Role of Shell Company: A Ghost Firm in Money Laundering

A shell company is a legal entity that hides people behind the business who may engage in illegal activities. In the modern world, the Panama Papers leak case (2016) is a real-life example of when big names were exposed. This scandal uncovers the shell, for example, the British Virgin Islands, which operated for large-scale money laundering. Influential people and politicians were doing business by hiding their names under such companies. The assets of influential people are concealed from investigators through such companies. A shell company hides the details of the ultimate beneficial owner (UBO) and only exists in papers. This 3-minute read explores how shell companies operate and their role in money laundering. 

What is a Shell Company?

A shell company is usually called a ghost firm with neither a real office nor employees. These companies exist in papers without business operations and generate income independently. As the name implies, shell companies are hollow from the inside. They do not have a physical location but sometimes possess bank accounts or investments. Not all shell companies are illegal, as some are operated for legal purposes. However, in both cases, the objectives of these companies are the same, such as hiding the ultimate beneficial owner (UBO) identity. 

The exciting fact about the ghost firm in the US is that it does not tick any special box of the shell category while setting up. Similar to other businesses, it mainly operates to clean up black money on paper.  

Common Red Flags

The most common red flags regarding shell companies are mentioned below: 

• Two businesses with the same address or registered agent.
• A business makes transactions that don’t match its usual activities. This can be large volumes or odd spikes.
• Difficulties getting details about the transaction or who benefits from it.
• Payments without clear reasons or for things that don’t make sense.
• There are lots of large transfers between other shell companies.
• Various recipients in risky jurisdictions or offshore centers.
• A business often transfers money to multiple destinations. 

Shell Company in Money Laundering

Shell companies are notorious for money laundering, corruption, and other financial crimes. Politically exposed persons (PEPs), criminals, and sanctioned people find comfort in doing business under shell companies. A UBO is a person or group in the company that is taking benefits directly or indirectly. A shell company hides the details of the UBO, so it helps criminals do business. 

Furthermore, shell companies assist criminals in transferring illicit funds as genuine-looking invoices. An account of the business people back to another with strict privacy laws. So, an investigator found no money trail of illegal funding. Shell companies, as an identity filter, help money launderers mitigate the risk of investigation of their name.    

How do Shell Companies Work? 

A shell company is the safe gateway for the money launderers to hide illegal ways of money. The criminals and PEPs remain safe because it  is hard to track cash flow in the shell company. 

Shell company’s money laundering depends on this type of scheme:

• The ghost firms often have strict privacy laws similar to those found in tax havens. So, an investigator is unable to reach the money trail.   
• A money launderer deposits significant money in a company’s account, making cash flow tracing challenging. 
• Through this account, criminals move the money to their accounts using fake invoices that look real. 

Countries with lax regulations are vulnerable to money laundering and other financial crimes. Politicians and sanctioned people there do business in shell companies, which badly affects the country’s economy. 

Final Words

Money laundering seriously threatens the business world, leading to legal consequences such as penalties and sentences. A shell company assists in making financial crimes smooth and undetectable. There is no black-and-white procedure to identify the shell companies in the market while doing business. A corporation must rely on third-party due diligence to prevent fraud from a shell company. Third-party due diligence involves a thorough investigation of the business in question, which helps to identify the potential risks. Once the corporation mitigates the risk on time, secure financial relations are built.