Upload
others
View
2
Download
0
Embed Size (px)
Citation preview
©2017
EMERGING TRENDS AND ISSUES
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
Shell companies are used for many reasons; some are legal while others are not. They act as the
intermediaries, while the real owners remain hard to trace. As such, they are an ideal mechanism
for concealing identity and aiding fraudulent transactions to appear legitimate. This session will
provide a practical breakdown of what constitutes a shell company and provide tools to identify
when shells are being used for illegal purposes.
LISA DUKE, CFE, CPA, MAFF
Supervisor Forensic Accountant
U.S. Department of Justice
Federal Bureau of Investigation
Prior to her current appointment, for the past 10 years, Ms. Duke worked as a subject matter
expert at the New York State Comptroller’s Office. In her current role, she leads a team of
forensic accountants who provide financial investigative support to cross programmatic threats,
which requires financial analysis, documentation of analysis, and expert testimony by employing
surge based response. Her engagements have included cases involving fraud investigations,
conflict of interest, waste and abuse of multiple government agencies, contractors, public
authorities, and nonprofit organizations. Duke is a certified trainer by the NYS Governor’s
Office of Employee Relations (GOER) and Rutgers University. She has done multiple
presentations on a variety of audit and fraud related topics for the NYS Office of the State
Comptroller, as well as the NY Chapter of Association of Government Auditors (AGA), the NY
& NJ Intergovernmental Audit Forum, and the Association of Certified Fraud Examiners
(ACFE). She is a member of ACFE, AGA, the Institute of Internal Auditors (IIA), and the
National Association of Certified Valuators and Analyst (NACVA).
“Association of Certified Fraud Examiners,” “Certified Fraud Examiner,” “CFE,” “ACFE,” and the
ACFE Logo are trademarks owned by the Association of Certified Fraud Examiners, Inc. The contents of
this paper may not be transmitted, republished, modified, reproduced, distributed, copied, or sold without
the prior consent of the author.
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 1
NOTES Module 1: Program Introduction
Course Overview
This presentation will provide forensic accountants,
government investigators, auditors, and regulators with best
practice and skills for understanding what constitutes a
shell company and how it can be used to commit fraud and
other nefarious activities, as well as some investigative
tools for cases involving shell companies.
Objective
What are shell companies and how are they revlevant
for fraudulent acts?
Ways people abuse shell companies for fraud
Legitimate reasons to set up shell companies
Tools to detect whether a shell company is being used
for illegitimate purposes
What Are Shell Companies and Why Are They
Relevant for Fraudulent Acts?
Objectives:
What Is a Shell Company and Is It Legal?
Shells can be legitimate, legal entities that do not possess
actual assets or run business operations. They function as
transactional vehicles. They give the appearance of being a
legitimate business, but are just empty shells. They hide the
true ownership of the money that they manage. They can
also be called letter box or mail box companies as they are
no more than an address to post documents to.
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 2
NOTES Figure 1: Characteristics of a Shell company
Shells can be used for legitimate purposes. But anonymous
shell companies allow their owners to trick the system. The
Shell/phantom/ghost company does not operate on its own
or have noteworthy assets. In fact, it is used as a “pass
through” to allow other companies or businesses to
smoothly move financial assets from one place to another
or from one country to another. Or it may serve as a
“sleeper cell,” sitting dormant until its owners need it.
Beneficial owners is another term used for the real people
who ultimately own or control a shell company. Due to the
nature of how these companies are established, it is
sometimes difficult to identify the real owners, and this can
lead to an investigative dead end.
Simplicity of Forming a Shell Company
In the United States, to become a shell company an
interested party must first file with the U.S. Securities and
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 3
NOTES Exchange Commission (SEC). Each state has statutes
governing the formation and operation of a Shell. Examples
of shell companies include:
Limited liability companies (LLCs) and trusts,
corporations
Any start-up firm that files with the SEC is technically
a shell corporation.
In some states, only minimal information is required to
register articles of incorporation or to establish and
maintain “good standing” for business entities. Owners can
distance themselves from the actual formation of the
company by using registered agents or nominee
incorporation services to create them. They can be set up
online in many countries for a few hundred dollars by using
law firms or accounting firms that specializes in this
business.
They are established all over the world but are concentrated
in tax havens, or Offshore Financial Centers (OFC).1 Many
OFCs have limited organizational disclosure and
recordkeeping requirements for establishing foreign
business entities. OFCs are normally small countries with
very low or non-existent tax on financial transactions. For
example, the British Virgin islands, Bahamas, Panama,
Cyprus.
The secrecy of the true owners is what makes them
attractive to criminals, money launderers, and tax evaders.
