What is a shell company, and how does it work?

Описание: A shell company, defined as a legal entity without active business operations or significant assets, is frequently exploited for financial crimes like money laundering, tax evasion, hawala transactions, and corporate fraud. While not inherently illegal, these entities enable criminals to obscure ownership through techniques like fake invoicing, over-invoicing or under-invoicing of goods/services, and cross-border trade manipulation to transfer illicit funds and launder black money.

In India, shell companies have been linked to high-profile scams such as the ₹850 crore Falcon Invoice Discounting fraud, where nearly 15 shell firms and cryptocurrency were used to divert money, and the FairPlay case, involving ₹4,500 crore siphoned overseas via bogus imports and exports. Such schemes often exploit weak anti-money laundering (AML) frameworks, using shell companies to deposit illicit funds in jurisdictions with strong bank secrecy laws or tax havens.

Additionally, shell companies play a pivotal role in GST fraud, round-tripping, public fund siphoning, and benami transactions, leveraging corporate secrecy to hide the identity of ultimate beneficial owners (UBOs). To combat this, governments globally are enforcing stricter AML regulations, mandating disclosure of UBOs, increasing scrutiny on suspicious financial flows, and deregistering inactive entities, as seen in the Indian Ministry of Corporate Affairs (MCA) crackdowns targeting shell companies involved in tax evasion.

Despite these efforts, shell companies remain a critical tool in financial crime, underscoring the need for enhanced transparency, international cooperation, and AI-driven compliance tools to detect suspicious entities.

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