LEGAL VIEWPONT Shell Companies Part One by Dr AbdelGadir Warsama Ghalib, Principal Legal Counsel

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Dr AbdelGadir Warsama Ghalib, Principal Legal Counsel, Bahrain

Banks are following very tough strategy to curb and firmly control money laundering through banking avenues. Many steps were taken to achieve this, including know your customer (KYC) policy. As consequence to this bold stand in the face of money laundering, the launderers initiated other alternatives to pursue their criminal activities. Incorporating shell companies is one of the lucrative alternatives.

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The use of shell and shelf companies to facilitate money laundering is an active method. Many definitions are given for shelf company, a corporation that has no activity and has been created and put on the “shelf”. This corporation is later sold to someone who would prefer to have an existing than a new one. Shell company, is a company that is incorporated at time it has no significant assets or operations.

The easy way in which corporate vehicles can be created and dissolved in some jurisdictions, allows these vehicles to be used for legitimate purposes and also to be misused by those involved in financial crime to conceal the sources of funds. Shell companies can be set up in onshore as well as offshore locations and their ownership structures can take several forms. Shares can be issued to a natural or legal person or in registered or bearer form. Some companies can be created for a single purpose or to hold a single asset. Others can be established as multipurpose entities.

The ability for competent authorities to obtain and share information regarding the identification of companies and their beneficial owners is essential for authorities responsible for preventing money laundering. The reasons to establish or control a company for money laundering purposes include, companies with the objective of converting cash proceeds of crime into alternative assets, through shell companies, the launderer can create the perception that illicit funds have been generated from a legitimate source. Once a company is established, commercial accounts can be created at banks or other financial institutions. Especially attractive to money launderers are businesses that customarily handle a high volume of cash transactions. Illicit revenues can then be deposited into bank accounts as legitimate bearer, or “bearer shares,” are prime money laundering vehicles because they belong, on the surface, to the “bearer.” The dirty money is laundered by pretending it is revenue earned by these front companies.

Generally, front companies also have legitimate revenue, but sometimes their total revenue comes from money generated by crime. Then there is no real business going on anymore. In these cases, criminals may have the whole vertical business column in his power, from production to wholesale to retail.

Once a company is established, a wide range of legitimate and/or bogus business transactions can be used to further the laundering process. These include lending money between criminally-controlled firms, paying out fictitious expenses or salaries, disguising the transfer of illicit funds under the guise of payment for goods or services, offering public shares in the company, or purchasing real estate with proceeds of crime disguised as mortgages issued by a shell company. As a medium between criminal organizations and other laundering vehicles, companies are flexible and can be tailored to a launderer’s specific needs.

To distance a company from its criminal connections, nominees will be used as company owners, officers and directors. Nominees will often, but not necessarily, have no criminal record. Criminal proceeds from offshore are used to buy a company that is already  owned by the criminal enterprise. In this way, the launderer successfully returns a large sum of money. Often, the business will be purchased at an artificially inflated price. The difference between the artificial and the real market value is deposited in a bank account. A reverse situation may occur where a company is sold at an artificially low price and so on there are unlimited ways to achieve the bad purpose. This is how, dirty money will be laundered through using certain dirty techniques and, therefore, tough measures are required otherwise criminal minds will be able to manage the whole economy through illegitimate means …. (to be continued).