Did Chaucer get it wrong or did we get it wrong? Chaucer’s seminal work The Canterbury Talesis a work of 24 tales from the pilgrims traveling to the shrine at Canterbury, together with a Prologue or is it? The question still pondered is were there only to be the 24 tales or were there to be more? The Prologue which says there were 36 pilgrims, each of whom will tell two tales. So 60 tales on the way to Canterbury and then another 60 inbound on the way back from Canterbury. A grand total of 120. This was posited as the correct number by Reverend Walter W. Skeat, in his six-volume edition of The Complete Works of Geoffrey Chaucerpublished in 1899. Getting this information right informs today’s post on shell companies.

However A.S.G. Edwards, writing in TLSJune 29, 2018 edition, in a piece entitled To speken short and pleyn, has posited that Skeat got it all wrong, that the number set out in the Prologue was simply a joke by one of the characters on the pilgrimage. Furthermore, rather than splitting Chaucer’s manuscript into a series of fragments, it should be read as a single consecutive text which will “represent the evidence of Chaucer’s intentions more faithfully than our predecessors have done.”

Chaucer and this ongoing debate introduces this two-part blog post about the continued scourge of shell companies. According to Samuel Rubenfeld, reporting in the Wall Street Journal (WSJ) Risk & Compliance Journal, “Treasury Secretary Steven Mnuchin told lawmakers that he wants to make corporate ownership information available to law enforcement within the next six months.” Even Delaware, which has traditionally fought any attempts to regulate shell corporations, has “endorsed a bill that would allow the federal government to collect corporate-ownership information that could be accessed by law enforcement.” Sadly, the American Bar Association is now leading the fight against making such information public. Matthew Stephenson explains why in the Global Anti-Corruption Blog (here and here).

All of this matters because, as Ryan C. Hubbs wrote in the most recent issue of Fraud Magazine in his most recent piece on shell companies entitled “Anonymous shell companies rising,  “Criminals have learned, through trial and error, that anonymous shell companies can pass scrutiny. Authorities and entities don’t question them, the fraudsters blend in and they don’t appear to be risky. They represent the next big sale, the new low-cost supplier or the helpful business agent. And organizations are eager to work with them. It’s time to start reversing this trend.”

Hubbs listed several reasons why shell corporations are still proliferating. The first is that many due diligence practitioners still do not know what to look for in researching potential third-parties. Hubbs has previously noted, “If you don’t know what you’re looking for, how will you know when you’ve found it?” Many compliance practitioners, when performing due diligence, fail to understand that nefarious third-parties “routinely use shell companies to bypass sanction due diligence so they can continue their crimes and schemes.”

This leads to over-reliance on due diligence of third party lists based on negative information. Obviously, one would want to know if someone had engaged in bribery and corruption and that information was in the public record. The problem with the proliferation of shell companies is that the bad guys simply form a new anonymously owned company, which does not turn up the usual red flags which would prevent engagement. Hubbs stated, “Many due-diligence controls might not identify third parties who lie on questionnaires, provide fictitious concealing information, and don’t have negative histories or any reportable histories. These are but a few of the methods of concealment used by shell companies.”

Technology has helped the bad guys as well as those trying to fight bribery and corruption. Hubbs stated, “Faster computers and enhanced software coupled with internet banking, online companies that can quickly incorporate businesses, mail forwarding services, virtual offices and quick website development allow fraudsters to create anonymous shell company networks that appear so legitimate that they can pass due-diligence screening processes without exhibiting a single red flag.” This means that the now defunct Mossack Fonseca could incorporate anonymous shell corporations in Nevada about as easily as a jurisdiction rated more corrupt on the Transparency International Corruption Perceptions Index (TI-CPI).

Part of the problem is, as Hubbs noted, you are “looking for ghosts.” By this he means that regulators are so far behind the sophistication of many anonymous owners of shell companies, they do not have cutting edge techniques, such as best practices, for performing background research. In the US, Hallmark IV of the Ten Hallmarks of an Effective Compliance Program relating to third-parties was articulated in 2012. If a company is following the bare minimum required, it will not be likely to find the beneficial owners of anonymous shell companies.

Next is the twin issue of weaknesses in regulations and those third-parties who are unwittingly aiding corrupt, anonymous owners of shell companies. The weaknesses in US state laws are well known and well documented. Additionally, as Hubbs noted, “In some countries, the only documented linkage to the actual owner of an entity is a “paper-bearer” certificate. Other nations allow listings of nominee directors, agents, proxies and even other shell companies as directors, officers and shareholders while the real beneficial owners can remain anonymous.” When you add to this to persons and entities unwittingly aiding the creation of shell companies, such as brokers, dealers and incorporators, you have an entire industry with zero incentive to work to solve the problem.

Hubbs identified the final problem as perhaps the most intractable. It is the international nature of bribery and corruption and the various multi-national jurisdictions involved. Hubbs stated, “The complexity of an anonymous shell company network’s fraud scheme is only rivaled by the international complexity of getting all foreign jurisdictions and law enforcement agencies on the same page to cooperate. This is nearly impossible, and bad actors know this. Proliferation of hops and touchpoints originating in foreign countries further disperses evidence that fraud examiners could use to build a case against any wrongdoers and co-conspirators.”

From this arises several critical questions: Which jurisdictions or countries have standing? What country’s laws take precedent? Who is in charge of the investigation? He concluded by noting, “A case becomes even more complex when prosecutors have to prove that those who’ve incorporated shell companies actually intended to engage in bad acts. Intent is one of the premier components for proving any fraud case in court. The use of anonymous companies through multiple jurisdictions helps to create obscurity and ultimately weaken knowledge and intent of the involved parties.”

While all of this may seem like an intractable problem, tomorrow we will consider some responses from the compliance practitioner.

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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2018