Shell firms are considered to be a real threat to the corporate sector after the Panama Paper leaks. This public scandal highlighted how politicians, politically exposed persons, PEPs, criminals, and influential people laundered money through shell firms. These ghost firms without physical assets, operations, and employees provide convenience to the criminal minds. The business partner of illegal shell companies may face legal consequences that may have a bad effect on its own bottom line. The reputation of the business also gets affected if the business. 

What is a Shell Company?

A shell company refers to a company that does not possess any operations and no real assets. The legal function of a shell company is that it helps finance the start-up and avoid taxes. The formation of the shell company itself is not unlawful; however, in many cases, influential people misuse it. The ghost firms are incorporated in offshore tax havens; therefore, the beneficial owners do not disclose their identity to avoid paying taxes. Today’s widely recognized offshore tax havens comprise the Cayman Islands, Bermuda, Bahamas, British Virgin Islands, and Switzerland. The money flow in those tax havens is tough to track.

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How do Shell Companies work?

Large public businesses and private companies utilize shell companies in legal ways. Basically, a shell company helps avoid taxes for actual businesses, such as Apple’s corporate entities in the UK. The problem is that tax avoidance sometimes creates room for tax evasion. Tax evasion is an act of hiding money from the state and is regarded as a severe economic offense so that the corporation may enter in a black or gray list. The corporate sector must verify the legitimate status of the shell firms, and they must go under rigorous due diligence before partnering. Additionally, there are several legitimate uses of the shell firms, some of which are given below:

•  A shell company is convenient for a new startup as it allows the latter to keep the money it has attracted prior to starting operations. 
•  Due to this, corporations may place their assets in shell corporations particularly if it is planning to merge with another company or acquire another firm. 
•  It assists in forming a shell corporation since if the company is based in an insecure area or is a risky organization, it becomes safe. 
•  A shell company is useful for estate planning to provide a neutral account through the partition of the unique assets ownership of the wealthy person. 

Shell Firms as Tax Havens

One of the primary uses of shell organizations is to avoid income tax rates or corporate tax rates. The countries or regions characterized by very low or no taxes at all are known as tax havens. If the company’s home country has high tax charges, then it may open foreign companies that are shell firms in a tax haven. In countries or regions where the tax amount is comparatively small. There is no law that requires the reporting of tax information to any authority.

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In most countries and states of the world, the identified shell companies are quite lawful legal entities. The shell companies were active real business entities, but some of them collapsed. However, they are occasionally used for lawful activities, although the Panama Papers leaks keep the shell firms in question. 

Shell Company Money Laundering 

The shell firms have significant potential for practicing money laundering, corruption, bankruptcy, tax evasion, and other types of crimes. These companies offer business opportunities to such people as sanctioned individuals, politically exposed persons (PEPs), blacklist persons, and other criminals. It means that the actual owner is listed as different from the beneficial owner. Since a shell company conceals such information there is a likelihood of unlawful actions. The government and the regulatory bodies cannot obtain information regarding the ultimate beneficial owner, the UBO, of an entity or shell company. Therefore, the money trail of the shell company’s UBO is nearly untraceable; thus, they are employed for unlawful means. 

Concluding Thoughts 

Shell firms, besides their legal nature, are used for several illegal purposes. A shell company is the secure gateway for criminals to do business. Moreover, the authorities learn that shell companies help criminals get actual copies of bills to facilitate money laundering. Therefore, an investigator can never locate the illegitimate sources of funds belonging to the real owners of shell companies. The PEPs are watchlisted, while the criminals can easily engage in money laundering due to poor regulations of the tax havens. For this purpose, the corporate sector must understand shell firms while making business bonds.