The business world must understand the functioning of front companies. A front company is an organization that pursues little or no business operations. Often, it is a chamber with a larger commercial business behind it. Basically, the existence of a front company serves its main purpose as a shield for the real company or the brand from negative press. It is by maintaining operational secrecy with other parties and even masking any illegitimate business or the real parties benefiting from the scheme.
What is a Front Company?
A front company may be associated with intelligence services, but it will also, of necessity, be associated with advocacy groups, banned or religious organizations, the organized criminal fraternity, political or religious supporters, etc. It is mainly used to operate legally authorized casinos, construction companies, hairdressers, bars, restaurants, and many other businesses. The problem is that it is possible that a front company offers organized crime, financial crimes, and money laundering. However,
Characteristics of Front Companies
A front company has a variety of forms and goals, there are certain characteristics that are discussed below:
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Suspicious Financial Behavior
A front company shows some microscopic economic elements which look odd, including fake revenues and freight conflicting with the expected standard cash flow.
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Complex Ownership Structures
In a front company, ownership structures could be very blurred, in the sense that one really does not know who the owner of the company is.
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No Physical Location
Lack of an established office space or very low levels of business is another indicator of money laundering.
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Lack of Digital Presence
Contrary to an ordinary business in the digital age, a front company may be barely known on the Internet and may not actively promote its services.
The confusion between the front companies and the real ones is done deliberately to avoid being exposed. They also select industries that are complex in the supply chain or industries with high cash flows, so that the odd lots are well concealed from the public. Due to the method they apply in developing their balance sheets, engaging in business transactions, and interacting with other firms, they appear real.
Front Company vs. Shell Company
It is crucial to distinguish between front business and shell corporation concerning corporate misinformation and unlawful proceedings. Thus, even though both types operate in a different way within the context of corporate frameworks.
Shell Companies
Shell firms, also referred to as shell companies or shell corporations, are legitimate organizations that are established on paper with very little operation. Generally, such organizations do not have physical offices or employees; everything is based on lawyers or other companies that deal with paperwork and act as a mailing address. Legal purposes of shell corporations include; retaining assets, taxation, and mergers and acquisitions purposes. However, they don’t have any real company operations, and they can be applied for illicit purposes such as tax fraud and money laundering.
Front Companies
While the primary objectives of a front company differ from those of a shell corporation. So even in the case of organizations involved in fraudulent business practices, front companies remain a veil of credible business activity. Therefore, front organizations, unlike shell corporations, engage themselves in business operations while being involved in their true mission as their second task.
Methods for Front Company Verification
Business formalities and compliance programs are necessary for corporations while making business relations with a front company. These are the best approaches to ensure compliance:
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Enhanced Due Diligence
Regular monitoring and/or reviewing the company associate’s database helps to locate any new changes that may suggest the beginning of an association with illicit practices. There should be strict scrutiny on the part of companies when it comes to checking the backgrounds of those people who are lined up for employment with the company, suppliers, and customers. That includes verifying corporate information, understanding ownership structures, and reviewing or scrutinizing documents related to finance.
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Comply with Regulatory Standards
The AML checks are applied to counter-terrorism funding and money laundering at the national and International levels. This involves reporting any acts that are suspicious and maintaining compliance with obligations.
Final Thoughts
One cannot overemphasize the aspect of due diligence. Corporations should, therefore, have to perform thorough investigations on any transactions or dealings. It involves establishing the credibility of the potential business partners and the evaluation of the legal status. For this reason, due diligence cannot be simply associated with the legal risks only, but with the risks that might harm the business image and moral standards as well. Since a front company is under such serious legal and financial threats, strict procedures for conducting research on any potential partner are required to protect its own interests
