All-time low of shell companies in the Russian Register: According to the Federal Tax Service of Russia (FTS) 3,72 million of active legal entities are registered in Russia (on January 1, 2020).

Since 2016 there has been a noticeable reduction in the number of registered companies with current active status.  This raises the question, whether is was the result of an unfavorable economy climate or the result of the governments actions to shut down shady and fraudulent business.

It is worthwhile to review the underlying statistics in order to draw some conclusions about the overall decline in registrations, because the Government’s efforts in combating shell companies is still ongoing.

The number of active companies in Russia peaked by the beginning of 2016.  Decreasing rapidly thereafter and by the start of 2020 the number of active legal entities was reduced by 22,8% (s. Picture 1).  

Picture 1. Number of active legal entities in the EGRUL-Register (beginning of year figures)

A crisis is usually characterized by a growth in bankruptcies, but cessation of business for this reason did not exceed 1,3% of the total number of companies which ceased operations to 2020 (s. Picture 2).

For several years the main reason for cessation of business remains decisions taken by the Registration Body – the Federal Tax Service of Russia (FTS). In 2019 number of companies removed from the EGRUL-Register «by decision of the FTS» amounted to 85% from total companies.

In 2016 the FTS was authorized to identify companies showing attributes of unreliability (particularly incorrect legal address, manager/shareholder records) and compulsorily strike them off the Register. As a result, the Register has been cleaned from shady companies.

Simultaneously number of voluntarily liquidations increased by 19% to 74 thousand to 2020 (s. Picture 2) which means that entrepreneurs prefer going through legal cessation procedure. Earlier regardless to reputation managers or shareholders just left companies with debts or data detected as incorrect by the tax authorities checks and founded new ones. At present such individuals are disqualified from acting as managers and shareholders of newly registered companies for 3 years.

Picture 2. Reasons for cessation of legal entities

According to the Information and Analytical System Globas, for 5 years running the number of companies with shell company attributes has been decreased from 30% to 2% and amounts at present about 76 thousand companies. Compared to January 2019 the number of such companies has been twice reduced. Simultaneously evidence of untrustworthiness attributes have been detected in over 370 thousand companies which underpay VAT, are debtors on obligatory payments or don’t file financial accounts with the tax authorities. Such companies – both shell and untrustworthy – are subjects of a higher risk and for this reason of constant monitoring when doing business with them.  

Summary

For the last 5 years Russian tax authorities have been successful in combating the shadow economy sector.  The decrease in number of companies with detected attributes of shell and non-trusted companies is a consequence of positive results of regulatory measures implementation.

Meanwhile strengthening of the control has a downside: growth of pressure on trusted entrepreneurs, complication of tax and financial accounting procedures, there is a high probability of unduly categorizing SMEs and newly-established companies as untrustworthy.

In the meantime, shadow businesses are now increasingly macerating as trusted companies by using of following tools: they use old companies with account transactions for shady operations, on web sites of famous recruitment agencies job advertisements are posted for demonstration of false activities, pseudo-web sites are developed. Therefore, the fight is not over as yet.

Careful checks of buyers, suppliers and business partners has been a crucial issue and a complex task for risk managers of companies doing business in and with Russia.

Both shell and non-trusted companies (specific Scoring based on over 30 attributes was developed by the local provider Credinform) can be identified in in the Information and Analytical System Globas https://globas.credinform.ru/en-GB/Home/Auth which includes up-to-date, credible and reach data on Russian companies based on over 20 local public sources.  Users can search potential buyers & suppliers, access financials, check solvency and credit limit, gain insight into a company’s ownership structure and business linkages, historical data on CEOs/shareholders, perform litigation check and access data on public procurements.

Professional and experienced staff of Credinform is always ready to assist by identifying the company of interest and provide investigated Russian company credit reports.

Source:  Credinform