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Examining The Role Of Shell Company In Facilitating Money Laundering

The act of money laundering through the use of shell corporations is a prevalent, ubiquitous, and complex problem which poses a notable and worthy of attention challenges for law enforcement agencies and economical-financial institutions globally. This paper deals with and also explores the various techniques which are prevalent to launder the illicit funds through the means of shell companies, including the model of displacement, layering and integration along with trade-based money laundering. This paper also deals with and provides the example of how shell corporations are being used and utilized to hide and conceal the true origins of the illegal and illicit proceeds of functions such as in transactions related to real estates, accounts in offshore countries and in complex corporate systematic structures.

Additionally, this paper also deals with and highlights few High-profile cases of scandal incidents which connects with money laundering technique used through means of shell companies such as 1MDB scandal, Pandora paper leak and Panama Papers. These cases of incidents emphasize the importance and be in need of enhanced legal steps of measures to be taken and cooperation of international associations along with other nations to combat this illicit function of money laundering effectively.

By bringing attention and light on the techniques, tactics and strategies employed in the money laundering through shell companies, this paper also pertinent and aims to raise the awareness about the critical and ubiquitous issue and also emphasizes the importance of accountability of the government for the implementation of robust anti money laundering steps and measures to prevent, combat and safeguards the integrity of the national as well as the global financial system to run smoothly.

Shell companies have been a topic of long-term discussion in the corporate world, causing lots of controversy and intrigue. There have been many occasions and instances of high-profile cases of scandals related to money laundering across the world, but the main question still remains the same, what is a shell company? How is a shell company involved in money laundering? How does a shell company work as a channel for illicit economic flows?

In this article, we are going to deal with the watery and ambiguous workings of shell companies and their connection with the illegality of money laundering.

An Understanding of Shell Company

Before we discuss the role of shell companies and their role in the workings of money laundering, we must first understand the meaning and components of shell companies.[1]

A shell company, or a ghost company, or we can say a shell corporation, is a business personality and entity that only exists on paper and doesn't have any physical presence in any manner. The Shell Company has no physical presence, not a single employee, and no operation for any work. It's just a vacant and pyrrhic entity, like an empty shell, hence the name. Being a corporation, shell companies are legal entities and can be used for legal purposes such as protecting assets, managing different investments, or acquisitions and mergers facilitations. However, they are used for illegal activities like tax evasion and laundering money because of their dubious ownership and financial and economic transactions.1

In general terms, shell companies are corporations or trading-business entities that are often lacking in any kind of active operations related to business or any significant assets. The important thing to understand is that the formation of a shell company is not an illegal step under Indian law, and hence shell companies are not inherently illegal in any way, given that they are generally used for legal business and trade functions like holding assets. Nevertheless, their structure makes shell companies a useful tool for laundering money and concealing economic transactions.1

Shell Company In Money Laundering?

In the world of money laundering, a shell company is a very important tool in the hands of all corporations, which serves as a vehicle to camouflage the origin and distribution of the illicit funds of the corporations. By using shell companies and their channels, an individual can camouflage the illicit funds and also evade detection as the transactions appear to be legitimate in prima facie opinion.1

Nonetheless, not resembling a traditional business, these small shell companies generally don't have any physical presence, any member employees, or any genuine legitimate economic activities. They function only on paper, which makes it difficult for the anti-corruption authorities to detect and trace the origin of the funds and transactions passing through them.1

Monay Laundering Technique

There are many techniques to launder illicit money, but few are general and effective. This is the following technique used generally, step by step, to launder black or illicit money into white or legitimate money:

Step 1: Placement: In this way of money laundering, the illicit money is generally broken and distributed in many small parts and later introduced into the financial system through different deposits and investments.

Step 2: Layering: In this step, the illicit and illegal money is shifted around to create distance between the illicit fund and the original perpetrators by having many transactions in layering form in just a few days.

Step 3: Integration: Later, the illicit money is brought back to the perpetrators as legitimate income or investment.

How Do Shell Companies Facilitate for Money Laundering?

The functional and operational workings of shell corporations allow them to attract illicit ideas for laundering money.

Here's how they work in reality:
  1. False Invoicing: In shell corporations, false invoices are issued for goods and services to justify the working of the company and to launder the money through it. These false invoices are then paid with the illicit funds in the name of the company, which camouflages the illicit funds.
  2. Layering Transaction: The most general and effective way of hiding illicit funds is by transferring funds between different shell companies' multiple times quickly. This chain of various transactions makes anti-corruption authorities face difficulties in tracing and finding the origin and consumption of illicit funds.
  3. Investment Funnelling: Shell companies are legitimately made for the purpose of having the subsidiary role of any parent company. Though shell companies often invest in legitimate businesses and trade practices, they are capable of being able to invest illicit funds in legitimate businesses, further laundering illicit funds into valid funds and integrating them into the economy of the country.

