Moody's claims that this configuration may involve several firms working together to create extensive, tiered networks. These kinds of structures are frequently employed in risk management, tax optimization, and corporate operation management. They might, however, potentially make ownership unclear, which could lead to illegal activity. In these situations, due diligence is crucial to guarantee a comprehensive grasp of the firms involved.

Although not against the law, the establishment of circular ownership structures has both legal and perhaps unlawful uses. Because these arrangements are opaque, financial institutions and regulated firms need to perform extensive due diligence and risk evaluations.

Insufficient transparency may make it difficult to identify the ultimate beneficial owners (UBOs), who might be sanctioned entities or high-risk people. As a result, further steps to reduce related risks may be required.

Approximately 61,000 business entities worldwide have been recognized by Moody's Shell Company Indicator program as exhibiting circular ownership patterns. With the help of this technology, focused enhanced due diligence can be carried out, which is essential for identifying the ownership layers and assessing the risk exposure connected to UBOs inside these intricate corporate structures.

Navigating circular ownership requires an understanding of beneficial ownership. Beneficial ownership encompasses people who exert ultimate effective control over a legal entity and is defined by the Financial Action Task Force (FATF) as the natural persons who ultimately own or control a customer or the natural persons on whose behalf a transaction is done. Through the purposeful use of circular ownership, regulatory oversight may be avoided by allowing people to indirectly manage organizations through legal loopholes in beneficial ownership restrictions.

Jane Doe is an example of circular ownership as she formally owns a small enough portion of Company A shares to be considered a beneficial owner.

However, she actually has a far bigger portion of the corporation through a network of linked ownerships. Legal as they may be, these kinds of organizations may also be used by sanctioned persons and criminals to support terrorists, avoid paying taxes, launder money, and engage in other illegal activities—all while being protected by the intricate ownership arrangements.

Moody's data highlights the worldwide scope of this issue by demonstrating the considerable instances of circular ownership across many nations. It is imperative for those working in compliance, risk management, and anti-financial crime professions to recognize and comprehend these tendencies.

A thorough approach to identifying such dangerous company activities and putting this data into monitoring and due diligence procedures is offered by the Shell Company Indicator. This instrument is quite helpful in identifying latent hazards and facilitating focused inquiries to enhance financial compliance decision-making.