Within the United States, Delaware, Wyoming, and Nevada
are the top three states for shell formation, with Delaware
being number one. Their secrecy rules are especially tight
1 For general discussion on Offshore Financial Centers refer to
Resource Documents of the Board of Governors of the Federal Reserve
System
https://www.ffiec.gov/bsa_aml_infobase/pages_manual/OLM_097.htm
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 4
NOTES in comparison to other states. They have similarly lax
corporate registration laws and have attracted large
numbers of shell companies, along with registration fees
that contribute to the state’s funds. As a general practice,
states do not collect the names of beneficial owners through
their incorporation process. But Delaware and the majority
of states require disclosure of the names of the natural
persons who serve as director. 2 They also require each
corporation to disclose the names and addresses of its
directors on its annual franchise tax report.3
Foreign Business Companies
Similarly, foreign business entities that pose the greatest
risk are International Business Corporations (IBC) and
Private Investment Companies (PIC) opened in offshore
financial centers (OFC). IBCs are companies formed
outside of a person’s country of residence.
2 Refer to statute at
http://corplaw.delaware.gov/eng/facts_myths.shtml#fn:50 3 Further reference for studies of the State of Delaware and company
formation refer to
http://corplaw.delaware.gov/eng/facts_myths.shtml#fn:50
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 5
NOTES Module 2: Ways People Abuse Shell Companies for
Fraud
Figure 2: Ways Shell companies are used for illegal
activities
Basic Money Laundering Provision
Shell companies have been used as vehicles for money
laundering and have aided criminals and others in
international wire transfers allowing the movement of
billions of dollars by unknown beneficial owners. They are
used to prevent illicit funds from discovery. They are also
called phantom firms and can open bank accounts and wire
money like any other company. This makes them a favorite
tool for money launderers to hide their business assets.
Shell/phantom companies are the best device for moving
dirty money internationally. Money laundering involves
cleaning dirty money so that is can be used without its
origin being questioned.
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 6
NOTES
Often, the criminal ships the money to a dubious firm in an
Offshore Financial Center and they help convert the cash to
bearer bonds owned by a shell company.
Title 18 U.S.C S 1956 (a)(1) makes it a crime to knowingly
conduct, or attempt to conduct, a “financial transaction”
with proceeds from “specified unlawful activity” (SUA)
with specific intent to:
Other Areas Shells Are Used for Corrupt Practices
To conceal the movement of contraband in commerce
Prevents law enforcement and investigators from
knowing who is controlling companies and allows
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 7
NOTES bad actors to maintain plausible deniability and
operating freedom
Circumvent regulations and tax fraud—smaller
countries have established themselves as offshore
financial centers to stimulate economic development.
They attract investors and private individuals by
offering low or nonexistent tax rates. As such, they
attract deposits from individuals who are trying to
evade taxes through concealing much of their wealth.
Sanctions and sanctions busting
Sanctions are imposed on many countries,
businesses, and individuals to limit importation of
military equipment or ammunitions, or ban the
export of oil and other commodities. This is an
incentive for these bad actors to provide secret bank
accounts and shell companies in areas where
regulators turn a blind eye and, as a result, facilitate
sanction busting.
Module 3: Legitimate Reasons to Set Up Shell
Companies
To save up funds to open a business
As a front for product development that a well-
established company may want to keep private until it
is ready.
Facilitate financial institutions to perform financial
activity in foreign markets
To obtain financing, maintaining control over
conglomerate company
Realize a “tax haven” abroad
Module 4: Tools to Detect Whether a Shell Company Is
Being Used for Illegitimate Purposes
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 8
NOTES Investigative Red Flags of Suspicious Fund Transfers
Using Shells
There are several red flags that show potential suspicious
activities that may be associated with a Shell. These include
the following:
Payments that have no stated purpose, do not reference
goods or services, or identify only a contract or invoice
number
Purpose of the company is unknown or unclear
Goods or services identified do not match company
profile
Or responding bank provides dissimilar goods and
services in relations to the company transferring the
funds, or explanation given by respondent bank is
inconsistent with observed funds transfer activity
Fund transfers are sent in large, round dollar amounts.
Insufficient information available to positively identify
originators or beneficiaries of funds transfers
Company has little or no internet presence
Unusually large number of beneficiaries receiving
transfers from one company
Payments flow from one shell company to another with
no apparent legitimate business purpose.
Funds usually pass through jurisdictions or
beneficiaries located in high risk jurisdictions.
Transacting businesses share the same address, provide
only a registered agent’s address, or other
inconsistencies.
Other Areas to Review
Conduct due diligence research utilizing various
software to obtain affiliation for shells with suspicious
fund transfers. Utilize resources available to assist with ownership
identity and information on shell companies. This
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 9
NOTES includes conducting global research in various
databases and company registries. An initial search may show individuals in control of
the company.
