Shell company's risks and red flags

In the event of worldwide business growth, money laundering is the ultimate challenge financial institutions face. Criminals set traps to hide the origin of their illegally earned money and channel it through different processes to add it to the legal and financial framework. The regulatory bodies make it compulsory for every business to adhere to the AML compliance program. However, criminals still find other innovative ways to successfully launder their money to specific destinations.

The creation of shell companies to launder illegally obtained money is becoming increasingly popular. Though shell companies are legal and used by individuals for legitimate purposes, the label attached to them due to their frequent use for money laundering is notorious.

You might need clarification on Why governments allow individuals to establish hollow companies in large numbers. Well! Setting up a new shell company in the US or any other jurisdiction is relatively easy and straightforward because, in most cases, the state does not oblige them to show off their personal information to the state department while opening the shell company.

This article will highlight the common red flags related to shell companies in AML risks while implementing AML compliance programs.  

What is a shell company in terms of money laundering?

When we talk about the shell company in the context of money laundering, it’s nothing more than an organization that just exists on paper without any actual business operations. The purpose is also simple: to use such a business to conceal the origin of their money, which could be used to quickly move such funds to other destinations. Shell companies are not permanently established for illegal purposes; their creation is legal.

How Local Money Launderers Use Shell Companies

  1. Phantom Services

As the shell company itself is nothing more than a name on paper, the platform is used to create fake invoices and receipts for other companies for work that has never been done or is intended to be done soon. This is done to report that the money being transferred is used for legal services.

  1. Offshore companies accounts

An offshore business is created outside of the entity’s home jurisdiction to avoid tax. The next step is to transfer the illegally obtained money into such offshore business accounts so that it can be shown as the earnings of a particular business.

  1. Real Estate

With the ownership of property owned by shell companies frequently changing, the transparency and monitoring process becomes quite complicated. This is why Money launderers love to invest in real estate under shell companies due to the ease of laundering money.

Spotting the Red Flags of Shell Companies

Shell companies can be recognized by various suspicious activities. Here are some standard Red Flags concerning Shell Companies, which every financial institution must thoroughly check and monitor.

1.     If you see your financial institution being used to transfer money to a company with no physical office or employees and existing only on paper, a shell company often adds a P.O. box or a virtual office service.

2. The most common way of creating shell companies is through a complex or opaque ownership structure. With such a structure, it becomes quite tricky for institutions to recognize the actual owner due to layers of intermediaries, trusts, or nominee directors.

3.     No officially recognized business is listed with such companies, and if something is listed, it will be very opaque and vague.

4.     The company’s stated business purpose needs to align with its transactional activity or sector, which raises questions about the company’s legitimacy.

5.     Such companies frequently change the board of directors names to make the company employment hierarchy more complex.

6.     If the company is registered in a jurisdiction with very weak AML regulations or is best known for tax evasion.

7.     Inconsistent or unrealistic financial statements, such as unusually high or low revenues and profits, do not match the scale of the business.

8.     Companies that lack significant economic activity, such as few or no employees, have minimal or no revenue on record.

9.     Connections to other entities or individuals with known involvement in illegal activities or past financial crimes.

AML Compliance solution to prevent money laundering in shell companies

Although the establishment of shell companies isn’t prohibited by law, the volume at which these companies are used for money laundering makes them suspicious organizations. Therefore, companies that interact with such companies must conduct enhanced due diligence and comply with other compliance regulations to avoid fines or legal penalties.

AML Watcher can help businesses detect suspicious activities in shell companies. It uses all the necessary tools to monitor and prevent potential links with shell companies, particularly those used for money laundering. Don’t wait for the worst; embrace it today and protect your business from interacting with financial crimes.