Moody’s: Financial Crime at Shell Companies – The Key Signs

In this deep dive, Moody’s Analytics' Senior Director Ted Datta details how to tell if a shell company is being used for financial crime…

News of shell companies being used to conceal illicit funds has featured heavily in recent weeks. Just this month, it was revealed that major banks had held accounts for front companies that supported Iranian entities in their efforts to circumnavigate sanctions.

Then, German financial regulator BaFin opened an investigation into a Hamburg bank for its role as a financial hub for the Iranian military complex. 

Ted Datta, Senior Director and Head of Financial Crime Compliance Practice, Europe, Africa & Americas at Moody’s Analytics, says: “These stories highlight the risk shell companies can pose, and why it’s vital for organisations to gain insights into these threats.”

Now, we speak to Datta, who reveals how regulators can tell if a shell company is being used to harbour financial crime. 

Shell companies: Red flags for financial crime

“It's worth noting that shell companies are not always used for illicit activity,” says Datta. “However, there are common behaviours associated with shell companies that suggest an increased risk they are implicated in financial crime. 

“Shell company risk can be proactively avoided when these behaviours are understood and flagged to risk and compliance teams, allowing appropriate assessments of business relationships.

“If risky behaviours are flagged and risks dealt with, companies can minimise the reputational damage of being associated with bad actors and also avoid falling foul of regulation.”

Indeed, when a 2.8 billion Singaporean dollar money laundering case was dismantled by local police, Moody’s Shell Company Indicator analysis revealed hundreds of flags for companies associated with those arrested. 

But what are the red flags? 

“There are seven key behaviours commonly associated with shell companies that can suggest they warrant further investigation,” notes Datta. 

“The first of these is where a single individual sits as a director at an unusually large number of organisations. Moody’s data revealed one person who held 5,751 roles in 2,833 different companies. Cases such as these are atypical and suggest corporate opacity may be taking place, which can be a signal of money laundering.”

Another telling sign is corporate formation, particularly around mass registration, as Datta explains: “Mass registration is where an unusual number of companies are registered to the same address or under the same name, often at the same time. For instance, Moody’s tool pinpointed a South African strip mall with 61,000 businesses registered to it. 

“It also found thousands of organisations with their main address located at the Pyramids, Giza. Multiple organisations registered at the same location can make it very difficult for authorities to track the flow of money.”

Datta continues: “Another indicator of risk is the age of a registered director. Most organisations will not have directors younger than 18 or older than 80. 

“Yet Moody’s analysis found over 4,500 companies stating their director was below the age of 5, suggesting either false identification is being used or the controlling influence for the company lies outside the listed directorship.

“Other outlier behaviours that can indicate shell company risk include dormancy, a circular ownership structure with hidden shareholders, financial anomalies such as abnormally high revenue, and the director of a shell company is in a different jurisdiction from the organisation. 

“While these behaviours may be less attention-grabbing than in a location with thousands of registered businesses, they may still warrant further investigation.”

Indeed, the trouble for many regulators and compliance teams may first be identifying shell companies. “Given their opaqueness, gaining actionable insights into shell companies and their activities has been a difficult task for compliance teams,” Datta continues.

“But to tackle the increasingly complex world of sanctions, fraud, and money laundering, compliance teams can integrate this behaviour analysis into their processes and build a holistic understanding of who they’re doing business with.”

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