Shell Company is a corporate entity without active business operations or significant assets. They are often created to avoid taxes and many big companies create shell corporations to avoid taxes without attracting legal actions.
It can’t be asserted that shell corporations are illegal. They are deliberate financial arrangements to avoid taxes. Tax avoidance is not illegal, though it is not desirable.
But many shell companies park black money, carryout illegal transactions and sometimes act as facilitators of money laundering. Often, shell companies remain untraceable and happen to be the vehicle of choice for money launderers, bribe givers and takers, tax evaders and financiers of terrorism.
Money laundering is dealing with money obtained from illegal and criminal ways.
At the same time, some shell corporations are built to promote startups. This is perhaps the only point that supports the shell corporations.
Most of the shell companies are registered in tax havens like British Virgin Islands or Cayman Islands. Some of the shell companies are listed-that also in tax havens. Tax havens are countries or territories where there is nil or low tax. In many tax havens, registration of a company is very simple- by paying just few hundred dollars, revealing nothing about the promoters etc. The shell incorporation business is a major activity in these tax havens.
Now, there is increasing attempts globally and nationally from governments to check tax avoidance. Hence, shell companies are coming under government scanner.
The Financial Action Task Force (FATF), which is an inter-governmental body, gives guidelines in controlling shell companies.