A Dangerous Coupling of Shell Company and Money Laundering

The real essence of money laundering is making dubious and disguising the origins of illicit and illegally obtained money to make it appear as though it came from any legal and legitimate source of income. Shell corporations play a very vital and important role in money laundering processes; they serve as a tool to transact, hide, and move illicit and illegally obtained funds while also hiding the information and identity of the ultimate beneficiaries involved therein.1

The process for the same is setting up a shell corporation in a jurisdiction that has strict privacy laws in favour of corporations. These jurisdictions can involve things such as offering a legal veil of secrecy in favour of corporations, and this jurisdiction functions as a tax haven, which makes it harder and more challenging for the anti-corruption authorities and their investigators to trace the funds trail or chain back to the original criminal activities and the proceeds of them.1

Later shell corporations' functions in a series of transactions through any designed scheme available for money laundering to 'white' the black money obtained from illegal ways. As an example, Shell companies might make false invoices for non-existent goods or services, may draw a series of multiplex financial transactions between them to confuse or make it harder to understand the money trail easily, or may engage in round-tripping, where the same assets are sold and bought between the companies to create the prima facie illusion of legitimate and legal business activity.1

Schemes Used to Launder Money Through Shell Companies

There are a variety of schemes used for laundering money through shell companies, and each and every one is used and designed in such a way as to obscure the money trail and make it harder for anti-corruption authorities to trace the origin of the illicit funds.
  1. Trade-based: It involves the issuance of fake or false invoices in the name of actual legitimate business activity for non-existing goods and services, and then the shell companies use illicit funds to pay for these invoices, creating a chain of business activity that, prima facie, looks legitimate.
  2. Loan Back: It involves the idea of lending illicit money as a legal loan to legitimate businesses for a limited period of time, which is later paid back with interest. Here, the shell company works as a non-banking financial corporation (NBFC), which creates the appearance of legitimate activity between corporations, which in reality involves laundering the illicit funds into legal funds.
  3. Round-tripping: It involves the idea that shell companies buy goods from legitimate businesses by using illicit funds and selling them at the same price or a higher price. This type of transaction and activity makes it harder for the anti-corruption authorities and their investigators to trace and find the source of illicit funds because everything looks legitimate.
  4. Real estate: It involves buying properties in the name of a shell company by using illicit funds, and later these funds are used as legitimate funds for further legitimate activities.
  5. Mirror Trading: This involves the tactics of buying and selling stocks in such a way that illicit funds look to be legitimately earned through the stock trading.
  6. Ransom Payment: Some shell companies are made to receive ransom amounts from illegal activities, such as kidnapping, etc., making the proceeds of crime appear legal.
  7. Mergers and Acquisitions: Sometimes shell companies, in due to the tactics involved, merge with or acquire the real legitimate businesses to make it dubious the origin of their illegal funds.

Examples of Shell Company

  1. Offshore accounts: In this, a shell company is being set up in a country that is a tax haven by nature and has the most privacy and secrecy laws in favor of corporations. The illicit funds then pour into the company's accounts as "business revenue, making it harder to identify as illicit in the first instance.
Real Estate Investments: Sometimes shell companies are used for the purpose of buying valuable properties that can be immovable or movable with the use of illicit funds. Later, the ownership of these types of properties may switch multiple times in a shorter time frame to obfuscate the real owner of the illegal property.
  1. Phantom Services: In this, the shell companies may make invoices for the business activities which were never rendered by using and disguising the illegal and illicit money for payment of those services.

High Profile Examples of Money Laundering Through Shell Companies
The dangerous coupling of shell companies and money laundering is not just a theoretical assumption. In the history of the corporate world, there have been numerous high-profile cases where substantial amounts of illicit funds were laundered through shell companies. For example, in 2018, Denmark's largest bank, Danske Bank, was caught in a scandal that used to launder $230 billion through the means of shell corporations. In like manner, the alleged famous theft and money laundering incident of the 1MDB scandal in Malaysia, which involved laundering billion-dollar illicit funds through shell corporations and offshore accounts.4

In 2016, the most famous Panama Papers leak revealed how wealthy corporations, individuals, and groups evade taxes and launder illicit funds through the shell company method.4

In 2021, the famous Pandora papers will be released, containing nearly 12 million documents that reveal the corrupt dealings and money laundering via shell companies of the elite people from all over the globe. These cases give an idea of how money laundering is not just a theoretical assumption, and these cases underscore the level and multiplicity of money laundering through shell companies.4

