Understanding the risks posed by anonymous shell companies is key to the effective management of a Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program.
What are Shell Companies?
In the context of AML risk, the term "shell companies" denotes non-publicly traded corporations and limited liability companies (LLCs), and to a lesser extent, also includes trusts. These entities typically have no physical presence (other than a mailing address) and generate little to no independent economic value.
Shell companies are legal to establish and operate, and they serve a variety of legitimate and useful business purposes. Some of these include holding stock or intangible assets, facilitating asset transfers, and guarding trade secrets, among many others. Shell companies may be formed by individuals and by businesses. They can hold bank accounts, own real estate, and engage in a wide array of financial transactions.
What Risks do Shell Companies Pose?
Shell companies can be formed easily, quickly, and inexpensively. But the critical feature that enables the misuse of shell companies and poses significant compliance challenges for financial institutions subject to BSA obligations is that shell companies can be formed anonymously. Currently these is no requirement in the U.S. to document the true, beneficial owner of a shell company at the time of company formation, or to maintain and keep current any changes to beneficial ownership. This allows criminals and other bad actors to form shell companies anonymously and use them in furtherance of financial crime, including to hide and launder illegally obtained proceeds, evade sanctions, and engage in all manner of transactions undetected. This also poses a compliance burden on financial institutions when conducting customer due diligence (CDD) and poses the risk that the institution may unwittingly be used in furtherance of criminal activity.
What are Some Red Flags?
The Financial Crimes Enforcement Network (FinCEN) published the following list of red flags that are commonly associated with suspicious or illicit activity involving shell companies.This list can be useful to employees at financial institutions when evaluating and monitoring shell companies and shell company transactions.
An inability to obtain – whether through the Internet, commercial database searches, or direct inquiries to the foreign correspondent bank whose customer is the originator or the beneficiary of the transfer – information necessary to identify originators or beneficiaries of wire transfers.
A foreign correspondent bank exceeds the anticipated volume projected in its client profile for wire transfers in a given time period, or an individual company exhibits a high amount of sporadic activity that is inconsistent with normal business patterns.
Payments have no stated purpose, do not reference goods or services, or identify only a contract or invoice number.
Goods or services of the company do not match the company’s profile based on information previously provided to the financial institution.
Transacting businesses share the same address, provide only a registered agent’s address, or raise other address-related inconsistencies.
An unusually large number and variety of beneficiaries receive wire transfers from one company.
Frequent involvement of beneficiaries located in high-risk, offshore financial centers.
Multiple high-value payments or transfers between shell companies with no apparent legitimate business purpose.
Financial institutions that provide services to shell companies should keep in mind the unique features and corresponding risks of shell companies. The degree of risk may vary depending on
things such as the shell company's ownership structure, identity and nature of the customer, the types of services provided, purpose of the account, the location of services, and other related factors.
The potential that shell companies many easily be misused in further of criminal and other illicit activities must be recognized. Financial institutions have to be ever-vigilant in monitoring such companies on a continuing basis. This also includes assessing the risks posed by each shell company relationship and taking appropriate steps to ensure that the risks are identified and effectively mitigated in accordance with BSA requirements.
Information for this blog post was obtained from the FinCEN website and may be accessed here.