Are Shell Companies Dangerous?

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Revelations about widespread tax evasion and money laundering through offshore entities in recent years give shell companies a bad name. Even just recently, a web of around 100 shell companies in Britain was being reported to be aiding financial crime globally, with links to suspected money laundering, alleged bribery and even Paul Manafort, Donald Trump’s former campaign manager who is facing jail time for corruption.

You would be excused if, when reading the news these days, you thought that shell companies have no legitimate use. 

After all, the above revelations demonstrate a key aspect of what we learn about in AML training as the risks of the business structure of the shell company: 

  • It facilitates money laundering;
  • Establishing banking relationships through nominees so as not to reveal the criminal beneficiaries;
  • Hiding assets;
  • Creating an image of respectability.

Are shell companies by default dangerous?

In Cyprus, new rules set by the Central Bank clarify the distinction between legitimate and illegitimate. The Central Bank’s circular defines a shell company and then sets two instances in which a business relationship with a shell company shall be avoided by regulated bodies: 

(i) it is registered in a jurisdiction where companies/entities are not required to submit to the authorities independently audited financial statements and does not voluntarily prepare audited financial statements by independent qualified professional accountants who are licensed or regulated and/or

(ii) it has a tax residence in a jurisdiction included in the EU list of non-cooperative jurisdictions for tax purposes or the OECD’s list of non-cooperative jurisdictions for tax purposes or has no tax residence whatsoever,

then business relationships with such an entity shall be avoided.

Source: Cyprus Mail 

As corporate service providers take a Risk-Based Approach to Anti-Money Laundering, the above is meant to guide the compliance officer in making their decisions. These rules have been criticised for being still too vague yet harsh in their effects: banks are rejecting otherwise legitimate business which might seem risky under the new guidelines.

Clear rules are a good defence

All staff will feel well-equipped with clear rules that can be straightforwardly understood and implemented. It also helps morale that international creditors see a tightening up of AML rules as directly related to positive credit for Cypriot banks.

However, overzealous enforcement of a rule can also have negative effects, e.g., as mentioned, rejecting perfectly legitimate business. There are fears that this is resulting in billions of Euros lost from Cypriot banks, though this is always carefully balanced against the importance of a reputable compliance regime.

You can read more on why money launderers find corporate vehicles useful here.


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