There is a vast number of highly complex corporate vehicles such as corporations, partnerships and trusts. They are all excellent methods to maximize anonymity of ownership. Criminals can use these corporate vehicles to facilitate the movement of illicit funds.
In the public discussion, these corporate vehicles are usually called shell companies, or even offshore shell companies. Occasionally, the terms shelf company and front company are used.
What is a Shell Company?
Shell companies are usually non-publicly traded companies, limited liability companies, and trusts. They typically have no physical presence, other than a mailing address, and generate little or no independent economic value.
Actually, most shell companies are formed by individuals and corporations for legitimate purposes, such as to hold stock or intangible assets of another business entity or to facilitate domestic and cross-border currency transactions.
However, shell companies have also become common tools for financial crimes and especially money laundering. This is because they are easy and inexpensive to form and to operate. For the facilitation of money laundering schemes, shell companies may be used to generate false invoices, fictitious consultancy fees or bogus loans.
There are several ways, consistent with laws of certain countries, in which organizers of shell companies may obscure company structure, ownership, and activities. For example, many countries’ laws permit corporations, general partnerships, trusts, and other business entities to own and manage private limited company types, such as a limited liability companies, the so-called LLCs.
This statutory feature enables an individual or business to further conceal involvement in the activities of a shell private limited company type. Layers of ownership can be devised which makes it unlikely that relationships among various individuals and companies can be discerned, even if one or more of the owners is known or gets discovered.
What is a Shelf Company?
Then secondly, there is something called shelf company. Shelf companies are something that only few people know much about.
The creators, holders and protectors of shelf companies are typically lawyers. Especially lawyers incorporate private companies in which the law firm typically is the incorporator.
The company, after its incorporation, undertakes no business activity and sits on a “shelf” for a number of years. Eventually, the law firm will have a client who needs a pre-existing company and it will sell one of its shelf companies to the client.
Law firms often have numerous shelf companies. In some, albeit rare, occasions a person will create their own shelf company. Once a shelf company is sold, it stops being a shelf company.
After sale of a shelf company, the inactive shareholders usually transfer their shares to the purchaser, and the directors and secretary submit their resignations. Following the sale transaction, the purchaser may obtain the company’s credit and tax history.
What is a Front Company?
Last but not least, a front company or front organization is an entity, which has limited or no operations of its own but which is associated to a group or organization engaged in operations. A front company is most often a shell company.
As the relationship to other parties might not be, or barely be, visible, a front company can be used to protect a parent corporation or brand from negative publicity in the event of a mishap, and may also be used to conceal illegal activities which could not be facilitated if the true stakeholders/beneficiaries were made transparent.
Unsurprisingly, in practice, front companies mostly belong to intelligence agencies, organized crime groups, banned organizations, religious or political groups, advocacy groups, or corporations.
Front Company Examples
Over the past fifteen years, due to increasing concerns about obesity problem in the society Coca-Cola has experienced pressure from social movement activists to reduce the sugar content in its drinks.
Although Coca-Cola has publicly promoted consumer engagement in healthy lifestyles with its campaigns such as ‘Coming Together’, activists have also exposed that Coca-Cola has secretly funded front groups or organizations that criticize social movement activists and legitimize controversial corporate activists. The Center for Consumer Freedom (CCF) and Global Energy Balance Network (GEBN) are two main groups that engage activists on behalf of Coca-Cola, even though they were not intended to be publicly associated with Coca-Cola as a corporation. Research has revealed that CCF, with a mission to “promote responsibility and protect consumer choices”, uses both verbal and visual strategies to articulate obesity as “personal responsibility”, and hence protect the industry from corporate responsibility.
In the world of organized crime, financial crime and money laundering, it can be observed that many organized crime operations have substantial legitimate businesses, such as licensed gambling houses, building construction companies, hair salons and karaoke bars, engineering firms, restaurants and bars, billiard clubs, trash hauling services, or dock loading enterprises.
These are then front companies, which enable the criminal organizations to launder their income from illegal activities. As well, the front companies provide plausible cover for illegal activities such as illegal gambling, extortion, drug trafficking, smuggling, and prostitution. Tattoo shops are often used as fronts for outlaw motorcycle clubs.
Back in the days, the Cali Cartel, used a national pharmacy store chain as a front company in order to launder their drug trafficking earnings.