Shell companies: real-time tax, legal, and operational validation

Validating the companies you do business with will always help you avoid risky hiring in key sectors such as construction, healthcare, and technology, as well as protecting you from the risks of hiring shell companies.

The risk of shell companies for your business

Ghost companies, also known as “front companies” or “shell companies”shell companies”, can damage your business’s reputation if you don’t take precautions and use real-time tax validation tools.

En diferentes países estas compañías suelen carecer de estructura, activos, personal o capacidad real para prestar los servicios que facturan. En la Unión Europea, por ejemplo, la Directiva contra el blanqueo de capitales ha identificado a este tipo de entidades como mecanismos usados para el fraude y la evasión fiscal. En Estados Unidos, la Financial Crimes Enforcement Network (FinCEN) ha puesto bajo la lupa a las shell companies as recurring instruments in cases of corruption and money laundering.

Shell company activities are a key component of false invoicing, misappropriation, and fraud schemes that affect automated tax controls and operational due diligence, and increase the risk of hiring suppliers who cannot or will not meet your business's requirements.

Prevention: tools and risks in key sectors

To protect yourself from these dangers, you can incorporate real-time checks and random audits, which are essential risk management practices today, especially in key sectors such as construction, healthcare, and technology.

One of the main risks of working with suppliers who simulate operations is the tax risks that can lead to blockages, sanctions, and adjustments by tax authorities. In the United Kingdom, for example, HM Revenue & Customs (HMRC) has issued multimillion-dollar fines to companies that used front companies in public contracts. In Brazil, the Federal Revenue Service (Receita Federal) has dismantled false invoicing networks in the infrastructure sector.

While in key sectors such as construction, healthcare, and technology, these types of transactions can compromise the integrity of patients, safety at construction sites, and the operation of complex technological systems.

Risk cases and keys to detection

There are also international examples: in 2021, the European Commission revealed fraud in medical equipment contracts procured from companies with no real operations during the pandemic; and in Africa, phantom construction projects linked to misappropriation of funds from public works have been detected.

In the construction sector, it is recommended to require insurance policies, performance guarantees, signed logbooks, and photographic evidence with geolocation of the companies, as well as payments for deliveries subject to verification and validation by subcontractors. In the healthcare sector, it is recommended to validate authorizations, health licenses, and professional certificates for personnel. Furthermore, it is very important not to accept invoices as the sole proof of supply. Technology companies may be asked for evidence of development, as well as security and custody clauses.

Keys to detecting ghost companies:

• Tax address non-existent, or coinciding with that of other companies.
• When it comes to business newly established that bill high and immediate amounts.
• Shareholders or representatives with addresses in highly marginalized areas or who deny knowing the company.
• Split payments or to complex bank transfer routes that are unrelated to the operations of the company in question.
• Lack of staff, contracts without a construction schedule, or minimal technical documentation in construction or other services.
• Prices below the market without realistic justification, and suppliers that appear on tax authorities' blacklists.

The solution: Real-time tax validation

Today, there are tools in various countries that allow companies' legal and tax status to be verified in real time. In the European Union, the European Commission's blacklists identify high-risk suppliers; in the United States, FinCEN maintains registries of beneficial owners; in Latin America, various tax agencies such as the AFIP in Argentina and the Receita Federal in Brazil have incorporated public consultation portals.

Al mismo tiempo, confiar en plataformas globales de validación de identidad y cumplimiento KYC ayuda a evaluar listas negras internacionales, correos, IP y teléfonos sospechosos con tecnología anti-spoofing.