The Panama Papers leak revealed several identities involved in financial crimes through shell companies. The business owners, politicians, and other influential people were hiding billions of dollars by the illegal use of shell companies. These companies also helped business entities to prevent taxes through a Panama law firm. Therefore, a shell company is a threat to the business partners as the identities behind it can lead to legal consequences. The partner business can face penalties, sanctions, and other sentences. While establishing the business bond, the corporation must evaluate the legal status of a shell company. The verification of a shell company ensures transparent financial relations.What is a Shell company?
A shell company is a ghost firm that has neither business operations nor physical assets. The primary legitimate use of a shell company is to uplift the start-up through funding and tax avoidance. The nature of the shell company itself is legal, but most of the time, influential people exploit it. Such companies are registered in offshore tax havens, so the beneficial owners hide their identities to avoid taxes. The most well-known offshore tax havens include the Cayman Islands, Bermuda, Bahamas, British Virgin Islands, and Switzerland. It is extremely difficult to trace the money flow in these tax havens.
How do Shell Companies Work?
Well-established public companies and private entities usually rely on shell companies. A shell company helps legitimate businesses, such as Apple corporate entities in the UK, to prevent taxes. The problem is tax avoidance sometimes opens the way for tax evasion. Tax evasion is considered a serious financial crime that results in the corporation entering into a black or gray list. For this reason, the business world is always suspicious of shell companies and requires high-level scrutiny while making partnerships. Additionally, there are several legitimate uses of the shell companies, some of which are given below:
A shell company is helpful for a new startup as it may save the money it raises before it officially launches.
When a company plans to undergo a merger or an acquisition, it may choose to store its assets in shell companies to facilitate the process.
If a corporation operates in an unsafe region or is a high-risk company, it helps create a shell company for security reasons.
A shell company can be beneficial for estate planning when a neutral account is necessary to divide the assets of a wealthy individual.
Shell Companies as Tax Havens
One of the primary advantages of shell companies is to avoid income tax rates or corporate tax rates. The countries and regions with extremely low or non-existent taxes are considered tax havens. If the company has high tax rates in its home country, it can create foreign shell companies in a tax haven. In countries or regions with lower tax bills, there is no law to report tax information to an authority.
In most countries and states, the shell companies are completely legal entities. The shell companies were fully functioning businesses, and in some cases, they collapsed. However, eventually, after the Panama Papers leaks, shell corporations sometimes operate for legal purposes.
Shell Company Money Laundering
Shell companies are notorious for engaging in money laundering, corruption, bankruptcy, tax evasion, and other financial crimes. These companies offer encouragement to sanctioned people, politically exposed persons (PEPs), blacklist people, and other criminals to do business there. A shell company hides the beneficial owner's details, so there is a high risk of suspicious activities. The government and the regulatory bodies have no access to information about the ultimate beneficial owner UBO of a shell company. So, the money trail of the shell company’s UBO is almost impossible to investigate, so they are likely used for illegal purposes.
Additionally, shell companies provide criminals with actual copies of bills, aiding in money laundering. So, an investigator can never find the illegal funding resources of the entities behind shell companies. The PEPs are watchlisted, and criminals can easily launder money through lax regulations of tax havens.
Concluding Thoughts
Shell companies, besides their legal nature, are used for several illegal purposes. A shell company is the secure gateway for criminals to do business. These ghost firms provide no record of identities behind the business, so they never come under rigorous investigation. Over time, the difference between legal and illegal use of the shell company is getting blurred. Without physical presence, ghost firms are prone to money laundering, terrorist financing, tax evasion, corruption, and other financial crimes. Financial institutions, investors, and businesses require vigilant verification when establishing bonds with shell companies.
