A shell company is a Legal Entity that exists on paper but has no significant operations, active business activities or assets. These companies are often created for legitimate purposes such as holding assets, managing intellectual property or facilitating mergers and acquisitions. However, shell companies are also commonly associated with Financial Crime risks, particularly when used to obscure ownership, conceal illicit funds or bypass regulatory scrutiny.

Within Know Your Customer (KYC) and Anti-Money Laundering (AML) compliance, shell companies are considered high-risk because they can be used to disguise the identity of the true owners - also known as Ultimate Beneficial Owners (UBOs) - and facilitate activities such as money laundering, tax evasion, corruption or terrorist financing. They may appear to be legitimate businesses but lack employees, physical presence or clear revenue-generating operations.

Financial institutions and regulated entities must apply Enhanced Due Diligence (EDD) when dealing with potential shell companies. This includes verifying oOwnership and Control Structures, assessing the legitimacy of the business purpose and monitoring for suspicious activities / transactions. Transparency around beneficial ownership and the ability to identify shell company misuse are essential for reducing financial crime risk and maintaining compliance with global regulatory standards.

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