No.15 - A synthetic indicator for identifying shell companies by A. Pellegrini, P. De Franceschis, C. Bentivogli, E. Laurenza

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December 2020

JEL Classification: D22, K42, D85
Keywords: money laundering, shell companies, balance sheet indicators.

This paper analyses the features of 'shell companies', which are firms that issue false invoices to allow productive companies to exploit them for tax evasion purposes (by recording non-existent budget costs), for money laundering or for other illegal purposes. Using the available balance sheet data, we develop a synthetic indicator that signals the presence of the typical features of a shell company. An empirical analysis, carried out using the database of suspicious transaction reports received by the Financial Intelligence Unit for Italy, shows that very low values of the indicator correspond more frequently to companies reported for false invoices and/or intra-Community VAT fraud compared with those reported for other reasons. The indicator can act as an early warning device to trigger the initial screening of potential shell companies. However, further financial, administrative and fiscal analyses are still necessary.