A shell company is a legal entity that exists only on paper and has no significant operations, employees, or physical assets. It is often created to hold assets, manage financial transactions, or obscure the true ownership of funds. While shell companies can have legitimate uses, they are frequently exploited for illicit activities such as money laundering, tax evasion, and fraud. 

In the Anti-Money Laundering (AML) and financial crime compliance space, shell companies pose a significant risk as they can be used to conceal the origins of illegal funds. Criminals use these companies to create complex, opaque ownership structures, making it difficult to trace the flow of money. Financial institutions must conduct thorough due diligence, including identifying beneficial owners, to ensure that shell companies are not being used for financial crime. Enhanced scrutiny of these entities is crucial for preventing the misuse of the financial system.