Many companies list names and phone numbers for
their executives and board of directors on their
website to appear accountable and legitimate.
Companies don’t have websites and create a short
paper trail.
Web history
“Follow the Money”—Reviewing the flow of funds that
pass through one entity to another is useful in
identifying some individuals involved. Work with regulators and auditors in determining
whether constituents are complying with regulations.
“Know your customer.” Become familiar with evolving legislation regarding
beneficial ownership. Phantom companies shield the
veil of conduct.
International Standards Governing Shell Companies
The Financial Action Task Force (FATF) is the world
standard setter and enforcer of anti-money laundering
standards. More than 180 countries have committed to
FATF. It provides that “Countries should take measures to
prevent the misuse of legal persons [companies] for money
laundering or terrorist financing. Countries should ensure
that there is adequate, accurate and timely information on
the beneficial ownership and control of legal persons that
can be obtained or assessed in a timely fashion by
competent authorities.”4
4 Further studies on FATA can be viewed on
http://www.transparency.org/whatwedo/publication/doors_wide_open_
corruption_and_real_estate_in_four_key_markets
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 10
NOTES What Is Being Done to Eliminate Anonymous
Companies?
The UK has established a public beneficial ownership
information for all UK companies.
The European Parliament voted in March 2014 to create
a similar registry for all EU companies and trusts, but
further action by the EU commission and European
Council is pending.
All companies should be required to disclose their ultimate,
beneficial owner when they are created. This information
should be listed in a central registry.
Ways to Establish Beneficial Ownership of Shell
Companies
European Savings Directive
Banks in the EU countries collect the tax due on bank
accounts held by citizens of other EU countries.
U.S. Policies on Beneficial Ownership
On May 4, 2016, Financial Crimes Enforcement Network
(FinCEN) issued its long awaited final rule on beneficial
ownership with respect to customer due diligence. The final
rule required covered financial institutions to adopt due
diligence procedure to identify and verify a legal entity
customer’s beneficial owner(S) at the time a new account is
opened. The final rule creates a fifth “pillar” for anti-money
laundering (AML) programs required under FinCEN’ s
rules for banks.5
5 FinCEN releases Final rule on Beneficial Ownership and Risk based
Customer Due Diligence on May 10, 2016.
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 11
NOTES Initial Four Pillars of USA Patriot Act:
Fifth Pillar
Covered Financial Institutions Are Required to Comply
With the Final Rule by May 11, 2018—Covered
Institutions Including:
Depository institutions, including insured banks,
federally insured credit unions, savings associations,
commercial banks, federally regulated trust companies,
U.S. agencies and branches of a foreign bank and Edge
Act corporations
Securities broker/dealers
Mutual funds
Futures commission merchants and introducing brokers
in commodities.
Fifth rule requires a covered financial institution to
establish and maintain written procedures that are
reasonably designed to identify and verify beneficial
owners of a legal entity customers. The procedures must
allow the financial institution to identify all beneficial
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 12
NOTES owners of each legal entity customer at the time of account
opening unless an exclusion or exemption applies to the
customer or account.
Summary
Shell companies (Shell) are used for many reasons, some
are legal and others are not. They act as the intermediaries,
where the real owners remain hard to trace. As such, they
are an ideal mechanism for concealing identity and aiding
fraudulent transactions to appear legitimate. This training
provides a practical breakdown on what constitutes a Shell
and tools to identify when Shells are being used for illegal
purposes.
Abstract
Reason for writing: What is the importance of the
research? Why would a reader be interested in the
larger work?
Problem: What problem does this work attempt to
solve? What is the scope of the project? What is the
main argument/thesis/claim?
Methodology: An abstract of a scientific work may
include specific models or approaches used in the larger
study. Other abstracts may describe the types of
evidence used in the research.
Results: Again, an abstract of a scientific work may
include specific data that indicates the results of the
project. Other abstracts may discuss the findings in a
more general way.
Implications: What changes should be implemented as
a result of the findings of the work? How does this
work add to the body of knowledge on the topic?
Shells can be complex! A Shell can be owned by another
Shell, which in turn is owned by another Shell, weaving a
web of Shells with unknown beneficial ownership. The
SHELL COMPANIES, CORRUPT PRACTICES, AND HOW TO UNCOVER THEM
28th Annual ACFE Global Fraud Conference ©2017 13
NOTES ease with which they are created and the lack of
information required on the ownership makes them an ideal
mechanism for fraudulent activities. Don’t be a player or a
victim of “The Web of Shells.”
This session will provide participants with an
understanding of Shell Companies and it will provide some
tools on how to map and untangle The Web of Shells.
Target Audience
Forensic accountants
Regulators
Government investigators/auditors
Contractors and NPO (CEOs, CFOs) who receive
government funding
State registrants
Anti-money laundering specialist