Shell firms’ red flags

61 000 COMPANIES FOUND TO HAVE SAME ADDRESS

One business registered more than 10 000 entities in less than 10 days.

Credit rating agency Moody’s has found that 61 000 South African shell companies have the same registration address: at a shopping centre in Pretoria, while in Egypt, 22 600 shell companies have the Gisa pyramid complex as their registered address.

The agency even found a company director of a shell company who was born in the 11th century.

Moody’s found this and other interesting information about shell companies around the world using its Shell Company Indicator, a subscription-based application launched in November, that analyses data of more than 472 million companies and millions of individuals.

The analysis raises flags to identify shell companies that are potentially misused for illegal purposes.

Shell companies are corporations without significant business assets or operations. There are many reasons to create them and therefore they are not necessarily illegal, but bad actors can abuse these legal instruments to launder money.

Moody’s said they can create a mask for sanctioned individuals to disguise their business ownership and hide financial crimes, such as tax evasion, fraud and bribery. In 2016 the Panama Papers exposed crimes by some shell companies after 11.5 million confidential documents about a global network of 214 000 offshore companies were leaked.

The Shell Company Indicator analyses data of registered corporations and individuals to flag seven key behaviours commonly associated with shell companies.

The Moody’s app identifies hidden dangers such as circular ownership and mass registrations to empower financial services firms to reduce risk when evaluating new customers, while it also helps government agencies to investigate individuals’ and organisations’ alleged financial crimes.

The seven flags are:

Jurisdictional risk, where a director’s jurisdiction differs from the company’s;

Circular ownership, where there are hidden shareholders;

Where there are an improbable number of directorships at inactive companies;

Mass registration, where registration patterns indicate mass or bulk creation;

Outlier age, where owners are implausibly young or old;

Financial anomalies, where there is abnormally high operating revenue based on the number of employees; and

Dormancy, where there has not been any business activity in more than five years.

Among the 472 million companies in Moody’s Shell Company Indicator, about 19 million raise one flag and more than 900 000 companies raise two or more flags.

The most common double flag combinations are roughly 480 000 outlier directorship mass registration combinations.

Moody’s industry practitioners said that a company that raises two or more flags may be at a heightened risk of being a shell company, a corporation without active business operations or significant assets.

For South Africa, there were just over half a million flags, with 375 000 about directors and just over 126 000 for mass registrations.

Mass registrations can indicate illegal operations and Moody’s found one company that registered more than 10 000 entities in less than 10 days, all with the same name, address and director, similar to the 61 000 companies sharing an address at a mall in Pretoria.

Typical directorships can be used to hide the true owners and money from the authorities. Moody’s found one person who is registered as director at 2 800 companies, as well as one company with 292 directors.

Outlier ages for directors also raises a flag, as the average age of a director on the Moody’s data base is 52.