Shell companies and prevention of tax crimes: UIF identifies five indicators that help in updating compliance programs pursuant to Legislative Decree No. 231/2001

On December 15, 2020, the Italian Financial Intelligence Unit (“UIF”) published research identifying new indicators for detecting shell companies (i.e., “società cartiere”)[1] and thus preventing tax crimes. In particular, based on five financial statements’ indexes, UIF worked up a synthetic indicator useful for identifying shell companies.

The UIF has previously published a great deal of communication and research[2] showing that shell companies may be identified by the presence of the following elements:

  • (i) they are usually limited liability companies, with very limited assets and without bank financing. They often start winding-up procedures only a few years after their incorporations, frequently change their registered offices and stated corporate purposes, and are frequently managed by very old or young people. Using that structure, shell companies are able to elude tax assessments and open new bank accounts, temporarily avoiding the scrutiny of banking intermediaries.
  • (ii) they carry out very significant bank transactions and usually transfer funds abroad to connected companies, providing for subsequent monetization.
  • (iii) their financial statements, if they exist, are normally drafted in abbreviated form with very dynamic assets and limited capital injections.

In its latest research in December, the UIF identified five indexes that together comprise the new indicator. Those indexes are based on financial statement data extracted from the Cerved dataset.[3] Specifically, these are:

  • (i) tangible assets/assets: this references the company’s operating and production structure. For a shell company, the quotient usually varies between zero and one, since tangible fixed assets are minimal or zero compared to total assets;
  • (ii) interest and other financial expenses/income: this represents the item “liabilities to banks/liabilities.” In the case of a shell company, this ratio is equal to zero;
  • (iii) (Paid-up share capital + net reserves)/liabilities: this looks at the investment made by shareholders in the company. Shell companies are usually characterized by low share capital and reserves.
  • (iv) absolute value of (net purchases + costs for services and use of third party assets/incomes): shell companies usually have significant incomes, due to issuing invoices, but at the same time they have significant costs, since they repay the funds received from the companies to which they issue invoices.
  • (v) personnel expenses/incomes: when this index has a value close to zero, it means that the company has profits without personnel, which is a typical element of shell companies.

An early empirical verification revealed that very low values for these indicators usually identify shell companies.

The new indicator tool provided by the UIF is very relevant from a compliance perspective at a time like the present when most Italian companies are bringing their compliance programs into line with the provisions set forth by the PIF directive,[4] which extended the list of predicate offenses pursuant to Legislative Decree No. 231/2001.

Indeed, this synthetic indicator is a helpful tool for building internal oversight aimed at detecting possible shell companies and red flags for the commission of the crime of fraudulent tax declaration using false invoices. Accordingly, suppliers and third-party due diligence might include initial screening using the indexes prior to authorizing transactions.

When suspicions arise, further financial, administrative, and fiscal analysis is always necessary.

[1] Such companies usually issue invoices for non-existent transactions, allowing productive companies to use them for tax evasion purposes by indicating non-existent costs in their financial statements, as well as for money laundering and other illegal purposes.

[2] Most recently, on November 10, 2020, the UIF published “Patterns representative of anomalous conduct, pursuant to section 6, paragraph 7, letter b), of Legislative Decree 231/2007,” in which it highlighted new schemes under which tax fraud behaviors may be hidden.

[3] This is the most important source of data for Italian companies.

[4] The PIF Directive (EU Directive No. 2017/1371) set forth the rules concerning “the fight against fraud to the Union’s financial interests by means of criminal law” and has been transposed by Legislative Decree No. 75/2020. From a 231 perspective, it provided for the introduction of the following predicate offenses: (i) fraudulent tax declaration; (ii) omitted tax declaration; (iii) undue tax compensation; and (iv) smuggling.

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