The Crackdown on Shell Companies and the Role of Technology

The Anti-Money Laundering Act (AMLA) 2020, enacted as part of the National Defense Authorization Act (NDAA) 2021 of the US in January this year, had many key provisions to take the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) regime in the country to the next level. The disclosure of Ultimate Beneficial Ownership (UBO), targeted to curb shell companies, is one among them and is widely regarded as a game-changer in the country’s fight against financial crimes. The new law comes at a time when the US remains one of the easiest places to set up an anonymous shell company, according to research from the University of Texas and Brigham Young University in Australia.

The situation is no different in many countries where people can create untraceable shell companies that are used to give and receive bribes, launder money, evade taxes and circumvent sanctions easily by spending a few hundred dollars. In fact, many jurisdictions have acted to address the problem and the world is awaiting good results. Here, we look to dive deep into the problem of shell companies, notable actions against them and the ways in which technology can help.

What are Shell Companies?

The US Securities Act defines a shell company as “a company, other than an asset-backed issuer, with no or nominal operations; and either: 1) no or nominal assets/assets consisting of cash and cash equivalents; or 2) assets consisting of any amount of cash and cash equivalents and nominal other assets.” Shell companies are created for the purpose of diverting money or for money laundering. Some notable characteristics of most shell companies are:

  • They conduct almost no economic activity. They do not manufacture goods or render any service.
  • They are primarily used to make transactions, acting only in a pass-through capacity and facilitating cross border currency and asset transfer.
  • Their banking transactions often do not have any economic rationale. They tend to make high-value transactions that are in no connection with the operations of the business.
  • They have assets only on paper and not in real terms.
  • They do not have any or insignificant physical existence at their registered addresses.

The ‘Real’ Intentions Behind Shell Companies

The following are the major reasons why people create shell companies. They are often interlinked with one another.

  • Evading taxes: Shell companies are created by corporations at offshore locations, often called tax havens, where taxes are less, to park assets to evade high taxes within their home country.
  • Laundering money: Shell companies are often used to store black money or ill-gotten money or channels to obscure the origin of such money.
  • Hiding money off Ponzi Schemes: Criminals may create shell companies to divert money earned from Ponzi schemes. When the fraud is found, the real culprits are not identified, and the law enforcement agencies have only shell companies before them to put the blame on.
  • Hiding identities of actual owners: In most cases, the real owner/owners of an offshore shell company cannot be located as the registered addresses of the directors is completely different from the address submitted to the registrar.

Notable Governmental Actions against Shell Companies (Other than the US)

In a survey conducted by think tank Transparency International, only seven out of the 47 countries have central beneficial ownership registers which are publicly available with no restrictions, while 17 countries have no central register at all including key economies like Australia, Canada and the US (at the time of the survey). Here are some of the notable actions taken by various governments with regard to beneficial ownership information.

  • India: On 14th September 2020, India’s Ministry of Corporate Affairs (MCA) and Central Board of Direct Taxes (CBDT) signed a Memorandum of Understanding (MoU) to facilitate the sharing of data and information with each other on an automatic and regular basis “to curb the menace of shell companies, money laundering and black money in the country and prevent misuse of corporate structure by shell companies for various illegal purposes.”
  • UK: The UK launched its beneficial ownership register as the Persons with significant control (PSC) Register in April 2016. In January 2021, the UK government announced that all inhabited UK Overseas Territories, including the Cayman Islands and the British Virgin Islands, committed to adopting publicly accessible registers of company beneficial ownership.
  • Europe: The Fourth Anti-Money Laundering Directive (4AMLD) mandated member states to introduce beneficial ownership registers that may be accessible to persons with a legitimate interest by 2017. Further, the Fifth and Sixth Anti-Money Laundering Directives (5AMLD and 6AMLD) reiterated the block’s stance on registers and the extended timeline for member states that have yet to implement.
  • Singapore: In June 2019, the Monetary Authority of Singapore released a framework to detect and mitigate the risk from misuse of Legal persons.

