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Tax Engineering

What is a shell bank?


Question

What is a shell bank and how to prevent frauds of this type of banks?

Answer

Browsing on the internet one comes across the information about financial institutions that claim to be banks, correspondent banks or payment entities but once the bank account is opened and the client deposits money in cash or by wire transfer, the money and the entity disappear. If this is your case you have just been a victim of a shell bank fraud. What is a shell bank? Shell bank is a bank that is incorporated in a country, in which it has no physical presence, it is not regulated by its central bank and may not belong to any regulated financial group.

To prevent a fraud of a shell bank in an offshore or onshore jurisdiction, customers must follow these steps:

  1. Request the bank information from the financial commission that regulates the bank in the country where it is constituted. Financial commissions from all countries in the world have information on the bank's registry in the country where it operates and this kind of information is public. The customer can quickly verify if it is a shell bank or not, because it is easy to detect if the bank is registered or not.
  2. Ask the bank for the SWIFT banking communication protocol and link the letters that the bank has provided with the name of the bank. For example, the bank DEUTSCHE BANK AG in the UK has a swift code DEUTGB3L XXX. As you can see the letters DEUT correspond to the name of the bank. There may be exceptions when a bank does not use the first letters but it is not usual. You can check the SWIFT code of all the banks in the world and verify that it is not a shell bank in SWIFT CODES.
  3. Once the bank has provided you with the swift code, you can verify it at your bank or in online banking. Nowadays all online banks have the tools to verify foreign banking entities through the swift code and in this way prevent a shell bank fraud.
  4. Payment entities are not shell banks but financial companies that have a financial regulation imposed by the central bank of the country where they are registered. The payment entities are characterized by being able to allow the management of third-party funds through a correspondent bank or with a swift of their own. To know if it is a payment entity or not, the client will have to ask the payment institution for the public record of the central bank and see the limitations that it has since in many cases the payment institutions have limitations such as providing credits and mortgages and a bank no.

Following this security protocol, you can quickly differentiate whether the financial institution is a shell bank, a correspondent bank or a regulated payment entity.



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