How to Identify Potential Shell Companies for Anti-Money Laundering Compliance?
Shell companies can pose a problem for those working to prevent money laundering and financial crimes. Shell companies have no legitimate business activities or essential assets. This characteristic allows shell entities to be abused by persons looking to hide and layer their crime money through a complex web of transactions and ownership structures. Critical identification of potential shell companies in AML is the first and vital step.
About shell companies, there are several red flags that compliance officers ought to be looking out for. Since no critical and specific business is taking place, a potential shell entity with an AML risk can be identified by analyzing corporate records and the validity of the business. This enables a company to continue legitimate operations while at the same time protecting the financial system from potential abuse.
Let’s discuss how to identify potential shell companies for anti-money laundering compliance.
Why Peaceful Societies Are at Risk for Money Laundering?
What are shell companies? The nature of shell companies means that they present serious risks for money laundering and the reputation of true economic purpose or business activity. Such operations pose significant risks that can provide concealment of ownership and transfer criminal proceeds across jurisdictions.
The European police agency Europol estimates that, across the globe, about $1 trillion is laundered by structures such as shell companies. The Financial Action Task Force (FATF) has also pointed out that shell companies are one of the most used methods to launder the proceeds that originate from crimes.
Red Flags in Business Transactions
Compliance officers should also be on the lookout for a number of other red flags while conducting a review of business transactions. These include large cash transactions, payments from unknown sources, and transfers sending funds through multiple jurisdictions or shell companies with no apparent purpose. More than 25% of shell companies have been involved in suspicious money transfer schemes within two years of formation. This calls for due diligence of the client funds, transactions, and documentation under the AML rules.
Examining Corporate Records and Leadership
Areas to look for shell companies include those identified by FATF, such as in corporate records, entities that do not have any ongoing operations or do not have very few significant assets. Concerned teams should look into each minute detail of the ownership structure and the viability of the business model. Since it is a situation where high risk is involved with shell companies in the case of money laundering, due diligence should be comprehensive.
Tracking Funds In and Out
Potential customers of shell companies require that all of their funds be put under close monitoring, together with each transaction in or out of their financial statements. The FinCEN has proposed studying transaction patterns and the relationships between many entities. More than 15% of AML breaches involve wire transfers by shell entities with no stated purpose that can be validated. Detailed record reviews facilitate the detection of inconsistent incoming wire amounts, supporting documentation missing to wires, and transactions routing through high-risk countries.
Enhanced Customer Screening
Shell companies engaged in doing business across countries usually require more enhanced due diligence if there is a more stringent regulatory guideline. Such companies can include extra scrutiny for ownership details, business information, and the nature of transactions. In one study, missing due diligence was the reason 40% of money laundering schemes running through shell companies were not detected for 6-12 months. Customer profiles and application data should be maintained well to mitigate AML risk emanating from shell entities.
The Role of Regulators in Identifying Shell Entities
Regulators play a vital role in the area of information sharing in order to detect the existence of clandestine shell companies. The Financial Action Task Force encourages coordination between government agencies with regard to the modalities of public registries and data. Other efforts in this regulatory area include joint research on typologies and techniques used by the entities and shell entities of criminal networks.
Staying Compliant with Anti-Money Laundering Regulations
Proper compliance with AML regulations helps the concerned institutions to address the risks posed by shell companies. The program should be written and approved by senior management. All policies included in the program work towards customer identification and identifying and reporting any situation considered to be suspicious activity. For instance, fines for non-compliance may add up to $1 million or even more. Good staff training is also required, which should also cover the signs that should help red-flag shell companies.
By understanding how to identify the Red Flags concerning Shell Companies, your organization can enhance its anti-money laundering controls and remain compliant with regulatory requirements. To learn more about our suite of financial crime prevention services, including sanctions screening, transaction monitoring, and risk assessment, click here.
