Shell companies, characterized by their lack of active business operations or significant assets, pose unique risks to organizations. While not intrinsically illegal themselves, these entities can potentially serve as veils for illegal activities, including sanctions evasion and money laundering, due to their often complex and opaque corporate structures.
Shell companies, despite their reputation, can serve several legitimate purposes.
The task of identifying shell companies and whether they do pose genuine risks within your network or portfolio can be laborious. Understanding whether an entity is a shell company, its ownership and control structure, and associated risks requires specialized knowledge and resources. As no company – including a shell company – can form and operate on its own, it should be possible to identify an ultimate beneficial owner (UBO). A lack of readily available and discernable beneficial ownership information can be a red flag for a shell company that is being used to engage in suspicious activity.
Shell companies are often used as vehicles to obscure beneficial ownership and corporate control, thereby obscuring potentially illegal activities. In the current global and geopolitical context, public scrutiny has intensified on wealthy individuals who may be using shell companies in tax havens to evade taxation, or by sanctioned entities trying to evade the laws preventing them from accessing the financial system. There has been an increased effort both globally and nationally to curb money laundering through shell companies to tackle corruption, fraud, tax crime, sanctions enforcement, and organized crime. These dynamics have increased the workload for risk and compliance departments that face growing regulatory responsibilities, including identifying and reporting on suspicious shell companies.
With the rising expectation to manage third-party risk, and to detect and report on financial crime; understand beneficial ownership structures; and adopt a data-driven, risk-based approach to compliance, organizations need to implement know your customer (KYC) and know your business (KYB) processes. The most efficient and effective way of doing this is pairing automation with the skill of human analysts, as the ultimate decision-making about who to work with belongs to the professionals in the process.
When it comes to identifying shell companies and the risks they may pose, automated identifiers for shell companies can provide valuable insights that can be integrated into a wider risk analysis or compliance workflow. In cases where a shell company has been identified that poses a high-risk, the risk owner, along with their compliance team, can delve deeper into the matter. They can use the evidence as part of a decision to accept or onboard a new customer, or their decision to off-board them if the risks are outside tolerance. The results of these KYC/KYB processes can also be used to file suspicious activity reports to regulatory bodies and/or law enforcement agencies, as well as potentially reveal additional risk to be mitigated within their portfolio.
Compliance and risk mitigation processes are supported by specialist research tools, such as Moody’s Shell Company Indicator. Here are three ways Shell Company Indicator benefits organizations in understanding risk to make decisions with confidence about who to work with.
Moody’s Analytics Shell Company Indicator can help uncover hidden shell company risk through insightful, typology-driven flags during customer or third-party onboarding and risk monitoring investigations to support better decisions about who to work with.
If you would like to discuss Shell Company Indicator, or our other compliance and third-party risk management solutions, please get in touch anytime – we would love to hear from you.