The Financial Crimes Enforcement Network (FinCEN, 2016) states that shell companies ”[refer] to 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. Most shell companies are formed by individuals and businesses for legitimate purposes, such as to hold stock or intangible assets of another business entity or to facilitate domestic and cross-border currency and asset transfers and corporate mergers” (FinCEN, 2006). Similarly, shelf companies are simply companies that may have previously had economic activity, but are transaction-dormant, and may be sold to another entity with an interest in companies with a legitimate legal and financial history.

The difference between these corporate vehicles is minimal, but they serve a dual-use purpose with the ability to conduct legitimate and illegitimate business activities at the whim of their beneficial or controlling owner.The vulnerabilities of shell and shelf companies are compounded due to their often-complex formation structures, appearance of legitimacy, and lack of transparency of the business purpose of fiscal activity.

Shell companies are often a party (willingly or unknowingly) to the facilitation of corruption, money laundering, tax evasion, bribery and corruption, human trafficking, and drug smuggling. With such an extensive list of predicate offenses, one would assume that stricter regulations to govern loopholes within the AML/CFT regulations would be rigorously enforced and scrutinized. However, despite the prolific use of shell companies and their connectivity to both legitimate financial systems and criminal activities, there have been minimal efforts to mitigate their inherent risks in scale. The recent Ultimate Beneficial Ownership (UBO) rule enacted by FinCEN may help curb that risk, but only if implemented more effectively than other AML rules by financial institutions.

Over 2 million corporations are established each year in the United States. More importantly, the accessibility to obtain pre-established shell companies is as simple as a click of the mouse. Numerous nominee incorporation services (NIS) advertise and market a plethora of services for the formation, incorporation, and operation of shell companies online. These NIS firms provide the mechanism to aid individuals in the concealment of their identity and true business purpose, thus limiting the capacity for authorities to obtain beneficial ownership and other vital due diligence information.

In many instances, NIS firms provide a boutique service catered to individuals seeking anonymity, accessibility and minimal scrutiny from regulators.  Comparatively, these same services are also offered by gatekeepers such as accountants, auditors, lawyers and various financial intermediaries. The ease and accessibility with which gatekeepers can create and dissolve corporate vehicles is dependent on the needs of their clientele, but rarely difficult. Nevertheless, the lack of customer due diligence and oversight has allowed NIS firms and gate keepers to flourish largely unregulated, posing significant AML risk.

Through the purchase of corporate service packages, individuals can obtain a level of perceived authenticity overnight by acquiring an established company with a physical presence, regulatory documents, credit history and accessibility to a credit line. These packages often provide nominee shareholders, a company secretary, professional directors, mail forwarding services, a virtual corporate address and a live receptionist, federal tax identification numbers, and an attorney to represent the company. In addition, NIS firms may aid their clients in establishing local and foreign bank accounts, credit card merchant accounts, and provide regulatory documents such as the Certificate of Incorporation, and Articles of Association. These services, technically legal in many cases, may be attractive to those individuals seeking to launder funds or finance terrorism and can also include:

  • Established corporate credit
  • Immediate credibility based on the age of the company
  • The required regulatory Customer Due Diligence (CDD) documents for Know Your Customer: tax identification number, Certificate of Incorporation, Memorandum and Articles of Association, The Resolution of the Board of Directors, etc.)
  • Registered agent services meeting regulatory requirements under the Bank Secrecy Act (BSA)
  • Annual compliance services which include periodic reviews, audits, and financial reports for the bank review during the opening stages of an account
  • Nominee services to maximize anonymity of ownership

In order to promote financial transparency and reduce the risks that shell companies pose, customer due diligence should, by best practice and regulation, include:

  • Comprehensive UBO disclosures (addressed in part by recent UBO-related legislation in the US and Europe),
  • Monitored transaction activity, and
  • Investigations of NIS-affiliated shell companies

Further, firms that operate in jurisdictions that provide the means to obscure beneficial ownership and business activity should be subject to further scrutiny by their transacting partners and compliance personnel. A central customer clearing authority may be an additional long-term answer as well.