Have you ever thought about how banks identify red flags concerning shell companies that are used for money laundering? An expert said, “Shell companies often show common things that raise AML Red Flags needing more checking.”
Criminals form shell companies to hide who owns them or where the money is coming from.
And bad guys do have legitimate reasons as well, but they use shell companies to move money or hide things that they own.
Bankers must know what signs can mean a shell company is misused and not doing business in reality.
In this article, we will discuss the most common red flags that raise concerns that a company is being used for bad purposes, such as money laundering.
Hidden characteristics of shell companies
Some common traits of shell companies that banks look for in their AML Red Flags Database include the following:
- They do not have a real place of business but a letterbox.
- The people behind it are unknown.
- More information needs to be provided that shows what the company does.
These hidden details in a company’s registration documents can cause a red flag alert AML. They warn banks to look closer for money laundering.
A study by the Financial Action Task Force found that more than 80 percent of money laundering cases involve the use of shell companies.
Bonus: Familiarity with some of the most frequent AML red flags helps financial institutions better screen for malicious shell company operations.
Registration document AML Red Flags
Shell companies typically raise Red flag indicators when completing forms to register. The documents may carry no actual addresses or be listed in places such as private mailboxes.
They put no names or just fake ones for the real owners. The forms indicate that the business sells things but give no real details.
This problem in registration papers carries red flag alerts in the AML Red Flags Database. They introduce the need to dig deeper into banks.
Recent financial crime studies have shown that approximately 60-80% of shell companies are associated with money laundering.
Inconsistent business dealings activities
If a company’s action does not align with what its registration states, then this can be an AML Red Flag.
It may receive money from many different places and industries that need to coordinate with what their stated work is.
Or the kind and amount of money coming in and going out doesn’t pan out as some real business.
These consistencies between declared activities and actual dealings trigger alerts in the AML Red Flags Database. Then, the banks focus on possible money laundering.
According to recent reports, about 90 percent of flagged businesses bear a mismatch between stated and actual activities.
Unusual offshore bank funding
Major inflows from foreign bank accounts that are not related to a business’ work can trigger an AML Red Flag.
A new small cleaning business has started to receive millions from foreign banks. From where did this money actually come?
The offshore funding patterns become suspicious to the banks, and they scrutinize shell companies more.
These kinds of transactions trigger alarms in the AML Red Flags database. Global money laundering activities account for 2-5% of the world’s GDP in 2023.
Shell takeovers of real businesses
If a shell company buys an existing, successful business, that’s a red flag. Its true ownership and purposes are hidden.
Unknown shell companies buying older restaurants or stores trigger alerts in the AML Red Flags database.
It cautions banks to investigate the acquisition funding if it appears tainted or if the funds are laundered from illegally acquired cash.
In 2023, global AML fines equaled approximately $5 billion. That’s an indication of the importance of monitoring such suspicious activities to prevent financial crimes.
AML Red Flags: Illogical ownership structure patterns
Banks also pay attention to odd ownership structures that need to make business sense, such as lots of people owning tiny fractions of shell companies for no apparent reason.
Such patterns do not make sense in a corporate structure set off flags in the watchlist screening. They compel financial institutions to dig deeper into the checking of money laundering threats.
Recent reports state that more than 70% of complex ownership structures are those that are used to mask the real beneficiaries in cases involving money laundering.
Activity size mismatches resources.
Some shells claim to achieve much with very little to show for it. For example, a small start-up reports millions in sales with no staff or real office.
According to the FATF of 2023, more than 80 percent of such shell companies are often connected to money laundering globally.
The AML database turns red-flag when a declared activity of the company appears larger compared to the actual resources.
A mismatch like that raises questions for the banks about how such a job was done and where that money came from.
Risky locations raise concerns.
Places involved in money laundering activities are marked risky in the AML Red Flags database.
Banks are cautious when encountering shells registered in high-risk offshore zones or centers of dirty funds.
The Financial Action Task Force put 23 jurisdictions under increased monitoring in 2023 for money laundering, which is a growing concern among banks and financial institutions.
The ominous location calls for further verification of the business they are about, ensuring that the funds used come from clean sources rather than a laundering operation.
Find the newest alerts on high-risk business patterns in our updated AML Red Flags database.
