Today I conclude my exploration of some of the issues raised by Ryan Hubbs, a senior manager of fraud investigation and dispute services at Ernst & Young LLP (EY), in the 2014 Fraud Magazine article, entitled “Shell Games”. Today I conclude my two-part series with some of the indicia Hubbs suggests you look for in trying to determine if there are any shell corporations with which you may be doing business. As Hubbs noted, if you have a shell entity, the main purpose is concealment. If you determine that a third party you are considering as a business partner or representative is a shell company, my suggestion would be that you run, not walk away from the transaction.
Hubbs lays out some rudimentary techniques that will allow you to perform some basic research. First, and foremost, is do not limit your search to the International Consortium of Investigative Journalist’s database of companies listed in the Panama Papers themselves. Initially this database is reported to only have listed 5-7% of the world’s shell companies. Hubbs suggested that you “review all available internal data that contains contact, banking, address and ownership information such as vendor/customer data, wire transfer data, ship to/ship from locations for sales and purchases, purchase orders and invoice support document.”
What are some of the basic questions you should be looking at from your own data and information? It is a problem if the “Information that doesn’t make sense given the nature of the business relationship with the entity.” Look closely at the “Entity information mismatch: address, phone, fax, ship to, bank, cell contact, etc. in different geographic locations.” Be very aware if the “entity “representative” is associated with numerous other companies.” Finally, you should review incoming/outgoing wire transfer documents to determine if “payment is made to or received from an unrelated third party.”
However, your own information is only the starting point. While the following list is not going to guarantee that you may not miss a shell entity, as Hubbs stated, “The following tools and techniques can significantly help the anti-fraud professional in verifying a shell, or at the very least, help uncover that one piece of information that could unravel the entire shell network.”
- Web history. In this day and age, if a company or person does not have an active, up and running website, it should immediately raise a red flag. As Hubbs noted, “Fraudsters who want to establish shells, of course, must have websites to create the appearance of legitimate companies. Sometimes bad actors get sloppy and put too much information on a website or list information that can then be linked to other entities that they control or oversee.” This is old-fashioned gumshoe work. How can you tell if something is not right? It may be as simple as the fact that it does not look right.
- Public records searches to identify owners and tracking to known associates. There is a variety of information, which a competent due diligence provider can search. Public records are an important source of information to “link entities and individuals together.”
- Mapping the network. This is a key step. As noted by Hubbs, “The most important task for tracing and tracking shell companies and contacts is to be able to document the linkage between all the information uncovered. The amount of leads, dead ends and information can be overwhelming; a single piece of important information could go unnoticed or unlinked. Most investigators can’t afford expensive mapping technologies.” Yet there are tools available online at little to no cost which a researcher “can use to create easy relationship diagrams for presentations and reports and keep track of inter-related connections.” Finally, you need to “Map every piece of information — no matter how small. An address or phone number could be the key to uncovering the shell network. Search online for various combinations of phone numbers and addresses.”
- ‘Whois lookup’ for domain ownership, IP addresses. Here Hubbs concedes that most persons (or law firms) setting up shell entities “have been vigilant in concealing public records’ information on involved entities.” However such facilitators “may have been careless when setting up the corresponding website addresses. Using “Whois lookup” search engines, you can discover” such information as: domain ownership, IP addresses, the physical addresses of websites, the website administrators and their contact information and finally website creation dates. Hubbs goes on to note that literally “Hundreds of Whois websites are available” for public review. He provides on prime example of the power of a ‘Whois lookup’; “Want to know how many websites are located at the shell incorporation hot spot address of “103 Sham Peng Tong Plaza?” As of April 2014, Whoisology reports that there are more than 900.”
- Evaluating online presences. Hubbs believes this may be the most fruitful area for investigation as most “Shell incorporators have a hard time faking an active and robust online presence because these companies technically don’t exist.” He goes on to list several indicia of online authenticity. It includes “The existence of a well-designed website, including the presence of other online content.” The site should show “Periodic and regular updates of information.” Finally, there should be “contact email addresses that are linked to a legitimate website address, not free email accounts.”
Conversely some of the indicia of a false front website or online presence include, “company and contact info on numerous free 411 sites, which are online white/yellow pages.” Hubbs also notes that shell companies “might create placeholder websites to get domain specific email addresses, such as email@example.com.” He concludes such entities “often create fake social media profiles for the company and its “employees.””
Hubbs concludes this section by noting there are three key questions you need to resolve:
- No online presence whatsoever? (Huge red flag.)
- Is the amount of online information available consistent with the goods/services that the entity says that it’s engaged in?
- Is there too much free online posting of information on the company?
In addition to the online presence investigation, you need to consider where a shell entity is set up. Hubbs stated, “A shell company can be set up practically anywhere, but incorporators widely use particular countries and regions. Advantages can include lack of government enforcement or specific laws protecting corporate secrecy. A good source of a high-risk country list is the U.S. State Department’s annual list of major money-laundering countries.” There is also public information available by reviewing the “bank-specific SWIFT codes in high-risk countries with a website such as theswiftcodes.com. (A SWIFT code is a unique identifier that’s associated with financial and non-financial institutions around the world.) After you identify the SWIFT codes, you might want to monitor for any funds originating or being disbursed to these banks or check to see if any customers/vendors have banking accounts associated with these specific banks.”
Back in 2014 Hubbs laid out for all the steps you need to take when performing due diligence or when certifying a company. These steps have not changed. Further, there is not much high tech about any of this. It is simply old-fashioned work, most usually in public sources that allows you to perform this investigation.
Based on Hubbs articles and the presentations I have seen him make on this topic, I also have one other suggestion for you if you come across a shell organization, call Ryan Hubbs.
This publication contains general information only and is based on the experiences and research of the author. The author is not, by means of this publication, rendering business, legal advice, or other professional advice or services. This publication is not a substitute for such legal advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified legal advisor. The author, his affiliates, and related entities shall not be responsible for any loss sustained by any person or entity that relies on this publication. The Author gives his permission to link, post, distribute, or reference this article for any lawful purpose, provided attribution is made to the author. The author can be reached at firstname.lastname@example.org.
© Thomas R. Fox, 2016