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Understanding the risks and challenges of shell companies in managing AML compliance

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This paper begins by discussing how anonymous corporate entities serve as vehicles for the entry of illicit funds into the legitimate financial system, allowing criminals to carry out untraceable transactions and engage in illegal activity while remaining hidden from law enforcement, regulators and the public. It continues by discussing some of the stronger regulations focusing on corporate transparency many countries have adopted now that this issue is more widely recognised. The paper then discusses the various attempts to increase corporate transparency and combat the misuse of US shell companies, and analyses two recently introduced AML bills which demonstrate that there is strong bipartisan support for ending anonymous companies within the USA. Regardless of whether the proposed bills pass as currently drafted, the probability of AML reform impacting the US financial services industry is inevitable amid mounting domestic and international pressure, and the paper proposes that, in order to effectively manage AML compliance and meet increasingly stringent regulatory demands, it is critical that compliance leaders have a thorough understanding of the ways in which anonymous companies may be abused and the risks associated with such entities. The paper discusses the expectations places on regulators, financial institutions, and that financial institution’s AML compliance programme, including the processes and procedures around beneficial ownership. The paper contains advice on reassessing existing AML compliance programmes, with a focus on enhanced due diligence processes and procedures around the identification and verification of beneficial ownership.
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Keywords: anonymous corporate entities; anti-money laundering; beneficial ownership; compliance; shell companies; transparency

Document Type: Research Article

Affiliations: Founder, Compliance Notes

Publication date: June 1, 2020

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  • Journal of Financial Compliance is the major new professional journal publishing in-depth, peer-reviewed articles and case studies on how financial institutions can proactively manage the implementation of and adherence to regulatory requirements and effectively mitigate compliance and legal risk, as well as how central banks and financial regulators can effectively manage supervision, inspection and enforcement to facilitate customer/investor protection, financial stability and market growth.
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