Using Technology to Dodge the Shell Company Fraud

Bank of the Future

Using Technology to Dodge the Shell Company Fraud

 
September 24, 2020

During the Panama Papers episode, it was found that some of the Mossack Fonseca shell corporations were used for illegal purposes, including fraud, tax evasion, and dodging international sanctions. The incident also highlighted the use of shell companies in facilitating high level financial crime. The scale of the episode was a shock as was the detail and meticulous planning it took to set this off using shell companies.

A shell company is an inactive establishment used as a vehicle for probable financial crimes or kept dormant for future use in some other capacity. This company only exists only on paper and has no brick and mortar presence or employees. Identifying a shell company has been a constant struggle for the financial institutions and the approach has been evolving over the past years.

In addition to using a shell firm, there is also widespread use of mirror trades in financial crime. A combination of shell companies and mirror trades originating in different locations is a way to clean up the illicit money by disguising its actual source and help in identifying tax frauds. Mirror trades are two different transactions, which originate from point A to point B and then move back to point A. This method actually nullifies the original transaction but not without accomplishing the intent of converting dirty money into legitimate money.

Financial institutions are finding it difficult to identify a shell company and differentiate it from a legitimate registered firm. The fraud runs deep and it is possible that a legitimate firm listed through a registered agent has the same address as a shell company also registered by the same agent. The unduly complex corporate structure/shareholding patterns also add to the challenge of identifying a shell company. Additionally, unduly complicated ownership structure can disguise the actual ownership. Further, it is difficult to differentiate between genuine and illegal transactions.

The technology fix

Regulators and tax authorities across the globe have initiated various steps to check the use of shell companies in money laundering and other financial crimes. Regulatory norms dictate all registered companies file particulars online including details of registered office and location. There are provisions recommending furnishing of photographs for the company’s office location with members of senior management outside and inside office premises. This arrangement is driven by the idea of nailing shell firms and other institutions that use the banks and the financial system for financial crimes.

While shell companies are not easy to identify manually, active use of technology and automation can help potentially track and monitor these firms and subsequently conduct investigations. Here are a few recommendations that can help in the process:

1. Based on activity profiling: The company transactions should be verified with the anticipated account activity confirmed by the firm during on-boarding. In case of deviations in actual transactions and the anticipated account activity, the transaction analysis tools can throw a red alert and can be further investigated.

2. Activity with negative jurisdictions: Offshore jurisdictions with weak money laundering laws and incorporation procedures like Panama, Malta, Belize, and Cyprus are targeted for setting up shell companies. Identifying the transactions with the involvement of such jurisdictions will be the potential first step in cracking down on the fraud. Hence, one should identify the fund originating from such territories and follow up with alerts in case such companies share the same registered address with different owners. If beneficial owners or the physical location of the company remains unidentified, the subsequent transactions should be blocked and such companies can also be automatically added to the internal watch-list under a separate category.

3. Tracking shell companies through RPA: RPA plays a major role in handling investigations in this regard. Instead of manual interventions, RPA can be invoked for identification and analysis. Additionally, decision making can be driven with the help of manual interventions. RPA can be used to automatically pull out the complete KYC information for suspicious firms and also trigger a third party search and negative search for the beneficial owner and the transactions related to the companies relevant to the beneficial owner.

Conclusion

It may be very difficult to manually identify a shell company using information such as address etc. However, deploying technology and evaluating the patterns on a larger scale can help crack down on the financial crimes perpetrated by the network of such entities.

R. Srivatsan is part of the AML CoE of TCS’ Banking, Financial Services, and Insurance business unit. He has over 14 years of experience in banking operations and has worked with TCS’ leading clients in the BFSI space. Srivatsan holds a Master's degree in IT from Bharathidasan University, Trichy, India, and is a Certified CAMS (2009).