The Crucial Role of Shell Companies in Money Laundering

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The business world bonds with other companies for financial growth and diversification. While making the bond with other companies, the business must rely on corporate due diligence. Due diligence of the business is done through collecting its information, but it is quite challenging in the case of shell companies. A shell company has a policy to hide the ultimate beneficial owner’s details and transactions to evade tax. Therefore, it is a complex task to collect the shell company information and its verification. The screening of shell companies cannot be avoided as they are exposed to high-risk levels. 

What is a Shell Company?

A shell company is a limited liability without a physical presence in the jurisdiction. Shell companies are mainly formed in tax havens to prevent legally beneficial owners from paying taxes. Another name for a shell company is a personal investment company or firm that solely exists on paper without employees and without real operations. The shell company is not a real operating company; therefore, it does not provide goods or services to generate revenue. A single registered address may be shared by several shell companies. The shell company has a policy to hide the identity of beneficial owners, so it is usually set up by a third party, such as a lawyer, accountant, or citizen.  

Shell companies are legal ones operating for legitimate purposes. A shell company may hold investments or property but hide from creditors. It works as purchasing the property by hiding the ownership of assets and showing the company as the buyer. Most of the time, shell companies are used to avoid taxes on personal income or to lower the tax rate for wealthy people by copyrights that are returned to the beneficial owners of tax havens. It is a party of tax regulations but has threatened to be charged with tax evasion. However, shell companies have several illegitimate purposes as they have hidden the details of their beneficial owners. The criminals,   sanctioned and politically exposed persons (PEPs), are encouraged to do business in shell companies by hiding their identities. 

How do Shell Companies Work? 

The shell companies are generating revenue without the physical operations. A shell company hides the ownership structure of the company, so the criminals, blacklisted, and PEPs are doing business there. The way the company is run makes it difficult for investigators to get the money trail record. Financial crimes in shell companies depend on this type of scheme:

  • It is a ghost firm with a strict privacy policy, so an investigator fails to find the transaction record.
  • The illegal activities can hide behind the shell companies so criminal, politically exposed persons and sanctioned people are working there.
  • Money launderers find ways to line up credit, bank accounts, and transactions with these companies. 
  • The account holders in the shell companies are unknown, so they show fake to real.

Shell Companies Money Laundering

Shell companies are prone to money laundering, so a high level of due diligence is required before onboarding them. The shell company has a policy to conceal the ultimate beneficial owner (UBO), who is likely involved in money laundering, terrorist financing, bribery, corruption, and other financial crimes. It is quite easy to layer money laddering in a shell company as they offer no money trail to the investigator. They may use genuine-looking invoices to hide the records of illicit funding. 

For this reason, businesses must rely on the KYB process while onboarding shell companies. The complete inspection of the business data, including financial documents, occurs to evaluate the company’s legitimacy. This helps to detect fake or missing documents which prevents partner businesses from fraud. When the shell company is legitimate the business partner faces no high risk of legal consequences. In this way, secure and transparent financial relations are built in the market. 

Final Thoughts 

Shell Companies is challenged to form partnerships in the business world. Essentially, shell companies are legitimate ones, but they are notorious for being involved in financial crimes. These companies are mainly engaged in money laundering, which may result in legal consequences such as sanctions, hefty fines, and other sentences. The corporate sector must rely on Know Your Business services to avoid financial risks. The KYB process helps to determine the legitimacy of the business partner while onboarding. The evaluation of business data reveals the shell company’s involvement in money laundering or other financial crimes. In the end, KYB solutions prove helpful for corporations in onboarding shell companies so that healthy financial relations can be built in the long term.    

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