How To Use Shell and Shelf Companies to Launder Money
Opaque corporate structures and the use of offshore entities may be a common way money launderers and terrorist financiers facilitate illicit transactions, and shelf companies are an increasingly popular means for hiding the origin of funds and avoiding scrutiny. But what exactly are shelf companies, and how can compliance teams address this risk?
Note: This article is the first in a series by Castellum.AI covering shelf companies and how compliance teams can best identify and screen for new risks among corporate customers.
What is a Shelf Company?
A shelf company (also known as a shelf corporation) is like a pre-packaged corporate entity, patiently waiting on the shelf for someone to come along and make it their own. It's a business that has been registered, but it does not have real-world operations or transactions. Essentially, a shell company exists in order to generate a sufficiently long history of corporate records that it does not trigger compliance red flags like other newly-registered companies.
Shelf companies are like aged wine, but for financial crime. Once a shelf company’s corporate records are generated, sometimes spanning several years, it can be transferred to a new owner. In some cases, shelf companies come with real bank accounts already established, a credit history, a transaction history generated by moving funds between multiple shelf companies. These records serve to make the shelf company appear legitimate.
How does a Shelf Company Differ from a Shell Company?
While the terms "shelf company" and "shell company" may sound interchangeable, the distinction comes down to the corporate aging process.
Shell companies are any company that is registered to act as a fiduciary facilitating business activities or financial transactions but does not have its own operations. Though not always, shell corporations are often registered in an offshore jurisdiction that does not require substantial disclosures on business ownership or may have advantageous tax regimes, like Cyprus, the UAE, Seychelles, the United Kingdom and dependencies like British Virgin Islands (BVI) or Cayman Islands, as well as some US states like Delaware, Wyoming or Nevada.
Shelf companies are a category of shell companies and often serve the same purpose–to act as a fiduciary facilitating transactions–but the process of aging prior to becoming activated is the key differentiator. Additionally, shelf companies may be registered in jurisdictions not typically associated with offshore activities to further obfuscate their purpose.
By generating a corporate record history over time, shelf companies are able to hide the fact that they do not have their own operations. This process is indicative of illicit finance and efforts to evade scrutiny.
Premium shelf companies may also include additional enhancements that burnish their appearance as a legitimate company beyond company records dating back years. These enhancements “warm up” a shelf company to make it appear more like an operational business and may include:
Established bank accounts with legitimate financial institutions;
Pre-existing lines of credit or corporate credit cards;
Tax IDs registered with authorities;
Established websites and company branding material, which enhances the appearance of an active company; and
A history of transaction records generated by moving funds between multiple shelf companies.
Who Registers Shelf Companies?
Shelf companies are created using company formation agents and lawyers that specialize in registering, maintaining and facilitating the transfer of corporate entities. However, by generating shelf companies for future use and generating false histories of transactions, corporate agents facilitate financial crime.
Why do Money Launderers Prefer Shelf Companies?
Mounting public scrutiny over the past decade has highlighted the compliance and money laundering risk of shell companies. Prominent public investigations like the Panama Papers or Paradise Papers are prominent examples. As a result of these publicly available databases, existing shell companies have been burned and in many cases are no longer used.
Regulators have put pressure on the private sector to respond to money laundering risks stemming from shell companies, and financial institutions frequently implement red flags to identify shell companies and trigger enhanced due diligence. Most frequently, this includes simple rule-based solutions, such flagging any company with a corporate age under a particular time period and requiring additional due diligence.
As a result of red flags used to target shell companies, money launderers increasingly use shelf companies precisely in order to avoid added scrutiny.
How do Shelf Companies Present a Compliance Risk?
Shelf companies present a compliance risk because they are designed to avoid common red flag rules implemented as part of Know Your Customer/Know Your Business (KYC/KYB) onboarding process. The presence of seemingly legitimate corporate histories, transaction records and more makes it very difficult to use existing rule-based processes to identify suspicious activity.
How can Compliance Teams Identify Shelf Companies?
In order to accurately identify shelf companies, it’s important to leverage new solutions that go beyond the rule-based systems that shelf companies are designed to circumvent.
In response to this growing need, Castellum.AI has developed the only global database of confirmed shelf companies. This proprietary database includes hundreds of thousands of “unburned” shelf corporations registered in countries like Germany, Canada, Ireland, UAE and US.
This database is accessible alongside Castellum.AI’s financial crime risk data, enabling compliance teams to screen for confirmed shelf companies alongside sanctions, PEPs, adverse media, ultimate beneficial ownership and other risk data.
Leveraging this solution enables compliance teams to implement adequate controls on shelf companies in order to effectively escalate identified shelf companies to enhanced due diligence.
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Up Next in the Shelf Company Series
Deep Dive: Shelf Company Risk Factors
Case Study: How Shelf Companies Enable Sanctions Evasion and Money Laundering