The Real Intention Behind Shell Companies
There is only one main aim of doing money laundering, which in essence is turning illicit money into legitimate money, but there are some more associated intentions for money laundering to happen. Below are some associated intentions involved:
  • Tax Evasion: Shell companies are setup by different corporations at offshore locations as offshore accounts of the company, often in countries that are understood as tax haven countries where the tax amount charged is very low and the privacy laws are in the favour of corporations to establish assets to evade high taxes within the legal framework.
  • Laundering Money: Shell companies are used to launder illicit money through different steps, which are placement, layering, and integration.
  • Hiding money received from Ponzi schemes: The criminals may setup shell corporations to hide funds stored in Ponzi schemes. The money earned through illegal means like ransom amounts and fraud money can be invested in shell corporations to make it legitimate money, and later, if the anti-corruption agencies find out about the fraud, they will only have shell corporations in front of them to blame for the fraud as the real culprits wouldn't be easily found.
  • Hiding information and identities of actual owners: Generally, the offshore shell corporations have fake information regarding their owners and directors, and if somehow the anti-corruption agencies may find the shell companies, they wouldn't be able to find the actual owners as the information and identities provided there are fake in essence.

Best Practices to Combat Money Laundering Through Shell Companies
"Where there is evil, there is a solution available." There are some practices that can be adopted by governments and corporations to tackle money laundering practices. Some of them include the following:
  1. Customer Due Diligence: Governments may take steps to conduct comprehensive background checks on the businesses and individuals associated with them and any economic and financial transactions in between them.
  2. Advance Analytics: Governments and corporations may use technological data analytics tools and systems that can automatically detect suspicious activities or patterns in financial transactions.
  3. Regular Audit: Governments and different corporations may adopt the way of doing constant monitoring and auditing of transactions, which can be internal as well as external, to spot any discrepancies quickly and draw a position to act as soon as possible for the corporations as well as governments.
  4. Legal Consultations: Governments and corporations may involve the legal experts in their syndicate and make sure to regularly have consultations with the legal experts available to ensure that they are up to date with the anti-money laundering laws of the land or where the company is situated, and the government may consult to draw up new laws to combat money laundering.
  5. Sanction Scanning: Governments and corporations may exercise due diligence while dealing with customers and corporations that appear on the sanctions list on an international level, which may be attempting to enter the legal banking system through shell corporations. Due diligence should be taken against the applicable sanctions lists available on an international level, such as the consolidated list of the United Nations or the Specially Designated Nationals and Blocked Persons List maintained by OFAC.
  6. Monitoring of Politically Exposed Persons (PEP): The status of politically exposed persons should be checked regularly as they are more likely to be involved in money laundering activities, they offer a higher level of anti-money laundering risks, and they might be utilizing shell corporations to avoid taxation on their incomes.

Notable Governmental Actions Against Shell Companies
The Indian Parliament has drafted and passed many laws and regulations in response to the money laundering activities happening on the Indian mainland. India has also been involved in the creation of specialized agencies like the Enforcement Directorate (ED) and the Financial Intelligence Unit (India). India has also taken some steps in the workings of economic activities and transaction institutions like Know Your Customer (KYC), SEBI, and IRDAI rules for corporations to comply with, and it has also formed laws that directly deal with money laundering activities.[6]

On September 14th, 2020, India's Central Board of Direct Taxes (CBDT) and India's Ministry of Corporate Affairs signed a Memorandum of Understanding (MoU) to involve and work in the sharing of data and information with each other on a regular and automatic basis to combat the workings of shell companies, money laundering activities, and black money involvement in the country and to fight with the misuse of the corporate system by shell corporations for different illegal, illicit, and malicious activities.

FATF's Best Practices to Curb Shell Companies
In 2003, the Financial Action Task Force (FATF) became the first organization to lay down the first-ever broad framework, setting out the standards, parameters, and benchmarks to be recognized globally and implemented universally by nation-states in their respective domains. It also obligated nations to make sure that their respective institutions are provided with due access to exact and required information and data with regard to the founders of companies other than other persons associated with the company. Subsequently, in 2012, 2014, and 2019, FATF further improvised and elaborated its other requirements in order to qualify the ownership criteria set by it for entities to follow:

In 2019, the FATF recommended the following steps be adopted in its white paper published in October. It suggested the companies scrutinize the information provided with regard to employees in three ways:
  1. The checking of registers and registration methods.
  2. Pre-implementational analysis of the company's rules and regulations, which have been formulated for execution purposes.
  3. Cross-checking the available data and information on the real owners of the company should be at the disposal of the organization or can be accessed from a designated source present in the nation by the stakeholders or shareholders effectively within the stipulated time. Especially in cases of emergencies, by the designated officials.

