In the aftermath of the 2016 Panama Papers data leak, the term "shell company" rapidly emerged in news coverage of political corruption and financial crime.
But what exactly is a shell company?
According to the Financial Crimes Enforcement Network (FinCEN) shell companies are defined as “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.” Shell companies are used by individuals and organizations for a number of reasons, some of which are legitimate while others entail committing financial crimes. Such companies are usually created with the sole purpose of holding and moving assets on behalf of individuals or other businesses.
So, how to identify a shell company?
The more instances of concealment found, the greater the chance/risk that the entity could be a shell company. Below is a list of red flags by FinCEN cited in Suspicious Activity Reports Issue 7 concerning shell companies:
- The inability to obtain the required information to identify wire transfer originators or recipients. Whether through the internet, commercial database searches, or direct inquiries to the foreign correspondent bank whose customer is the originator or recipient of the transfer.
- In a specific time frame, a foreign correspondent bank surpasses the expected number of wire transfers projected in its client profile, or an individual company displays a substantial amount of irregular activity that is inconsistent with usual business patterns.
- Payments do not specify a purpose nor a reference of goods or services, and solely identify a contract or invoice number.
- Based on the submitted information to the financial institution, the company's goods or services do not match the company's profile.
- Other address-related inconsistencies have emerged. For example, transacting companies may use the same address or disclose merely the address of the registered agent.
- An extremely large number and variety of beneficiaries receive wire transfers from one company.
- In case of frequent involvement of beneficiaries from high-risk, offshore financial locations are present, this shows another red flag.
- Multiple high-value payments or transfers among shell companies that appear to have no legitimate business purpose.
Considering the above mentioned red flags, in case a financial institution discover such suspicious activities or has a reason to suspect that the transactions involve the use of US-based shell companies and/or foreign shell banks to launder illicit funds, the institution must file a Suspicious Activity Report in accordance with the suspicious activity reporting regulations and use the narrative to fully describe the suspicious conduct.
Shell companies are not illegal, however, the increased risk comes from the opacity they present to the true parties involved in the transaction. Sometimes, it is possible to identify negative news or other risk-relevant information on a person, entity, or address directly associated with the shell company. In addition to the transaction activity itself, this information could be sufficient to drive the case over the SAR filing threshold.
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