Individuals can use legal persons and arrangements to obscure or conceal their involvement in a transaction. In many jurisdictions, the individuals who truly own, control, direct, or benefit from a transaction—known as the beneficial owners—are not required to reveal their identities to the authorities. Individuals who are wanted criminals, known terrorist financiers, or connected to heavily sanctioned jurisdictions can form opaque companies in lower-risk jurisdictions and seek financial services under the name of a legal person or arrangement they control.

Even in jurisdictions where legal persons and arrangements are required to report their beneficial ownership, illicit actors can seek to conceal their ownership interest through the use of complex corporate structures, intermediaries, and nominees, as discussed below.

Legal persons, particularly businesses, engage in a wide variety of transactions with a wide range of counterparts. Depending on its size and the nature of its business, a legal person customer might be likely to send and receive far larger and more irregular transfers than would an individual—many of them with counterparties that are also legal persons. For example, a company that manufactures for export may send payments to suppliers in a number of foreign jurisdictions, and receive payments from purchasers in different jurisdictions.

The variety and unpredictability of transactions carried out by legal persons can make it more difficult to identify behaviour that is unusual or has no obvious economic purpose. This is especially true when the counterparts are also opaque legal persons or arrangements. For example, a company may seek to reduce its tax burden by claiming that certain transfers are tax-deductible expenses, when in reality they are payments to a legal person with the same beneficial owners as the originating company.

Legal persons can also be abused by individuals seeking to hide the source of an incoming transfer. For example, a politically exposed person (PEP) might receive a transfer that supposedly represents investment returns from a company located in another jurisdiction. Without knowing the beneficial owners of the originating company, it is difficult to say whether the transfer does in fact represent a return on investments, or whether it is in fact a bribe or somehow related to corruption.

The involvement of legal persons and arrangements can also make it more difficult for LFIs to identify a customer’s true source of wealth. A legal person that is represented as a profitable business, for example, may in fact be a shell company that merely passes on income from illicit sources.

The use of shell companies: Shell companies, commonly defined as companies that have no significant operations or related assets, may have legitimate business purposes. A shell company’s lack of employees and physical presence, however, makes it possible to abuse it as a vehicle for illicit transactions. These features also make it very difficult for law enforcement agencies in jurisdictions where the company operates to investigate its owners and activities.

Complex ownership and control structures: Individuals who seek to hide their interest in a company may create multiple layers of ownership and control that make it difficult to identify who really owns and controls the company. For example, a company may be owned by a second legal person, that is in turn owned by three legal persons, that are controlled via a debt financing arrangement. Where directors are required to be reported to the registering authority, a company may name legal persons as directors, further complicating the control structure.

Use of nominee shareholders and directors: Nominee arrangements involve an individual (the nominator) assigning his or her shares or voting rights to a second individual (the nominee) who agrees to act in accordance with the wishes of the nominator. The nominee is listed as the shareholder or director of record, but in fact has no power to direct the company and does not have a legal ownership right over the benefits accruing to the ownership interest, such as dividends. Nominee relationships may be contractual or based on a handshake agreement. Such informal arrangements often involve a nominator and nominee who are close associates or family members.

Use of intermediaries: Individuals seeking to create complex, opaque corporate structures will often seek out professional intermediaries (lawyers, accountants, and trust and company service providers (TCSPs)) who are experienced in bending and manipulating the rules in the jurisdiction where the legal person or arrangement is formed. Intermediaries may create new legal persons or arrangements, or sell the rights to existing legal persons that appear to have been in operation for some time. These intermediaries may also serve as directors, nominees, or trustees of the resulting legal persons and arrangements.

Abuse of legal persons and arrangements for ML/TF/PF often includes the creation of complex ownership structures with many such entities—including entities of different types and in different jurisdictions; the use of one-time ‘disposable’ entities that are abandoned after they have served their purpose; or the use of previously inactive ‘shelf companies. In addition, illicit actors will be able to more easily transact anonymously if they are required to reveal only minimal information during the formation process, can rely on nominees, or can complete processes without face-to-face interaction. For these reasons, legal persons and arrangements in jurisdictions whose formations processes allow for rapid, remote, and inexpensive formation and registration may be more attractive to illicit actors.

Because anonymity is one of the greatest attractions for illicit actors who seek to abuse legal persons and arrangements, they are likely to gravitate towards jurisdictions and company forms that require them to provide minimal information about the entities and themselves and that make it difficult for third parties to identify who in fact owns and controls the entity. The following controls that may be applied by the jurisdiction registering the entity in question can, to a certain extent, reduce the vulnerabilities created by corporate opacity.

Unlike individuals, legal persons and arrangements can swiftly change fundamental elements of their identity, rendering information provided during the formation process obsolete. Legal persons and arrangements can also compartmentalize information about themselves so that no single individual possesses full information about the entity. Because legal persons and arrangements abused for ML/TF/PF may not engage in licit commercial activity and may be controlled by only a small number of closely connected individuals, there is little commercial rationale for such entities to maintain adequate books and records. Illicit actors take advantage of these features by purchasing already-established companies “off the shelf;” selling companies to new owners; changing the company name; or failing to maintain records of their ownership. These vulnerabilities can, to a certain extent, be mitigated through effective controls, such as:

The effectiveness of any regime of controls over legal persons and arrangements depends on the consistency with which such controls are enforced and on the sanctions available to the supervisor and law enforcement.