Some companies can trade without taxation and easily hide their ill-gotten money from one place to another without checks. Criminals register shell companies in tax havens and then use these to conduct illicit gains such as money laundering and terrorist financing. The Panama Papers 2016 was published by German journalists who deep-dived into these companies’ registrations and disclosed how they use complex ownership structures to conduct financial crimes.
In this article, learn how to monitor the activities of shell companies and verify who is legal or illegal.
Shell Companies Overview
A shell company is a business registered by foreign owners. These companies do not have significant assets or employees; they usually exist only on paper. They have a registered address but no physical office. There are two types of shell companies: legitimate and illegitimate. Companies must verify the partner entity identity to ensure they are not onboarding illegal business. The verification discloses the owners of these shell companies and enables the company to understand the warning signs of these unlawful bogus businesses.
Businesses must comply with AML regulations to verify these shell companies. These anti-money laundering obligations ensure the company is safeguarded from money laundering. This also clears the perspective of the business using financial services. There are various places for business owners to register shell companies, from which Switzerland, Panama, and the Cayman Islands are primarily used as tax havens.
How are Shell Companies Legal?
Shell companies are designed to provide legal services to protect their owners’ intellectual property rights and assets. They have minimal policies and taxes, which make them accessible for all business owners and boost the country’s economy. However, the exact nominal security makes it worthwhile for illegitimate company owners to trade their black money in the financial system.
Money launderers use illegal shell companies to exploit the system for hiding the origin of their unlawful assets. They can utilise shell companies to conceal the origin of illicit funds, create false invoices, and encounter complex transactions that obscure the money trail. Moreover, the company registered in the tax haven puts a curtain on the owners involved in illicit activities. It is challenging for law enforcement agencies to uncover these scammers and prevent the dignity of the global financial ecosystem.
Shell Companies Techniques to Launder Money
Shell companies engage in various activities to launder dirty money. Money launderers follow the layering to fake transactions and avoid encountering authorities. They also create a complex ownership structure, which assists them in hiding their identity behind the dummy owners. To support the illicit financial flow, they innovate techniques through advancement. Given below are methods used by illegal shell companies to launder money:
Layering
Shell companies are attractive to financial criminals who want to create a system without detection. Companies use the layering technique to hide the owners of the company behind the complex ownership structure. For this process, bad actors register multiple companies in different states and then use these to transfer money or create fake invoices for counterfeit goods. The trading of goods is used to justify the transactions in front of authorities.
Loans
They also create a fake debit circle against each other companies to hide the actual funding source. Moreover, shell companies arrange financial agreements between companies, generating more layers and muddying the water for authorities. They also register different companies in various regions to exploit law enforcement agencies with these global entities. This makes their layer more complex and challenging for law enforcement agencies to uncover in the verification process.
Bogus Invoices
Shell companies also create fake invoices to identify themselves as the legal operator. They make bogus invoices for services provided to other shell companies or for trading goods that do not exist. This provides legitimate reasons to transfer funds from one account to another. Law enforcement agencies can not ensure these invoices; companies must complete the initial onboarding step.
Mixing Legal Funds
Shell company owners also mix illegal and legal funds to accelerate their transaction movement. This ensures the blend of all the funds for legitimate ones. Sometimes, the real Ultimate Beneficial Owners register the shell companies, but behind the curtain, it used to hide the actual owners. They inflate the revenue with the legal company to mix with clean earnings. It enhances the secrecy of the shell companies by hiding them from jurisdictions.
Automate Verifying Shell Company
To combat money laundering, entities have to verify the shell company before onboarding. This is only possible through compliance with KYB checks. Know Your Business derivatives ensure the shell entity is legal and not involved in illicit activities. It takes time and budget from traditional measures to verify the identity, whereas utilizing technology streamlines the onboarding process with advanced innovations.
Through automation, the company can accelerate the onboarding business. They only have to submit the documents from the partner entity to the software, which will verify the company’s identity in detail. This makes it difficult for authorities to track the real owner of the shell company. This also allows the owners to avoid taxes and bypass regulations.
