On October 27, 2022, The ACAMS New York Chapter held an event titled Shelf Companies and their Financial Crime Risks, which was sponsored by Rietumu Bank and hosted by The Center for Professional Accounting Practices at Fordham University. The event (pictured from left to right) was introduced by Meryl Lutsky (Chapter Co-Chair), moderated by Nishi K. Gupta (Head of Compliance, Eco, Inc.), and included the following panelists: Pawneet Abramowski (Founder & Principal, PARC Solutions LLC); Jelena Buraja (CEO, Rietumu Banka); and Peter Piatetsky (CEO, Castellum.AI).
The discussion began with an overview of the differences between front companies (an actual business used to mask illegal activity), shell companies (generally created to aid the facilitation of a particular transaction), and shelf companies (there is no real activity, but there is an active website that demonstrates officers and directors). Despite the risks tied to each of these categories of companies, all would likely pass the due diligence processes of most US financial institutions. According to panelist Jelena Buraja, in an effort to significantly prevent financial crime, Latvia has significantly limited banks from servicing shell and shelf companies.
Panelists discussed the fact that there is an entire industry run by “enabler lawyers” that is devoted to the creation and sale of shelf companies. These companies are marketed with fake logos and websites, and can be advertised as more desirable based on having a previous transaction history that helps to create an assumption of legitimacy. Generally, age and transaction history make a shelf company more desirable and expensive. Also, most shelf companies are formed in “safe” jurisdictions, such as the US, UK, Ireland, Hong Kong, and the UAE, to give a perception of legitimacy.
The creation of a national beneficial ownership registry in the US could help to mitigate the risks of illicit finance through shelf companies. Beginning in January of 2024, all non-exempt companies formed or registered to do business in the US will have to report beneficial ownership information to FinCEN. Ownership changes (which would be triggered during the sale of a shelf company) will need to be reported to FinCEN within 30 days. FinCEN’s registry should enhance corporate transparency, however, the effectiveness of the registry may depend on factors such as how the registry data is verified, and whether reporting company exemptions are abused by criminals.
While shelf companies continue to be legal and a vehicle for facilitating financial crimes in the US, financial institutions can take steps to ensure that they are not banking shelf companies, which are often publicly advertised to buyers. While reviewing a case study on how Rietumu Bank responded to a recent administrative action, the panelists discussed tools that can be used for this due diligence, including through screening technology offered by Castellum.AI. Using such tools is a proactive and effective way to prevent and detect illicit financial activity and to avoid being connected to a major event like the Panama Papers.