The UK leads the world – and not in a good way – for the number of corporate structures that raise alarms about whether they are for legitimate purposes or not, the organisation said as it disclosed results of a new indicator. The UK is ahead of nations such as China and the US in several metrics of concern.

The UK generates more “risk flags” for shell companies than any other comparable nation in the world, according to Moody’s Analytics.

As of November 2023, Moody’s Shell Company Indicator found that the UK leads the world for shell company-related risks with almost five million flags. China is in second place, with 3.4 million flags, and more than double that of the country in third place, the US, with 1.8 million flags. 

While these shells companies can have legitimate uses, they are often used for fraud, money laundering and tax evasion, the firm, which has developed a new “Shell Company Indicator,” says.

"The findings reveal concerning levels of shell company risks emanating from the UK, which may require more attention from risk management and compliance teams during their investigations,” Ted Datta, head of financial crime compliance practice for Europe, Africa, and Americas at Moody's Analytics, said. 

The Indicator analyses more than 485 million companies, entities, and individuals to flag behaviours which indicate a shell company may require further due diligence to assess its potential for involvement in illicit financial activity.

The launch of the Indicator comes at a time when debate continues about the extent to which information about companies, such as their beneficial ownership, should be transparent and easily available. Moody’s Analytics has criticised a ruling by the European Union’s top court in 2022 to squash a public register of beneficial ownership. (This ruling has in turn led jurisdictions such as the British Virgin Islands and the Cayman Islands to review their moves on this front.)  In the US, however, such data on beneficial ownership must be registered with US authorities, such as the IRS, under the newly-enacted Corporate Transparency Act. In the UK, the government enacted the Economic Crime and Corporate Transparency Act. (See a related commentary on the legislation as it was being steered through Parliament.)

Almost two years after the UK and others imposed sanctions on Russia because of its invasion of Ukraine, pressure remains to tighten controls on structures that can be misused to hide illicit funds. 

The UK's simple company formation process may be one explanation for the high number of potential shell company firms, Moody’s Analytics said. “Virtually anyone can own and manage a UK limited company as long as there is one real person who is at least 16 years of age appointed, and the director's address is not a PO box,” it said.

The indicator shows seven potentially risky behaviours commonly associated with shell companies – atypical directorships, mass registration, jurisdictional risk, dormancy, financial anomalies, outlier ultimate beneficial ownership, and circular ownership. 

The UK has the highest number of flags for “atypical directorships,” where directors are holding positions at an unusual number of companies, with 3.51 million. China had 2.23 million.

The UK also ranks the highest globally for “mass registration” behaviour, when many companies are registered within the same timeframe, with 1.1 million flags. Within European countries, France ranks second place with nearly 550,000 flags. 

With 260,000, the UK has the highest number of “jurisdictional risk” flags, ahead of Dubai, Ukraine, and Russia.

The UK ranked fourth for the “outlier age” of key individuals within European countries, behind Italy, France, and Germany i.e. directors who are aged under 18 or over 100. 

“With the UK home to such a large volume of flagged entities, organisations face a monumental and highly complex task in conducting proper due diligence across their client base and supply chains. This is especially true given the recent Economic Crime and Corporate Transparency Act and the new failure to prevent fraud offence,” Moody’s Datta added.