FATF Best Practices to Curb Shell Companies

In 2003, The Financial Action Task Force (FATF) became the first international agency to set global standards on beneficial ownership reporting requirements. It mandated countries to ensure that their authorities could obtain up-to-date and accurate information about the person/persons behind companies and foundations and other legal persons.  Later in 2012, 2014 and 2019, the FATF strengthened and clarified its beneficial ownership requirements further.

The following are the best practices suggested by FATF in its paper published in October 2019.

  • Use of one or more mechanisms (the Registry Approach, the Company Approach and the Existing Information Approach) to ensure that information on the beneficial ownership of a company is obtained by that company and available at a specified location in their country; or can be otherwise determined in a timely manner by a competent authority
  • A multi-pronged approach using several sources of information is often more effective in preventing the misuse of legal persons for criminal purposes and implementing measures that make the beneficial ownership of legal persons sufficiently transparent.
  • Increased sharing of relevant information and transaction records would benefit global efforts to improve the transparency of beneficial ownership.
  • Build an effective system with key features such as:
    • Risk assessment
    • Adequacy, accuracy and timeliness of information in beneficial ownership
    • Access by competent authorities
    • Forbidding or immobilising bearer shares and nominee arrangements
    • Effective, proportionate and dissuasive sanctions

Implementation Risks and Red Flags for Financial Institutions

While the above recommendations would help government agencies to curtail the growth of shell companies, their implementation is a challenging task for countries. According to FATF, the common challenges in implementing beneficial ownership measures are:

  • Inadequate risk assessment of possible misuse of legal persons
  • Inadequate measures to ensure information is accurate and up to date
  • Inadequate mechanisms to ensure competent authorities had timely access to information
  • Lack of effective sanctions on companies that fail to provide accurate information
  • Inadequate mechanisms for monitoring the quality of assistance received from other countries

From the perspective of financial institutions, with which shell companies open their accounts and conduct transactions, what is important is to have a modern solution that can identify red flags related to shell companies and accurately alert staff on the same. Some common red flags are:

  • The disproportionately high velocity of transactions
  • The complexity of financial transactions
  • Unusual patterns in dealings (eg. transfer of financial assets to a new company that has no liabilities or wire transactions and activity history that do not match the company profile)
  • High-risk or sanctioned regimes country of registration or operation
  • Adverse media about the shell company or its directors
  • Any director on watchlists
  • Involvement with agents or more firms of similar nature
  • Connection with high-risk customers
  • Transactions with entities sharing the same address of the shell company
  • Variety of beneficiaries receiving wire transfers

How Modern Technology Can Help Identify Shell Companies

In most instances, shell companies cannot be identified manually. However, with active use of modern technology and automation, financial institutions can track and monitor these firms, conduct investigations and report suspicious activities to the regulators. Here are some of the techniques financial institutions can use to ensure compliance.

  • Customer Risk Assessment: At the time of onboarding, financial institutions need to assess multiple risk factors such as negative jurisdictions, the same registered address with different owners and inclusion in watchlists. A system should be in place to provide a single holistic overview of customer risk, removing the need to consult multiple sources of profile. Each customer should have a risk score based on the initial assessment. Significant risk profile changes need to be captured dynamically throughout the customer lifecycle.
  • Transaction Monitoring: The transactions of the company should be compared with customer activity assessed at the time of onboarding with the help of modern tools. Transaction analysis tools should provide alerts in case of deviations in actual transactions from anticipated customer activity.
  • Screening: Shell companies and their owners should be constantly screened against PEP lists, sanctions lists and adverse media among others.

Modern technologies such as machine learning and Big Data analytics can be effective tools for financial institutions to help identify shell companies and prevent their illegal activities. Specifically, modern solutions equipped with network analysis, deep learning, anomaly detection, natural language processing can assist compliance staff get superior results in their hunt for shell companies.

Tookitaki’s end-to-end AML operating system, the Anti-Money Laundering Suite (AMLS), powered by AML Federated Knowledge Base is intended to identify hard-to-detect money laundering techniques including shell companies. Available as a modular service across the three pillars of AML activity – Transaction Monitoring, AML Screening for names, payments and transactions and Customer Risk Scoring – the AI-powered solution has the following features to aid in the detection of shell companies.

