What are shell banks and why are they risky?

Shell banks are financial institutions that exist only on paper, without a physical presence or substantial operations. They typically lack regulatory oversight, making them particularly risky in the context of money laundering and financial crimes. Because these banks do not have a physical location or operate under the supervision of a regulatory authority, they are often used by criminals to obscure the origin of illicit funds and facilitate the movement of money without detection.

The risks associated with shell banks arise from their potential to enable anonymous transactions, making it extremely difficult to trace the flow of money. Without regulatory scrutiny, these institutions are attractive for individuals or organizations wishing to engage in illegal activities, including tax evasion, fraud, and money laundering. Consequently, shell banks pose a significant threat to the integrity of the financial system and are viewed unfavorably by compliance regulators and law enforcement agencies.

Other options describe different scenarios that do not accurately depict the true nature of shell banks. For instance, some suggest that shell banks may be legitimate institutions or provide services to marginalized communities, which detracts from the core issue of their inherent risks related to anonymity and lack of regulation.