Let’s look, in turn, at the headline features of each, as well as drilling down into the more practical implications.

Front companies

‘Front’ in the English language can mean front as in “It’s at the front, not the back.” And it can mean front as in “He was acting like everything was OK, but I’m sure it was just a front.” In other words, a shield or disguise. Obviously, it is the latter meaning from which the AML phrase is derived. Front companies typically have the following features:

• They have a criminal or hidden purpose

• Their function is to disguise or pretend (hence the name…)

• They are usually genuine businesses

• They can be offshore but usually are not

• Their true beneficial ownership is hidden

• They are an ideal vehicle for terrorist and proliferation financing.

So, the essential feature of a front company is that it has genuine operations – it has premises, staff, products and revenues and it is from within this base that its hidden operations are conducted. Typical examples of front companies would be:

• The use of cash intensive businesses (CIBs) for laundering large volumes of cash from drugs and people smuggling.

• The use of transport companies to carry weapons and military supplies for a terrorist group.

• The use of a technology and engineering company to assemble components and dual use goods into a navigation system for drones as part of a proliferation financing scheme.

• The use of a property company to generate profits for its criminal owners to enjoy and/or to permit question– free access to safe houses or apartments being used by criminal or terrorist operatives preparing for an attack.

Most people working in front companies will not even be aware that the ownership of the organisation is criminal or terroristic. The criminal elements of its operations will only be known about by a few people in key positions;

There’s an intriguing exception to the criminal purpose of front companies: intelligence agencies will sometimes operate them as cover for their activities. Remember ‘Universal Exports’ – the front company for the British secret service in the James Bond novels?

Shell companies

As with front, the word ‘shell’ has alternative meanings in English. There is shell as in ”She sells sea-shells”. And then there is shell as in something which is empty and somehow fragile because of that, as in “He was a shell of his former self when he returned from the war.” It is in this latter sense that we use the word in a financial crime context. Shell companies typically have the following features:

• They need not have a criminal or hidden purpose

• Many will exist as part of (legitimate) tax-driven structures

• Indicia:

o No physical presence in its jurisdiction

o No business operations

o No staff beyond minimum legal requirements

o Often incorporated offshore

• They can also be used for criminal purposes (e.g. to hide beneficial ownership)

So, a shell company is not a ‘real’ company, in the sense that it does not have premises, staff, products and customers like a front company does. It exists primarily on paper and, perhaps, as a nameplate – one amongst hundreds – in legal and accounting offices, many of them in offshore islands (BVI, Cayman, Turks & Caicos etc. etc.) We should think of shell companies as being divided into two types. The first has an entirely legal purpose and indeed makes no attempt to hide the fact that it is a shell company. An example of this might involve a tax equalisation scheme put in place by the lawyers acting for an aircraft leasing company, in which “NewCo” is a shell company whose purpose is to receive and transmit funds, as designated in a legal opinion from a respectable law firm to the effect that this mechanism will reduce overall tax amounts payable. There is no criminal or illegal purpose involved. You can’t pick up the phone and try and speak to someone at NewCo because it doesn’t have a phone number. And if it did, no one would answer. The second is the shell company type used by launderers. Any financial investigator will be familiar with the late nights involved in trying to untangle ultimate beneficial ownership from wealth structures containing hundreds of different companies, many of which own stakes in each other, and from which it can be all but impossible to derive the identities of human owners. Indeed, the presence of such companies in the ownership structures of what are, ostensibly, genuine companies will often be a red flag that these are, in fact, front companies as we have described them.

Shell/front hybrids

There is a third type of company in all of this which should concern us and that is what I will call a ‘Shell/Front Hybrid’. This is used exclusively for criminal purposes and its role is to pretend to be a real company, so that, over time, large sums can pass through its accounts without banks realising that there is in fact no genuine underlying economic activity. The shell/front hybrid therefore combines features of both front and shell companies:

• It is more than just a nameplate, but it doesn’t have significant premises. For example, it may operate from serviced offices under hot-desking arrangements.

• If you telephone it, someone will pick up the phone – but it’s probably a call answering service or the receptionist of the serviced offices, answering for 20 other companies as well.

• It may have some nominal staff members. Perhaps these people have “jobs” at 10 or 15 other companies. Their main attribute is that they are not sanctioned and are not PEPs. They may know little about the business sector the company claims to operate in.

• It may have a website, but it will be a brief and fairly low-key affair.

• If it does have any real business, then it will be at a deliberately bare minimum. The majority of its transactions will be fake ones, with “clients” and ‘suppliers” which are other shell/front hybrids, whose sole purpose will be to move money between accounts as part of the laundering scheme.

• Accordingly, because it is unable to service genuine business (and has no interest in doing so) it conducts almost no marketing activity, unlike a genuine company – or indeed a front company.

Understanding the distinct yet connected features of these three different types of corporate vehicle, can help staff do a better job at detecting financial crime and for this reason they should be covered in any core training programme.