61 000 shell companies registered at one Pretoria address

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.

Moody’s says 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.

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Moody’s Shell Company Indicator’s seven flags

The Shell Company Indicator analyses data of registered corporations and individuals to flag seven key behaviours commonly associated with shell companies to tackle the rising complexity of fraud, sanctions and criminal money laundering networks.

The seven flags are used to build a portrait of any underlying risks. 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 and at least one is high risk
• Circular ownership, where there are hidden shareholders in a company r entity in a circular ownership network
• Atypical directorships, where there are an improbable number of directorships at inactive companies
• Mass registration, where registration patterns indicate mass or bulk creation
• Outlier age, where company owners are implausibly young or old
• Financial anomalies, where there is abnormally high operating revenue based on the number of employees
• Dormancy, where there has not been any business activity in more than five years.

ALSO READ: Panama law firm heavily implicated in ‘Pandora Papers’ revelations

So many flags, so many companies

Among the roughly 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 among the seven behaviours identified.

The most common double flag combinations are the roughly 480 000 outlier directorship-mass registration combinations. Moody’s industry practitioners say 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.

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

ALSO READ: FIC lays bare money launderers, fraudsters’ flow of cash into SA

Very old and very young company directors

Outlier ages for directors also raises a flag, as the average age of a director on the Moody’s data base is 52. However, Moody’s found directors ranging in age from 0 years to 943 years of age for the director who was born in the 11th century at a shell company offering business services in Belgium, registered in 2018.

According to Moody’s the business services sector raises the most flags with approximately 3.6 million, followed by the wholesale sector with 1.5 million flags and retail 1.4 million flags. Moody’s industry practitioners say one possible explanation is that these services are more easily faked.

They note that empty shell companies are frequently established solely for the purpose of sending fake invoices in cases related to trade-based money laundering and organized crime as business services is a broad term used to describe economic activities when you do not want to be specific about the products or services produced or provided.

As a result, bad actors who want to engage in illegal business may use a business services classification for their shell companies to use them as pass-through entities to facilitate the transfer of crime proceeds from one account to another.

ALSO READ: Cracking down on tax, financial crime enablers

Earning $2 billion a year with only one employee

While financial anomalies are also not a sign of anything illegal, Moody’s consider it as worth looking into, such as a Chinese company earning revenue of more than $2 billion in 2019 although it had only one employee.

Jurisdictional risk also raises a flag and is the most prevalent since 2022, probably due to the wat in Ukraine where sanctions against Russia to hide where the company owner is from.

The UK has the most shell companies at 5 million, followed by China at 3.4 million and the US with 1.8 million. Moody’s experts say it is extremely easy and cheap to register a company in the UK, which Is probably why the UK has the highest number, while China’s high number is probably due to sanctions.

Panama has the highest number (473) of shell companies per 1 000 that raise suspicion, followed by Myanmar with 466. The Financial Action Task Force placed Myanmar on the greylist in 2022 because it does not do enough to combat money laundering and terrorism finance. The UK has 264 per 1 000 companies that look suspicious, while South Africa has 65 per 1 000, more than the US and China.

The company that raised five of seven flags

One UK company raised five of the seven flags:

• Financial anomaly: $1.5 million, an abnormally high revenue per employee
• More than 340 directorships, with five of the five directors flagged for mass directorships
• Eight total companies were flagged for mass registration
• The company has been dormant for more than five years
• One individual has jurisdictional disparity.