Shell Company Risk And Red Flags

One of the most common strategies for laundering the proceeds of crime and corruption is through anonymous shell businesses. This article elaborates on ‘Shell Company Risk And Red Flags’.

Organizations must adhere to best practices and guidelines, such as those given by the FATF, to remove the veil of secrecy around the ultimate owner of a corporation, foundation, organization, or other legal entity and to avoid their exploitation for crime and terrorism. 

FATF recognizing the right owners

The Financial Action Task Force is the international standard-setter for anti-money laundering and counter-terrorist funding initiatives. FATF was the first international organization to establish worldwide beneficial ownership norms.

This is to guarantee that the right owners are recognized and that there is no risk of dealing with shell firms. It required countries to ensure that their authorities could obtain up-to-date and accurate information about the person behind the company’s foundations and other legal persons. The FATF further strengthened and clarified its beneficial ownership requirements in 2012.

FATF’s approach to misuse of legal persons for criminal purposes

The FATF has finalized best practices with examples from across the global network of FATF and FATF-Style regional bodies’ members, which will help countries implement the FATF’s requirements. The report highlights that jurisdictions using a multi-pronged approach with several sources of information are often more effective in preventing the misuse of legal persons for criminal purposes. 

The report identifies the most common challenges that countries face in ensuring that the beneficial owner of legal persons is identified and suggests key features of an effective system.

Shell Company Risk And Red Flags

Indicators of Shell Companies

Following are the minimum list of indicators of Shell Companies: 

  • Formal nominees may be “mass” nominees who are nominated agents for a large number of shell companies; 
  • Informal nominees, such as children, spouses, relatives, or associates who do not appear to be involved in the running of the corporate enterprise;
  • Address of mass registration, usually the address of a TCSP that manages several shell companies on behalf of its customers 
  • Only a post-box address 
  • No real business activities undertaken 
  • Exclusively facilitates transit transactions and does not appear to generate wealth or income (transactions appear to flow through the company in a short period with little other perceived purpose) 
  • No personnel (or only a single person as a staff member) 
  • Pays no taxes, superannuation, retirement fund contributions, or social benefits 
  • Does not have a physical presence.

Red Flags of Shell Companies

Below are the transactions or events, which require the generation of red flags, for review and investigation:

  • The customer is both the ordering and beneficiary customer for multiple outgoing international funds transfers; 
  • The connections between the parties are questionable or generate doubts that cannot be sufficiently explained by the client; 
  • Finance is provided by a lender, whether a natural or a legal person, other than a known credit institution, with no logical explanation or commercial justification; 
  • Loans are received from private third parties without any supporting loan agreements, collateral, or regular interest repayments;
  • The transaction is occurring between two or more parties that are connected without an apparent business or trade rationale; 
  • The transaction is a business transaction that involves family members of one or more of the parties without a legitimate business rationale; 
  • The transaction is a repeat transaction between parties over a contracted period; 
  • The transaction is a large or repeat transaction, and the executing customer is a signatory to the account but is not listed as having a controlling interest in the company or assets; 
  • The transaction is executed from a business account but appears to fund personal purchases, including the purchase of assets or recreational activities that are inconsistent with the company’s profile; 
  • The transaction is executed from a business account and involves a large sum of cash, either as a deposit or withdrawal, which is anomalous, or inconsistent with the company’s profile;
  • The funds involved in the transaction are unusual in the context of the client or customer’s profile, are anomalous in comparison to previous transactions, or are sent to/received from, a foreign country when there is no apparent connection between the country and the client, and/or, funds are sent to, or received from, a low-tax jurisdiction or international trade or finance center;
  • Unexplained use of powers of attorney or other delegation processes (for example, the use of representative offices).

Final Thoughts

This article is a detailed elaboration on ‘Shell Company Risk And Red Flags’ and how some legal persons may be used for criminal purposes such as money laundering and terrorist financing. And one of the most commonly used for laundering is through anonymous shell businesses.

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