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How are shell companies used to launder money?

On Behalf of | May 31, 2023 | White Collar Crimes |

An individual can use a shell company to evade taxes or to conceal assets from another party, such as a former spouse, business partner or even the authorities. Money launderers can use them to clean their money. Because shell companies can accept cash transactions, the money launderer can deposit money they illegally obtained into to the company in undetectable tranches. The shell company then distributes the money to different fraudulent bank accounts inconspicuously owned by one beneficial owner through layering.

A shell company is a legal entity with no active operational assets. They typically exist to hide the identity of the business owners. Shell companies are legal unless the person who established the company uses it for illegal means.

What are legal reasons for setting up a shell company?

Shell companies exist only on paper and are fundamentally empty, so it is easy to abuse the legal entity. However, there are legitimate reasons to establish a shell company. Here are examples:

  • The taxes abroad can be cheaper and the taxation policies more lenient than those in the United States. It is perfectly legal for a domestic company to set up a shell company to realize a tax haven
  • A startup can create a shell company to raise funds for their business.
  • A corporation looking to pursue a hostile takeover of another company can utilize the privacy a shell company provides.
  • A large and reputable company can also use a shell company to conduct secret operations, like when designing or conceptualizing a new product. They remain hidden until they are ready to go public with their invention or innovation.

You can use a shell company to limit the liability of your partners and other stockholders. It can protect a business owner from potential risk. If you are using a shell company for these legal and valid reasons, then you need not worry.

Shell companies are legal despite money laundering

Albeit entirely legal to own and establish a shell company, the federal government continuously and aggressively investigates shell companies. They are on the lookout for shady activity. You should continue to assess the risks involved in any transaction within your shell company to prevent apprehension and unwarranted attention. A lawyer with experience in dealing with money laundering and other white collar crimes can help you make an assessment.