Over the past 18 months, government bodies have frequently highlighted shell companies as significant red flags in anti-money laundering (AML) activities. But it begs the question, is your organisation actively identifying shell companies in its transactions? Here, Thomas Lobert, Solutions Consultant at Descartes, explains how companies can address the risk of sanctions evasion through deceptive practices, with shell and front companies providing a major challenge across different jurisdictions.
Key Takeaways
- Sanctioned entities have increasingly used sophisticated tactics, like shell and front companies, to evade sanctions since the Ukraine invasion.
- Shell companies, lacking active operations, are central to money laundering and evading sanctions, by hiding the true ownership of assets and complicating law enforcement efforts.
- Unlike shell companies, front companies conduct real business activities but are used to integrate illicit funds into the legitimate financial system, making detection harder.
- Sanctions evasion often crosses borders, exploiting weak regulations and slow international cooperation to avoid detection.
- Screening tools are crucial for identifying and mitigating risks associated with shell and front companies involved in sanctions evasion.
The world has seen an exponential increase in the number of sanctions issued by jurisdictions and regional bodies since Russia’s invasion of Ukraine. As a result, the Russian Elites, Proxies and Oligarchs (REPO) Task Force under the auspices of the U.S. Treasury Department has issued a Global Advisory on Russian Sanctions Evasion to expose the tactics used by Russia, its allies and proxies to evade sanctions.
For clarity, sanctions evasion is defined as intentionally bypassing trade restrictions by engaging in illicit activities while avoiding being detected. Organisations must take proactive steps to reduce the risk of becoming involved in such business dealings.
So, what are the different typologies used to bypass sanctions?
Shell Companies
A shell company, shell corporation or ghost firm is a legal entity devoid of active business operations or significant assets. These companies are essentially empty and are not all illegal because they can form legitimately like, for example, in the situation of a hostile takeover.
However, shell corporations play a significant role in money laundering schemes, both in the laundering of illicit funds and in obfuscating the ownership of financial assets held in their name.
In jurisdictions that have strict privacy regulations, shell companies are safeguarded in regard to confidentiality of company ownership information, making it difficult for authorities and the public to ascertain the true individuals or entities behind said company.
Therefore, when directing illicit funds to another account located in a jurisdiction without strict privacy laws, bad actors create a dead-end in the money trail. This in practical terms is described as an identity filter, which is a significant part of money laundering schemes.
Money laundering involves three crucial steps, placement, layering and integration. Crucially, shell companies play a role in the layering step, where the money is sent through a complex series of transactions often crossing international borders to hide the original source of the funds.
The crossing of international borders grants money laundering schemes an advantage. Not only are investigations constrained by jurisdictional boundaries, but the collaboration between police forces across borders often slows or halts investigations.
What’s more, the laundered money usually flows through countries with minimal financial regulations, where authorities may not assist investigations.
For example, the Pandora Papers leak, comprising 6.4 million documents, exposes how elites and politicians worldwide used secret offshore companies to conceal wealth. Through shell companies, they dodged taxes, engaged in corrupt practices and purchased properties discreetly to launder money on a global scale.
Front Companies
Unlike shell companies, a front company operates as a façade, covering illicit activities or the true nature of transactions, yet may have physical offices, employees and conduct business activities. This facade masks the underlying illicit activities or beneficiaries, making them more sophisticated in their deception.
Criminals use front companies in the placement stage of money laundering, where this step introduces illicit cash or proceeds of crime, like drug trafficking, human trafficking and fraud, into the legitimate revenue of the front company. This part relieves criminals of the burden of holding large amounts of cash and integrates the illicit funds into the legitimate financial system.
Four significant steps are then taken to obscure the origin of funds and complicate detection, helping to avoid sanctions. First, perpetrators establish parent companies in jurisdictions unaffected by sanctions, then they create additional subsidiaries under these parents before hiding ownership through intricate structures and channelling payments through front companies.
For example, the Financial Times reported that Iran used British front companies with accounts in Lloyds and Santander UK to covertly transfer funds globally, bypassing U.S. sanctions. These companies, secretly owned by a sanctioned Iranian petrochemicals firm near Buckingham Palace, moved money around the world in a sanctions evasion scheme that was backed by Iran’s intelligence services.
However, front and shell companies are just two ways in which sanctions are evaded across different jurisdictions, and these typologies highlight the ongoing battle against sanctions evasion, as detailed by the REPO Task Force — who alerted member states what measures should be taken to mitigate the risk of exposure to evasion.
One measure is through our sanctions screening software, which ensures companies wanting to address the risk of sanctions evasion through deceptive practices. Using advanced screening algorithms and comprehensive databases, Descartes Visual Complianceä allows companies to conduct thorough denied-party screenings, identifying potential shell and front companies that mask sanctioned entities or individuals across different jurisdictions.