  • AI-powered detection of interactions and network relationships between customers or interested parties to flag suspicious activity
  • World’s biggest repository of AML typologies providing real-world AML red flags to keep our underlying machine learning detection model updated with the latest money laundering techniques across the globe.
  • Advanced data analytics and dynamic segmentation to detect unusual patterns in transactions
  • Risk scoring based on matching with watchlist databases or adverse media
  • Visibility on customer linkages and related scores to provide a 360-degree network overview
  • Constantly updating risk scoring which learns from incremental data changes

Our solution has been proven to be highly accurate in identifying high-risk customers and transactions. For more details of our AMLS solution and its ability to identify shell companies among other money laundering techniques, please contact us.

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Increased digitization has influenced various businesses and brought in a paradigm shift in the way they create business models and approach growth opportunities. Moving away from conventional transac...

Excel to AI: How Reconciliation Tools Evolve for Better

In the world of finance, reconciliation is the process of comparing two related sets of records or two accounts at the end of a specific accounting period to find out if account balances are matching ...

Lessons Not Well Learned: 2020 AML Fines Cross 2019 Total

If research is to be believed, institutions across the globe have not done enough in the anti-money laundering (AML) compliance area. Data from consultancy Duff & Phelps revealed that AML fines in...

Exploring AML Risks in COVID-Era and the Ways to Address Them

The world continues to battle the COVID-19 pandemic and the crisis it brought in is unprecedented in the history of humankind. While there are a number of pandemic-related factors contributing to the ...

AML Amid COVID-19: Watch out for These FBI-listed Fraud Schemes

There has been a rise in the number of cybercrimes and fraud schemes across the globe ever since the proliferation of the COVID-19 pandemic. Criminals, in general, are taking advantage of people’s s...

OCC Spring Risk Perspective: 5 Takeaways on Compliance Risk

Despite its general strength, the US federal banking system is apparently susceptible to the ongoing economic weakness caused by the rampant spread of coronavirus. Earlier this month, The US Office of...

How Criminals Used COVID-19 Sales Pitch to Defraud, Launder Money

As the world is working hard to contain the spread of the COVID-19, criminals continue to take advantage of the pandemic. They are devising sophisticated methods to defraud people and launder the crim...

5 Top Myths and Facts about AI Implementation in AML Programs

We are more confirmed about the power of Artificial Intelligence (AI) to transform lives and businesses now. There are countless possible applications of AI and machine learning at present, and we see...

Typology Repository Management: Solving AML Problems Via Collective Intelligence and Continuous Learning

Despite its general strength, the US federal banking system is apparently susceptible to the ongoing economic weakness caused by the rampant spread of coronavirus. Earlier this month, The US Office of...

Money Laundering Amid COVID-19: What Regulators Across Globe Say

As the world continues to fight against the COVID-19 pandemic, there are reports that criminals are taking advantage of the difficult situation. They are seizing the moment to proliferate their crimin...

How will Art Cease to Be a Preferred Money Laundering Vehicle?

Money laundering via high-end art and antiquities is not new yet it is difficult to detect. Art-related money laundering amounts to about US$3 billion per year, according to this blog, quoting the Uni...

Beware! Money Mules in Demand amid COVID-19. Here’s an Effective Cure

If reports are to be believed, cybercrooks are taking advantage of the COVID-19 situation. They are targeting people who were laid off or working from home due to the pandemic to work for them as mone...

How do we weather a tornado of change?

“Great works are performed not by strength but by perseverance” – Samuel Johnson All of us are in challenging times. However, we cannot afford to be lethargic to life, work, and busi...

Roundtable Rewind: Embracing Next-gen Tech & Collaboration Key to Sustainability

As a regtech player with a vision to enable sustainable compliance programs in financial institutions, Tookitaki organized a first-of-its-kind industry roundtable in Charlotte, NC, USA to discuss oppo...

