Understanding the risks and challenges of shell companies in managing AML compliance

Abstract

This paper begins by discussing how anonymous corporate entities serve as vehicles for the entry of illicit funds into the legitimate financial system, allowing criminals to carry out untraceable transactions and engage in illegal activity while remaining hidden from law enforcement, regulators and the public. It continues by discussing some of the stronger regulations focusing on corporate transparency many countries have adopted now that this issue is more widely recognised. The paper then discusses the various attempts to increase corporate transparency and combat the misuse of US shell companies, and analyses two recently introduced AML bills which demonstrate that there is strong bipartisan support for ending anonymous companies within the USA. Regardless of whether the proposed bills pass as currently drafted, the probability of AML reform impacting the US financial services industry is inevitable amid mounting domestic and international pressure, and the paper proposes that, in order to effectively manage AML compliance and meet increasingly stringent regulatory demands, it is critical that compliance leaders have a thorough understanding of the ways in which anonymous companies may be abused and the risks associated with such entities. The paper discusses the expectations places on regulators, financial institutions, and that financial institution’s AML compliance programme, including the processes and procedures around beneficial ownership. The paper contains advice on reassessing existing AML compliance programmes, with a focus on enhanced due diligence processes and procedures around the identification and verification of beneficial ownership.