The UK has emerged as the global leader in shell company risk flags, surpassing all other nations by a significant margin, emphasising the urgent need for heightened vigilance and rigorous oversight in international finance.
A shell company, which exists primarily on paper, often serves legitimate purposes such as holding assets or facilitating business transactions, but it can also be used for illicit activities.
Moody’s new Shell Company Indicator analyses over 485 million companies, entities, and individuals to flag behaviours that indicate a shell company may require further due diligence to assess its potential for involvement in illicit financial activity.
The Indicator flags seven potentially risky behaviours commonly associated with shell companies – atypical directorships, mass registration, jurisdictional risk, dormancy, financial anomalies, outlier ultimate beneficial ownership, and circular ownership.
In November 2023, Moody’s Shell Company Indicator identified the UK as the global leader in shell company-related risks, with nearly five million flags. This figure significantly surpasses that of China, which secured second place with 3.4 million flags, and is more than double the number in the third-ranked US, which had 1.8 million flags.
More attention needed?
Moody’s analysis implies that the uncomplicated process of forming companies in the UK could be a contributing factor to the elevated count of potential shell companies. In the UK, virtually anyone can own and manage a limited company, provided they appoint at least one genuine person aged at least 16, and the directors’ addresses are non-PO Box registrations.
“The findings reveal concerning levels of shell company risks emanating from the UK, which may require more attention from risk management and compliance teams during their investigations,” said Ted Datta, senior director – head of financial crime compliance practice Europe, Africa, and Americas at Moody’s Analytics.
“With the UK home to such a large volume of flagged entities, organisations face a monumental and highly complex task in conducting proper due diligence across their client base and supply chains. This is especially true given the recent Economic Crime and Corporate Transparency Act and the new failure to prevent fraud offence.
Datta added that proactive measures and advanced detection capabilities are essential to properly identify shell companies, assess their legitimacy, and determine what further action is warranted.
“Though progress has been made in corporate transparency, there is still significant work to be done by both businesses and governments to detect and prevent financial crimes that are underpinned by illegal use of shell companies,” he said.