Shell Company
A shell company is a company with no significant operations, staff or physical presence of its own, often nothing beyond a registered address, that exists to hold assets, own other companies or carry out transactions. Many are legitimate, but their opacity makes them useful to launderers.
Also called: shell corporation · shell entity · letterbox company · brass plate company
FinCEN's 2006 advisory described shell companies as non-publicly traded corporations, limited liability companies and trusts that typically have no physical presence other than a mailing address and generate little or no independent economic value. It also noted that most are formed for legitimate reasons, such as holding shares or intangible assets of other companies, or facilitating mergers and transfers of assets.
The risk is concealment. A chain of companies across several jurisdictions, with nominee directors and shareholders, can hide who owns and controls the money. Shells are used to receive bribes as 'consulting fees', to issue invoices for goods that never move in trade-based money laundering, and to hold accounts for sanctioned persons. In March 2022 the FATF strengthened Recommendation 24 on the beneficial ownership of legal persons, requiring countries to use a multi-pronged approach that includes a registry or alternative mechanism, and prohibiting the issue of new bearer shares.
For banks and payments firms, the response is to look through the company. Know your business checks ask who the ultimate beneficial owner is, why the entity exists, where its people and activity are, and whether its transactions fit that story. Jurisdictions with no or nominal corporate tax now also apply economic substance laws to entities with mobile income. A portfolio of customers that are mostly shells is a common trigger for de-risking by correspondent banks.
In practice
Being a shell is not an offence. The questions that matter are who owns and controls the company, why it exists, and whether its transactions make sense for what it is.
Example
A newly formed company with a virtual office, no website and one nominee director receives US$3 million in consulting fees from four unrelated companies in its first month and pays it on within days to a company in a third country. Each feature has an innocent explanation; together they are the pattern FinCEN warned about.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Shell Company, with more detail and background.
Commonly confused with
| Term | How it differs |
|---|---|
| Shell bank | A shell bank is a bank with no physical presence in the country where it is licensed and no affiliation to a regulated group. FATF standards prohibit correspondent relationships with shell banks; shell companies in general are not prohibited. |
See also
- Ultimate Beneficial OwnerThe ultimate beneficial owner is the natural person who ultimately owns or controls a customer, identified by tracing ownership up through holding companies, trusts and nominees. Twenty-five percent is the common anchor in the United States, the United Kingdom and the European Union, but each states it differently and control is tested alongside it.
- Economic SubstanceEconomic substance is the requirement that a company earning income in a jurisdiction actually carries on the activity that generates it there, with adequate people, premises, spending and decision-making, rather than existing only on paper.
- Know Your BusinessKnow Your Business, or KYB, is the verification of a corporate customer rather than an individual: that the entity legally exists, who owns and controls it, and what it actually does. It is the corporate counterpart to KYC, and the ownership chain is the hard part.
- Trade-Based Money LaunderingTrade-based money laundering (TBML) is the use of trade transactions to disguise and move criminal proceeds or to shift value across borders, most often by misstating the price, quantity or nature of goods on the documents.
- Offshore Financial CentreAn offshore financial centre is a jurisdiction whose financial institutions do most of their business with non-residents, so that its external assets and liabilities are large relative to its own economy. Typical features have included low or zero tax and specialised company law.