In 2016 an unprecedented leak of 11.5 million files from the database of the world’s fourth largest offshore law firm, Mossack Fonseca, exposed the myriad of ways in which the rich can exploit secretive offshore tax regimes. Famously known as the “Panama Papers,” the leak exposed organized crime rings, corrupt politicians and celebrities for hiding billions in shell companies and tax havens.
Since the Panama Papers, waves of new reports — the Unaoil scandal, the Paradise Papers, the Luxembourg leaks, the ‘Grave Secrecy’ report — have shown that shell companies are still popular for both legitimate businesses and criminals alike.
“It’s so easy to set up a shell company,” said Ryan C. Hubbs, CFE, CIA, CCEP, Global Anti-Corruption and Fraud Manager at Schlumberger, during his Pre-Conference session, “Investigating Shell Companies,” at the 29th Annual ACFE Global Fraud Conference. “If everyone in this room sat here all day and we collectively worked together, we could set up hundreds of shell companies.”
On their faces, shell companies aren’t illegal; many individuals and organizations use shell company structures to operate as holding companies or to secure future rights and interests. According to Hubbs, shell company risks decrease if the true owners and decision makers are known and identifiable. But that’s not always the case.
“The anonymous shell company has become the premier vehicle of choice in combining both the concealment of the fraudulent act with the concealment of the wrongdoer’s identity,” said Hubbs. “It’s evident in the ever-increasing number of cases, prosecutions and regulatory penalties involving shell companies across the world.”
Hubbs explained that anonymous shell companies allow fraudsters and criminals to:
- Disguise schemes.
- Conceal ulterior motives.
- Hide their identities and those of their co-conspirators.
- Conceal the origin and flow of monies to support a crime.
- Conceal the destination of ill-gotten gains.
- Protect the identities of the true beneficiaries and other involved parties.
And they’re gaining ground not because of the failure of a single law or to a specific flaw in a process, but because they’re becoming easier to use and are less easy to detect.
Identifying shell companies
According to Hubbs, to identify a shell company, fraud examiners must assess the attributes of the suspicious entity and compare them to how a normal entity would be represented. The more instances of concealment that are identified, the higher the risk that the entity could be a shell company. He said that investigators should focus on assessing a third party against the following eight characteristic categories:
- Incorporation jurisdiction that enables anonymity
- Banking jurisdiction that minimizes transparency or has a higher risk of money laundering
- Incorporators and intermediaries specializing in offshore or high-volume incorporations
- Presence of nominee directors, officers and shareholders
- Gaps or red flags in the entity’s online presence (Is there an active website? Is there a robust social media presence?)
- Location analysis red flags, such as clustering, forwarding, virtual, radioactive and voids
- Information mismatch — if a U.K. company is doing business in Angola with an Azerbaijan address and a phone number in Hong Kong, there's a higher risk
- Entity contact concealment, which can include:
- Use of generic email addresses
- No physical address or only a partial address
- No mention of the owners or operators on invoices, websites or other correspondence
- Use of initials, partial signatures on contracts and invoices
Investigating shell companies and shell networks
Hubbs explained that it’s important to understand your goal going into a shell company investigation. What are your suspicions and why are you investigating this third party? How far do you trace the entities and the nexus? At what point will you have enough information to make a decision?
Gather initial data and information, starting with the most important pieces: addresses, names, a working website and email, and phone numbers. Fraud examiners can gather this information from invoices, due diligence forms, contracts, bidding information, etc. You can also use enhanced third-party due diligence controls and Hubbs advises deploying shell company and high-risk entity data analytics.
"To become proficient in investigating shell companies, you must dedicate time to recognizing red flags, understanding new schemes and identifying resources to help you on future cases."