Study on Shell, Shelf and Front Companies

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CA Mayur Joshi
CA Mayur Joshi
CA Mayur Joshi is a Forensic Accounting evangelist in India. He is the co-founder of Indiaforensic and is author of 7 books on forensic accounting, fraud investigations and money laundering.

In the past few years, the financial world witnessed numerous paper leaks such as Panama Papers, Paradise Papers, Swiss Leaks, etc. These leaks underlined the significance of the Shell and shelf companies. These are highly complex corporate vehicles such as private companies, partnership firms, and trusts. They are all excellent methods to maximize the anonymity of ownership. Criminals use these corporate vehicles to facilitate the movement of illicit funds.

Moreover, these corporate vehicles are known as shell companies or sometimes offshore shell companies. Occasionally, the terms shelf company and front company are used.

You might see a general confusion about these three terms: shell company, shelf company, and front company. You might even find it a little bit confusing yourself. But let’s shed some light on it.

What is a Shell Company?

Shell companies are usually private companies, limited liability companies, and trusts. They typically have no physical presence, other than a postal address, and generate little or no independent economic value.

Moreover, most shell companies are legitimate. They hold shares, securities, or intangible assets of another business entity. Additionally, they facilitate domestic and cross-border currency transactions.

However, shell companies have also become common tools for financial crimes and especially money laundering. This is because they are easy and inexpensive to form and operate. To facilitate money laundering, shell companies generate false invoices, provide fictitious consultancy, or grant bogus loans.

There are different ways to disguise company structure, ownership, and activities. For example, many countries’ laws permit corporations, general partnerships, and trusts to own and manage private limited companies. In many countries, the companies can also become partners of LLPs.

This statutory feature enables an individual or business to further conceal involvement in the activities of a shell private limited company type. Layers of ownership are the most complex. These layers help the individuals to stay away from corporate structures. Even if one or more of the owners is known the ultimate beneficiary remains safe.

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Then secondly, there is a shelf company. Shelf companies are something that only a few people know much about.

What is a Shelf Company?

The creators, holders, and protectors of shelf companies are typically lawyers. Especially lawyers incorporate private companies in which the law firm plays an active role.

The company, after its incorporation, undertakes no business activity and sits on a “shelf” for a number of years. It just files its annual returns in time and keeps itself alive. Old companies get more value. Their losses create a value proposition as an acquisition target. In many countries, the losses can be set off against the profits. This helps the acquirers to save on the tax bills. Eventually, the law firm will have a client who needs a pre-existing company and it will sell one of its shelf companies to the client.

Law firms often have numerous shelf companies. On some, albeit rare, occasions a person will create their own shelf company. The shelf becomes empty once the company sells.

After the sale of a shelf company, the active shareholders usually transfer their shares to the new owner. And the directors and secretary submit their resignations. Following the sale transaction, the purchaser owns the credit and tax history.

What is a Front Company?

Last but not least, a front company is an entity, which has limited or no operations of its own. Front company is a part of the active business group. A front company is most often a shell company. The front company helps to protect the business from unforeseen contingencies. These companies generally have no nexus with the representatives of the business group. As the relationship with other parties is invisible, a front company helps to protect a parent corporation or brand from negative publicity in the event of a mishap. It helps in concealing illegal activities and disguising the true beneficiaries.

Moreover, front companies may also belong to intelligence agencies. Even though organized crime groups, banned organizations, religious or political groups, and advocacy groups are frequent owners.

In the world of organized crime, financial crime, and money laundering, it can be observed that many organized crime operations have substantial legitimate businesses, such as licensed gambling houses, building construction companies, hair salons, karaoke bars, engineering firms, restaurants, and bars, billiard clubs, trash hauling services, or dock loading enterprises.

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