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Verify Shell Companies to Prevent Money Laundering & Financial Crimes

Shell Companies

Shell companies are designed to disguise their owners’ identities to conduct illicit operations. Most shell businesses are registered in tax havens or free zones where there are nominal or no regulations. German journalists disclosed all information about these companies registered with third-party owners in the Panama Papers 2016.

Financial watchdogs designed Know-Your-Business (KYB) derivatives to identify shell companies. These derivatives uncover the complex ownership structure, aiding the company in preventing money launderers and financial criminals. This will protect legitimate companies from various scammers in the initial step and will be a bottleneck for them in the financial ecosystem. 

What is a Shell Company? 

A shell company is a business registered in a foreign country under the name of a third party. These companies often adopt the LLC structure, with multiple owners, some of whom are the ultimate beneficiary owners (UBOs), holding 10-25% of the company’s interest. This structure can be exploited for illicit purposes. Due to the complex ownership structure, it’s possible for the company to conduct financial crimes without revealing its identity. 

According to the International Monetary Fund (IMF), in 2017, American Fortune 500 companies registered offshore and are hiding tax over $2.6 trillion from the US government.  But the problem is still there. How are they operating it, and is their operation legal? 

Are Shell Companies Legal? 

Shell companies are legal until they are used for a legitimate purpose. New companies can use them to store funds or expand their business worldwide. Shell companies also assist owners in investing in markets outside their hometown, directly impacting the country’s economy. This leads the country and company simultaneously on a path of progress. It is also used to hide the company and owners’ assets. 

However, most owners open shell companies to conduct illicit activities. By hiding their identities, they can partner with legal businesses. If a company has a bad reputation and is involved in financial crimes, it can use shell companies’ complex ownership structure to enter the economic system. They also used to launder money from one country to another through fake invoices from shell companies. 

How to Verify Shell Companies? 

Shell companies can be good if the owner uses them for legitimate reasons. But it’s on the valid business owners to verify the identity of the shell companies before onboarding them. This can be done by upholding the international regulations such as AML and KYB. Compliance with these protects businesses from illegal businesses. Given below are steps that company owners have to follow for partnering with legal entities uptodatetoday

Collect Information

In the first step, the business information is required to identify the actual identity of the company, such as its financial statement, address, business registration number, industry license, and others, depending on the country from which it operates. Verifying these documents ensures the company is operating in the real world or has records in the government bodies that not only exist on the papers. 

Verifying the documents 

Once the profile of the shell company is created and guaranteed, they are registered on the government database. Furthermore, document verification ensures the papers submitted by company owners are original. This process can be divided into two structures. First, depending on the papers, businesses verify documents by attesting to security features such as fonts, signatures, borders, etc. In the next move, it ensures the data is valid or not counterfeit by cross-checking the data written on documents against the government databases to meet with the original records. 

Screening the Profile 

For compliance with the AML regulations, companies must screen the data of the shell business against the watchlist sanctions. These sanctions lists were created by the government and law enforcement bodies such as OFAC, FATF, FCA, and SEC. These databases store information about suspicious persons and companies that were involved in financial crimes or other illicit activities. By screening through these sanctions, the company guarantees the partner business is not a criminal or involved in illegal actions. 

Automate Shell Companies Verification 

Businesses can use advanced technology to separate legal shell companies or bogus registered entities for adequate results. The traditional method of collecting documents takes time, and human verification is error-prone. Digital innovations upgrade the verification technique through machine learning and robust AI technology to resolve these issues. By utilizing these tools, the company can reduce verification time and cost. By this, they can collect information remotely and verify with the automation algorithm with accurate results.  

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