Multi-dimensional strategies are methods that are much more fruitful in ensuring effective prevention or illegal use, possibly and often adopted with unlawful intent, along with enforcing the steps that ensure that credible information is open and fair in availability.
  1. More and more pooling of resources and genuine data in relation to the maintenance of financial databases is necessary in order to facilitate international measures undertaken with regard to maintaining openness in gathering beneficiaries' data.
  2. Devolving a robust platform and mechanism with required features like
  3. Pre-implementational analysis of the possible ramifications of the approaches undertaken.
  4. Gathering the beneficiary data adequately, with proper accuracy, and within the stipulated time.
  5. Proper assessment by duly appointed authorities.
  6. Preventing the mobilization of data with regard to share bears, along with regulating the appointment of subscribers.

Modern Techniques to Counteract Shell Company's Money Laundering
Many new techniques have evolved since the enactment of the Companies Act for the first time in order to effectively tackle unlawful activities like money laundering being undertaken by unspecified authorities. But still, persistent, and varying difficulties remain omnipresent in the present context and must be dealt with effectively. Some of the measures are:
  1. Registration of beneficiary data on a centrally controlled, computerized database helps a lot in gathering the data with regard to organization owners on a real-time basis, which lessens the loopholes in the system and reduces the risk of leakage.
  2. A thorough check not only cross-checks the data in relation to consumers real positions in regard to company operations but also checks upon any mala-fide intentions adopted by them, helping the institutions to be more descriptive and transparent when providing information to consumers at the time of issuance of securities, especially those involved with shell transfers.
  3. A digital analysis of the content and data of employees by cross-checking the available information and digitally registered accounts helps in effective modification in accordance with global set parameters, ensuring a more effective and relevant approach being adopted in regard to business operations.
  4. AI-based techniques help in recognizing advanced algorithmic sequences and irregularities in the laundering approach, revealing and bringing to the notice of authorities any fraud being committed, along with remaining ever more adaptive to new requirements.
  5. Governments of nations can play an effective role by mandating and facilitating collaboration between their respective agencies in the effective pooling of financial data, effectively preventing the transfer and receiving of assets across nations that have signed the agreements. The OECD's Automatic Exchange of Information is a pioneering step in this direction.
  6. Blockchain technologies- This technology ensures an open and non-tamper-able trace of financial activities undertaken, leaving behind a just and transparent record of transactions.
  7. Promoting internal consultation and collaboration with organization officials secretly, which play a pivotal role in the disclosure of internal changes being adopted by the company in its operations.
  8. Raising awareness among the public by making investors aware of their rights and duties and the legal safeguards provided to them with respect to their investments.

In summary, the use of shell corporations with the aim of laundering money presents a very ubiquitous risk to the protection, integrity, and the systematic functions of the worldwide financial institutions. The complex methods employed to hide illegal funds through these entities emphasize the necessity for increased regulatory supervision and international collaboration. Noteworthy incidents such as the Panama Papers and 1MDB scandal serve as clear indications of the widespread nature of this unlawful activity and the pressing need for decisive action.

To effectively tackling with the trouble and the complications involved in the laundering money through shell corporations, it is very necessary and indispensable for the governing bodies, economic institutions, and the law enforcement agencies to come along with each other and draw some strict measures also put them into practice with prime concern. Improved due diligence processes, transparency guidelines, and information sharing mechanisms are crucial in detecting and preventing the abuse of shell companies for criminal purposes.

This publication aims to enhance awareness of the strategies used in money laundering through shell companies, stressing the importance of vigilance and proactive measures to safeguard the financial system's integrity. Only through joint efforts and a united front can we effectively combat this pervasive threat and shield the global economy from the harmful impacts of money laundering.

  1. How Shell Companies Are Used in Money Laundering: A Detailed Guide, (Dec. 14, 2021), (Accessed March 23, 2024).
  2. Stefano Siggia, How are shell companies used for money laundering?, Pideeco (May 30, 2023), (Accessed March 23, 2024).
  3. (Accessed March 25, 2024).
  4. Paul Dixon, What Is a Shell Company in Money Laundering? A Key Tool for Criminals, Sanctions.Io (Accessed March 25, 2024).
  5. Shell Companies and Money Laundering, Sanction Scanner (Accessed March 24, 2024).
  6. AML Regulations in India: A Complete Guide, KYC Hub (Sept. 8, 2023), (Accessed March 22, 2024).

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