Anti Financial Crime
Introduction
In the TV series ‘Blacklist,’ Red Reddington – a so called FBI most wanted fugitive who cooperates for hunting down other criminals – advised his contact agent: if you aim to decode the actions of criminals, THINK LIKE A CRIMINAL. This principle also applies to our line of work. To effectively combat crime, we must understand how criminals think and know the loopholes they might exploit. That’s why, at WIACON, we make it a priority to stay updated on everything happening in the realm of financial crime.
One of the emerging topics following the release of the Panama Papers in 2015 is the misuse of shell companies for fraudulent purposes. The Pandora Papers, launched in October 2021, once again brought global attention to this issue. In this context, we also encounter a less academically described and confusing term: ‘shelf company,’ which piqued our interest in digging deeper into the distinctions.
Most would agree that inherently fraudulent means are much easier to deal with compared to those with dual use. While shell and shelf companies are both practical vehicles for legitimate purposes, they have also been widely used for criminal endeavours, causing complications in judgment. In this paper, we aim not only to shed light on the definitions of these two types of companies but also to discuss their illicit applications in order to understand how delinquents may benefit from them.
Table of Content
Shell Company
According to Financial Crimes Enforcement Network (FinCEN), The term “shell company,” refers to non-publicly traded corporations, limited liability companies (LLCs), and trusts that typically have no physical presence (other than a mailing address) and generate little to no independent economic value [1]. The term has been used widely in recent years, often interchangeably with terms such as ‘letterbox or mailbox company’, ‘special purpose entity’, ‘special purpose vehicle’ and similar. In a nutshell, shell companies can be legal entities that exist only on paper, having no independent operations. They primarily serve as a conduit to facilitate investments, mergers, or dissolutions. Anonymity is the main advantage of shell companies. A legal representative can easily register a shell company in various jurisdictions without requiring a specific relationship with the ultimate beneficial ownership. ´
Shelf Company
To our knowledge the most exhaustive definition of the term “shelf company” is what appeared in one of world Bank publications in 2011 which says: The term is typically (although not uniformly) applied to a company that (a) is incorporated with a standard memorandum or articles of association; (b) has inactive shareholders, directors, and secretary; and (c) is left dormant—that is, sitting “on a shelf ”—for the purpose of later being sold [2]. The term also been categorized as Special Purpose Entities (SPEs) by OECD in 2011 alongside with shell companies. New owners often choose shelf companies to avoid complicated paperwork. Some of these companies already have bank accounts that go to the new owners. Once they buy it, the new owners can also benefit from the company’s credit and tax history, which makes the company seem more reliable.
Legitimate purposes of shell and shelf companies
As mentioned earlier, both the aforementioned corporate vehicles are designed to serve legitimate purposes and represent powerful means of conducting business. While investigating a financial crime, it is crucial to acknowledge their original objectives and try to identify the beneficial owners to have a fair judgement.
Shell companies are set up for various reasons. Business partners create them for partnerships or mergers, making legal processes simpler and ensuring fairness in a fair legal location. They’re also used to manage personal or family assets for easier inheritance or to protect them from creditors. Big brands sometimes use them when buying property to keep their identity private and avoid overpaying. Even famous people like movie stars use these companies to keep their home address private. Companies also create shell companies in other countries to pay less tax back home, finance operations abroad, invest overseas, or move assets more easily.
Shelf companies expedite the process of establishing a new entity by reducing the time required. They offer an advantage during bidding, contract formation, or loan applications, especially in terms of perceived longevity. Acquiring a shelf company allows the business to commence promptly. This tactic can attract investors, workforce, or consumers by presenting a longer history, although it lacks ethical merit.
The misuse of shell and shelf companies
Circling back to our beginning, consider what a criminal might do to conceal illegally obtained funds, whether for money laundering or tax evasion.would they receive or transfer the money using their own or RCAs accounts? Certainly not. How many individuals can they trust with these transactions ? not so many! None of these concerns are on their radar. A fully legitimate service provided by intermediary corporations can easily facilitate such organization. They can easily conceal a UBOs involvement in transferring illegal funds thorough establishment of either shell or shelf companies. Shell companies offer a high level of confidentiality and shelf companies can create a false sense of trust to an illegal transaction. Criminals exploit shell companies by funnelling illegal funds through a complex network of transactions, making it challenging to link the money to its initial illicit source. The opacity of shell companies facilitates money laundering and other illegal activities, enabling criminals to disguise their involvement and evade detection. By using shelf companies, delinquents can give the appearance of a well-established business, attracting unsuspecting parties into illegal financial transactions. This can involve transactions that mask the true nature of the funds being moved or transactions that legitimize funds gained through illegal activities.
The deceptive nature of shell and shelf companies, with their ability to disguise ownership and transactions, complicates the efforts to identify and prosecute those involved in illicit financial activities. To combat financial crime effectively, regulatory authorities and law enforcement bodies must remain vigilant and work collectively to control the loopholes and mitigate the risks presented by these corporate for a more secure and just financial landscape.
Other articles
Sources:
[1] Financial Crimes Enforcement Network (FinCEN), Potential Money Laundering Risks Related to Shell Companies, 2006.
[2] E. v. d. D. d. Willebois, E. M. Halter, R. A. Harrison, J. W. Park and J. C. Sharman, The Puppet Masters, How the Corrupt Use Legal Structures to Hide Stolen Assets and What to Do About It, Washington DC: The International Bank for Reconstruction and Development / The World Bank, 2011.
[3] J. Costa, Revealing the networks behind corruption and money laundering schemes, an analysis of the Toledo–Odebrecht case, Basel Institute on Governance, , 2021.
[4] J.-d.-J. Rocha-Salazar, M.-J. Segovia-Vargas and M.-d.-M. Camacho-Mi˜nano, “Detection of shell companies in financial institutions using dynamic social network,” Expert Systems With Applications, vol. 207, 2022
[5] D. Jancsics, “Shell Companies and Government Corruption,” 2018.
