Shell Companies Could Mean Fraud

A shell company is an entity created without active business operations or assets.  While they are not illegal, sometimes shell companies could mean fraud.  Quite often, shell companies are used by unscrupulous employees to commit fraud against their employer. The following are just a couple of illustrations of how shell companies can be used in fraud schemes.

Shell companies – stealing on the cheap

  1. An employee sets up a shell company to send out — and collect on — fictitious bills. Consider, for example, an accounting employee who knows that his/her company rarely scrutinizes invoices for less than $2,500. He/she can easily get a DBA certificate for a the shell company, using a post office box as the business address, and open a business account at a local bank. Voila! They are ready to bill their employer for goods or services that don’t exist but cost less than $2,500.  Because the invoices are not reviewed, the payments go undetected.

Of course, perpetrators may not even have to send the bills for nonexistent goods and services to the company, but it’s easier, and can help them evade detection, if they do.

  1. An employee sets up a shell company to sell products to his or her employer at a marked-up price. In this scenario, the shell company may actually provide products to the employer. The products will typically be “drop shipped” to the employer by a legitimate supplier. Drop shipping means that the supplier sells the goods to the shell company but ships them directly to the employer.  The supplier invoices the shell company, who then turns around and invoices the employer for the goods with a healthy “mark-up” in the price. Because the shell company never takes possession of the products and has no overhead or expenses, the employee pockets the proceeds.

Following the paper trail

Shell company schemes can go undetected for a long time, particularly if the fraudsters are savvy enough to attempt to cover their tracks — and don’t get too greedy. Most perpetrators, however, leave a paper trail of invoices that:

  • Vaguely define their products or services,
  • Have a company address that matches an employee’s home address,
  • Use a post office box as their return address,
  • Arrive more than once a month, or
  • Show an increased number of purchases over time.

Shell company scams work only if the employee can pay the invoices or get the shell company authorized as a legitimate vendor. A quick credit check on a new vendor will reveal whether it has an operating history and deserves greater scrutiny.

System of checks

Familiarize yourself with the signs of shell company abuse and put controls in place so that you’ll catch billing fraud before it begins. Contact us if you would like help or more tips on how to find and prevent fraud in your company.


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DISCLAIMER: This blog is provided for informational purposes only and is not a substitute for obtaining accounting, tax, or financial advice from a professional accountant. Presentation of the information in this article does not create nor constitute an accountant-client relationship. While we use reasonable efforts to furnish accurate and up-to-date information, the evolving landscape surrounding these topics is supported by regulations or guidance that are subject to change.

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