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Misuse of Shell Companies as Conduits for Money Laundering
Misuse of Shell Companies as Conduits for Money Laundering
Shell companies are those companies that have been incorporated but have no independent business operations or activities, employees or assets. While shell companies may have legitimate uses such as to hold stock, invest in another business or hold assets for another company, they are often misused as conduits for money laundering. This infographic discusses how shell companies are misused to launder money.
Conversion of Proceeds of Crime into Alternative Assets
Proceeds of crimes such as tax evasion, drug trafficking, corruption, etc, are funnelled into the shell company, which is then used to buy assets such as real estate, jewellery, art, etc. It can also be used to invest into other businesses or give loans to other businesses. Using shell companies gives the proceeds of crime a cloak of legitimacy.
Layering of Laundered Funds
Layering is the second stage of the three stages in money laundering. After a shell company is formed, it can open commercial accounts at banks and other financial institutions. Transactions are then routed through shell companies to distance the illicit funds from their criminal source.
Fake Invoicing
Shell companies can be used to generate fake invoices for non-existent goods or services, allowing money launderers to transfer illicit funds under the guise of legitimate business activities.
Concealing Beneficial Ownership
Shell companies are used to create complex ownership structures, such as multiple layers of ownership. Shell companies may also issue bearer bonds or use nominee directors who act on instructions of the real beneficial owners. Shell companies can also be used to buy assets such as real estate for beneficial owners who may be criminals and cannot otherwise purchase assets in their own name.
Fictitious Business Expenses or Loans
Criminals use shell companies to record fictitious business expenses, such as paying salaries of fake employees, buying non-existent assets, etc. It can also give out or take fake loans so that the illicit funds are integrated into the legitimate economy.
Conclusion
To mitigate the misuse of shell companies for money laundering, Indian Anti-Money Laundering (AML) laws and regulations obligate entities such as banks, financial institutes, real estate agents, accountants, dealers in precious metals and stones, etc, to adopt an AML program. This AML program comprises of compliance requirements such as Customer Due Diligence (CDD), Know Your Customer (KYC), transaction monitoring, etc. Regular training and awareness related to red flags would go a long way in ensuring that criminal activities can be identified at an early stage.
We are committed to assisting proper enforcement of AML and CFT regulations to regulated entities in India by designing a personalised AML framework – policies, internal controls, and procedures – and ensuring effective implementation of the same.
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