracted to criminals, is that they can be difficult to trace since they don’t have physical presence.
Tax evasion is one of the uses why Shell companies are formed. Because criminals don’t want to pay taxes on their incomes and assets, they set up shell companies in jurisdiction with lower tax rates or lax regulations. This is done by the criminal transferring his or her income and assets to the shell company, which then acts as 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 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 or transfer founders 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 recognizable products or services.
- Transactions with a large percentage of beneficiaries in high-risk jurisdictions or off-shore financial centers.
One way for combat the use of shell companies by criminals to further their criminal activities is for the enactment and implementation of laws to regulate the formation, operations and activities of shell companies. These laws will require greater transparency in the ownership structure of these business. The implementation of the beneficiary ownership registry will go a long way to identify the actual owners of companies. Making the information on the beneficiary ownership registry available to the law enforcement agencies will help in their investigation and subsequent prosecution of the criminals behind the shell companies. Also international standards and guidelines for combating 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 the transactions of shell companies.
Despite these dangers and controls stated, the use of shell companies for financial crimes continues to be a challenge. As technology, digitalization and globalization 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 organizations to combat the use of shell companies for financial crimes.
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