As Kenneth A. Blanco, the former Director of FinCEN, says about the shell companies that
“Shell companies have been used to mask beneficial ownership and launder illicit gains from crimes such as drug trafficking, corruption, and tax evasion.”
This statement from the former FinCEN directors highlights that the lack of transparency in the shell and offshore companies makes the shell companies suspicious entities.
However, this does not mean that all shell companies are established to launder money and hide their source of money.
Although having shell companies in any jurisdiction is legal, their ownership structure makes them suspicious, and investigations, particularly the multiple leaks, have found that they are mostly created to avoid the detection of their illegally obtained money.
In this blog, the purpose of establishing shell companies, the positive side of offshore companies, and the dark side of shell companies will be discussed with real-life examples.
What do you need to know about Shell Companies?
On paper and in official manners, establishing offshore or shell companies in any jurisdiction isn’t illegal.
However, when regulatory bodies and companies fighting against money laundering crimes go deeply down, they experience shell companies that have no physical business operations or clear ownership structure.
Such type of practices make shell companies suspicious, and most people see them as a source of money laundering and terrorist financing.
If one has to differentiate between the shell companies and the traditional operational company, how would one do it?
The key difference between shell companies and traditional operational companies is that shell companies in AML do not produce any products or services at all. They are just about structure and strategy.
Are there any legitimate uses for Shell Companies?
Establishing shell companies is officially legal, so it means these companies are actually established with the aim of performing legal activities.
So, one can easily say that not all shell companies are shady or established with the intent to launder money. In fact, they have a range of legitimate purposes that can benefit various types of businesses: let’s discuss what these are.
- Holding Assets: the main purpose of creating shell companies, in most cases, is that people want to hold assets such as real estate or intellectual property. The purpose of choosing this practice is to keep these assets separate or hidden from the core business operations.
- Facilitating Mergers and Acquisitions: another legal purpose is its easy structure of ownership transfer process that is easily done with very minimum disruption. This is also the major loophole of shell companies that allow a criminal to launder their money.
- Tax Planning and Liability Management: Managing taxes has always been a top priority for all organizations. So they chose shell companies for that. So, some businesses set up shell companies as part of their tax strategy, managing liabilities across different jurisdictions.
- Simplifying Business Structures: to easily hold the business operation, large corporations that have multiple subsidiaries might use shell companies to consolidate their holdings and make the overall structure easier to manage.
The criminal alliance between Shell Companies and Money Laundering
There is always a dark side to anything we produce, generate, or establish. And when people discuss the offshore leaks in money laundering, it’s the alliance made in hell. That is not the case every time. Just exaggerating to grab the attention.
However, there are higher chances that shell companies can easily become ways for illicit activities, such as money laundering and other financial crimes including the terrorist financing.
Why is there no regulatory framework to combat such an alliance? Well, The lack of transparency around shell companies’ ownership and operations makes them an attractive option for criminals looking to hide illicit gains.
- Mask Beneficial Ownership: This is one of the major reasons shell companies are used for money laundering people; by setting up layers of shell companies across different jurisdictions, they try to hide the true owner of the asset, which ultimately makes it difficult for authorities to trace the source of funds.
- Hide Illegaly obtainded Funds: Another way shell companies are used for money laundering is by funneling various accounts, which makes it quite difficult for the organization and authorities to detect the original source of funds, which is often tied to illegal activities such as drug trafficking, corruption, or tax evasion.
Regulatory Perspective
Since the early days of their establishments, there have always been concerns from the regulatory bodies over the establishments. The quotes from former directors of FinCEN are at the start of the blog. This statement shows how shell companies are used for criminal activities.
Isnt there any measures to stop using such companies for illegal activities? There are regulatory bodies that have introduced various measures. As in the 4th and 5th AML directives, the body has strictly included the beneficial owner register that is accessible to the public.
So businesses, particularly Financial organizations, must check whether the payments being made to shell companies are legitimate or not. The organization can check the status of shell companies by screening against the Offshore leaks gathered by the ICIJ in different leaks.
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