Moody’s warns of financial crime risks after review highlights 708,640 red flags in Australia

A review of global businesses by Moody’s Analytics finds 708,640 red flags in Australia for shell companies and potential financial crime.

Assets seized by the Australian Federal Police. Picture: AFP

Australian businesses raised 708,640 warning flags in a review of shell company activity by Moody’s Analytics, in a sign many local companies may be structured to enable financial crime.

In a review of global corporate arrangements, Moody’s finds Australia is the second-worst country in the Asia Pacific region for shell company structures.

Shell companies often have legitimate purposes, but Moody’s notes they are also often used to complicate an understanding of corporate arrangements and are associated with financial crime.

Moody’s data shows the firm has sent more than 1,485 money laundering risk alerts to subscribers concerning Australian companies since January 2018.

The credit ratings and research group notes a profusion of shell companies presents significant challenges for compliance teams in attempting to understand a company’s arrangements “given the level of opaqueness often associated with them”.

Assets seized by the Australian Federal Police. Picture: AFP

In its Shell Company Indicator, Moody’s finds seven key features associated with shell company activity may indicate “illicit activity”.

“These span atypical directorships, mass registration, jurisdictional risk, dormancy, financial anomalies, outlier ultimate beneficial ownership, and circular ownership,” Moody’s notes.

Moody’s review found more than 21 million risk activity flags raised across its survey of 472 million different companies.

The United Kingdom ranks as the worst country in the world for shell company activity, with more than 5 million flags recorded by Moody’s.

This was followed by China at 3.4 million flags against companies.

Australia ranks as the second worst in the Asia-Pacific region and well above near neighbours Singapore and New Zealand.

Moody’s notes companies which were flagged for two or more unusual corporate structure or features were “at a heightened risk of being a shell company”.

“The indication that an entity is a shell company gives customers the ability to further investigate whether the company is potentially being used for illicit activities,” the report said.

Moody’s data found 650,729 flags for atypical or outlier directorships in Australia, representing individuals with an “unrealistic number of directorships”.

The agency warned directors having a “prolific involvement” in many companies “can prompt further investigation”.

The survey also flagged 769 companies for directors with “outlier ages” either improbably young or extremely old.

Moody’s also found 12,177 companies had mass registration issues for sharing names, addresses or directors in what may “suggest systematic efforts to obfuscate ownership”.

The global survey highlighted that more than 22,000 different companies had been registered to the Pyramids of Giza, outside Egypts capital Cairo, while a further 61,000 were supposedly based in a row of shops in South Africa.

Moody’s review also flagged 2542 Australian companies for “circular ownership”, which picked up companies engaging in tangled ownership structures “which can be a sign of fraudulent transactions and money laundering”.

Moody’s Analytics head of financial crime compliance practice, Europe, Africa, and Americas Ted Datta said companies were facing increasingly complex operating environments which made it difficult to detect “risk corporate relationships”.

“Our goal is to leverage our global data to arm organisations globally – across banking, insurance, corporations and government sectors – with unprecedented detection of hidden networks of shell companies that span the globe.,” he said.

“By detecting these discrepancies, we can equip investigators and analysts with the tools to better investigate fraud, unmask the beneficiaries of financial crime, and take action against bad actors.”

Australia has come in for criticism for its lax financial controls, with the country failing to sign on to new controls to stop money laundering and terrorism financing.

Consultations closed on proposals to modernise the country’s anti-money laundering and counter-terrorism financing regime in April last year.

Australia is one of three countries that has not signed on to extending its money laundering laws to real estate agents and lawyers, alongside Haiti and Madagascar.

The Australian Federal Police recently charged an alleged syndicate of Chinese-Australians for laundering upwards of $229m in the proceeds of crime.

The raids saw four Chinese nationals and three Australian citizens arrested and charged for their alleged involvement in the syndicate, with the AFP claiming they used the Changjiang currency exchange to mask the laundering of cash.