Tookitaki Appoints Industry Veteran Joe Friscia as Advisor

Tookitaki Holding Pte. Ltd. appointed industry veteran Joe Friscia, former President of NICE Actimize and BAE Systems as Advisor to the Company’s Advisory Board. Joe brings over 25 years’ extensi...

Should Modern Machines Be Ethical?

There are mounting concerns across the globe about the reliability and safety of artificial intelligence (AI) based systems and its enabling technologies such as machine learning (ML). On the air are ...

Tookitaki Raises Another US$11.7 million in Series A; Closes Round at US$19.2 million

– by Abhishek Chatterjee, Founder & CEO The Tookitaki team and I are excited to announce that we have raised an additional US$11.7 million in Series A funding, taking the total investment in...

30 Years of FATF: Notable Facts About Global AML Watchdog

The Financial Action Task Force (FATF), the intergovernmental body formed in 1989 to combating money laundering, is celebrating its 30th anniversary this year. Since its inception, the global agency p...

Tookitaki Joins Aite Financial Crime Forum as Sponsor

Technological advances have fundamentally changed the operational landscape of financial institutions. However, there are also new risks emerging in forms of sophisticated financial frauds and complex...

Will Machine Learning Replace Compliance Professionals?

The impact of modern technologies such as artificial intelligence (AI) and machine learning on job security has been a widely discussed topic today. Of course, AI has advanced very quickly in the last...

6 Most Prevalent Cyber-Laundering Methods in APAC

Despite being a medium to exchange information in real-time and with scale, the Internet is being misused in several ways. Among the slew of financial crimes facilitated by the Internet, money launder...

What Made Us Earn the WEF Technology Pioneer Title

Tookitaki has bagged another global acknowledgement for its outstanding works in the regulatory compliance field. Our company was selected among hundreds of candidates as one of the World Economic Fo...

We Stay as a Team, We Win as a Team and We Flourish as a Team

“Teamwork is the ability to work together toward a common vision. The ability to direct individual accomplishments toward organizational objectives. It is the fuel that allows common people to a...

ABA Regulatory Compliance Conference: 10 Sessions You Can’t Miss

The 2019 edition of the American Bankers Association (ABA) Regulatory Compliance Conference is a few more days away. Organized by the Washington, D.C.-based trade association, the conference is touted...

Tookitaki AMLS Wins SBR Technology Excellence Award 2019

Tookitaki’s Anti-Money Laundering Suite (AMLS), an end-to-end machine learning-powered transaction monitoring and names screening solution, has bagged the inaugural Singapore Business Review Tec...

Watchdogs Grow Optimistic about AI Prospects at Banks

Proper regulation of banking operations is important as any failure in the banking system would affect the wider economy. Therefore, banking is one of the most regulated industries across the globe. F...

Pitfall of Black Box AI at Banks: Explaining Your Models to Regulators

The use cases of artificial intelligence (AI) and machine learning in front-office, middle-office and back-office activities at banks are growing slowly but steadily. The major areas of AI play includ...

AI for Regulatory Compliance at Banks: 4 Assessments Before You Okay the Solution Proposal

Banking is one of the industries where artificial intelligence and machine learning find their applications at a rapid pace. Regulatory compliance within banking is an area which has become a costly a...

We Believe in Innovation, the Key to Survival and Growth

“Innovation distinguishes between a leader and a follower.” -Steve Jobs What comes on the top of your screen when you google the meaning of the word innovation is – the introduction of somet...

Compliance Functions in Need of a Technological Overhaul. Can Machine Learning be the Game-Changer?

McKinsey in its latest compliance benchmarking survey found that compliance function at financial institutions has reached “an inflection point” and current compliance standards are in an “incho...

Tookitaki Raises US$7.5 mn Series A from Global VCs to Transform Regulatory Compliance

Tookitaki, a regulatory technology company that aims to enable financial institutions to develop sustainable compliance programs, has raised US$7.5 million in Series A round. The round was co-led by L...

From Wachovia to Danske Bank: Biggest Money Laundering Cases in Recent Times

Money laundering – the criminal activity of processing criminal proceeds to disguise their origin – is one of the gravest problems faced by the global economy, and its size is growing rapidly. It ...

A Modern Approach to Address the Reconciliation Challenges of Financial Services

Reconciliation of transactions is deemed critical for the smooth running of every financial institution. The speed and accuracy of data reconciliation can distinguish a successful institution from its...

Busting a Myth: Compliance Officer’s Job is All About Risk

Regulatory compliance has become a dreadful task for banks after regulators across the globe set stricter norms in the aftermath of the 2008 financial crisis in an effort to prevent financial crimes s...

SocGen Goes Next-Gen with Tookitaki Reconciliation Suite

Société Générale leveraged Tookitaki’s Reconciliation Suite to automate the bank’s existing break reconciliation system. Key Challenges Addressed The bank’s finance department was unable to ...

Attending ACAMS Conference in Singapore? Tookitaki Awaits You with Its Disruptive AML Solution

“In today’s era of volatility, there is no other way but to re-invent. The only sustainable advantage you can have over others is agility, that’s it.”- Jeff Bezos Singapore is hosting ACAMS’...

MAS’ Stress on Transaction Monitoring for Effective AML/CFT Compliance and Machine Learning is the Answer

Singapore is known for its top-notch AML/CFT regime created through up-to-date legislation, stringent policy and uncompromising supervision to safeguard against the abuse of the city state’s financi...

Mifid II and the Pressing Need for a New Reconciliation Approach

The financial services industry in the EU has been confused with the introduction of a revamped version of the Markets in Financial Instruments Directive (Mifid II). The ambitious regulatory reforms t...

Is Automated Reconciliation Next to Impossible in Today’s Complex Financial World?

The 2008 global financial crisis and fairly new regulatory requirements like Basel III asked financial institutions (FIs) to cut operating costs and adopt a lean operations structure, pushing FIs to r...

Modern Tech to Reshape US AML Compliance with Regulators’ Recent Handshake

George Bernard Shaw once said: “Those who cannot change their minds cannot change anything.” The past week has seen a significant change of mind from financial regulators in the US in their ardent...

Skills Development: We Have Talents and We Strive to Multiply Them

“Mastery lies on an infinite continuum, and as a result, we will never reach the end. We can, however, see to it that we are as far along that continuum as our circumstance allows.” ― Chris Mat...

It’s Our Fourth Founding Day; Taking a Pause to Cherish Our Simple but Awesome Journey

Today, as we step into our 4th year of foundation, I feel proud and honored to be leading Tookitaki that has been successful in creating added value to all its stakeholders. I was never a CEO and Took...

Tookitaki Expands into the US with New Office in Charlotte

SINGAPORE, Sept. 24, 2018: Tookitaki Holding Pte Ltd, a leading regulatory technology company, is pleased to announce the official opening of its North American office in Charlotte, NC, in the Unite...

We Tame Machines but We Unleash Human Spirits

We are well aware of the fact that our progress as an organization is in the hands of our employees. The more energy, time and attention we invest in them, the more yield we receive. So, we always mak...

5 Methods That Modern Money Launderers Use To Beat Detection

Society prepares the crime, the criminal commits it. DID YOU KNOW? Every year, an estimated amount in the range of US$800 billion-US$2 trillion (2-5% of global GDP) is being laundered globally Regulat...

Risk Management Conference: Positive Vibes from All Corners

The Risk Management Association’s (RMA) premier annual event, the Risk Management Conference, came to an end on 6 November, and Tookitaki had the privilege to attend the event which we believe was ...

Singapore Fintech Festival: Tookitaki to showcase advanced machine learning solutions in financial services

Singapore is assured of the Fintech world’s unwavering attention next week, as the city state, is hosting this year’s Fintech Festival during 12-16 November. Touted as the world’s largest platfo...

The RMA Clarion Call to Address Risks and the Tookitaki Way

Risk officers, doing your best today is good while preparing hard for tomorrow is extraordinary. Risk management at banks has become difficult due to operational and regulatory changes. The Risk Manag...