According to a WWE Press Release, Josip Nikolai Peruzović, known to pro wrestling fans as Nikolai Volkoff, died this week at age 70. For those who may not remember, Volkoff was one of the great early WWE villains, battling against the likes of good guys Sgt. Slaughter, Hulk Hogan and Bruno Sammartino. While Volkoff made a great team villain when he wrestled in tag-team matches with the Iron Sheik, it was Volkoff’s infamous rendition of the Soviet National Anthem before his matches that cemented him as one of the great heels in pro wrestling. To top it off, Volkoff was managed by “Classy” Freddie Blassie who was always around to throw a loose chair or table onto a competitor.

Weirdly, Volkoff informs today’s post and not simply because of President Trump’s fawning over all things Russian. We wrap-up the blog series about the continuing dangers of shell companies, as articulated by Ryan C. Hubbs, writing in the most recent issue of Fraud Magazine in an article entitled “Anonymous shell companies rising. Today, I conclude by considering what companies can do to protect themselves.

Hubbs began by noting, “Fraud is inherently hidden.” This has always been a primary lesson for anti-fraud professionals. It is the same for the anti-corruption practitioner. Just as concealment is a primary tool of a fraudster, this is even truer for the corrupt company employees engaged in bribery and corruption as well as the corrupt government official or employee of a state-owned enterprise who is the recipient of the bribe payment. Without concealment, corruption is more easily identified and the chances of being detected are raised. As Hubbs stated, “Therefore, a search for and awareness of concealment techniques must be components in every fraud examination. The better we are at identifying concealment red flags, the better we’ll become at unravelling complex fraud schemes.”

This conceal can take a variety of faces, limited only by the imagination of those involved.  “Fraudsters have primarily focused these time-tested techniques to conceal their acts but with less emphasis on disguising their identities. But if they could also become anonymous, how large and complex could they make their fraud schemes? We have our answer in the ever-increasing number of global cases, prosecutions and regulatory penalties involving shell companies. The anonymous shell company has become criminals’ premier vehicle of choice when they conceal frauds and identities.” In the face of all this what steps can a company take?

These fraud techniques are only amplified with shell companies. Hubbs wrote, “Anonymous shell companies and their associated risks should be a concern for all legal and compliance professionals, internal audit executives, boards of directors and executive management. These proverbial wolves in sheep’s clothing are designed to bypass our internal controls and invalidate our checks and balances. They present an inherent vulnerability to all organizations — across all industries and geographic regions.” Hubbs laid out five questions you should consider from the compliance perspective.

First, are the employees in critical departments even aware of this risk? Hubbs believes these front-line departments “include legal and compliance, internal audit, procurement and sourcing, accounts payable, trade compliance, treasury and finance, tax and corporate planning, mergers and acquisitions, human resources, and sales and marketing.” I would add you should also consider your on the ground business development folks as well. They should have a better nose if something does not smell or even feel right.

Second, in what areas is the company vulnerable to anonymous shell company risks? This could be in relationships such as those with vendors, suppliers, business partners and agents, customers, wholesalers, shipping/receiving companies and vessels, joint ventures and partnerships, employees, contractors and beneficiaries. It could in specific types of business transactions such as mergers and acquisitions, in the sale and purchase of corporate assets or in business with state-owned enterprises or government officials. It could be in geographically high-risk countries or areas of the globe or in certain business sectors, such as pharma, tech or energy.

Third, you need to consider what are the financial, regulatory, operational, legal and reputational risks of engaging with anonymous shell companies? Unfortunately here the list of answers expands and expands in way that could level quite high costs to your organization. There could be direct and indirect financial losses, investigatory costs and any associated fine or penalty. Obviously, there can be significant reputational and brand damage for knowingly or unknowingly engaging in business transactions with entities controlled by corrupt politicians, organized crime, drug cartels and terrorist networks. Here you need only consider the reputational hit taken by companies that did business with Unaoil. There can be loss of operations and income from conducting business with sanctioned entities via shell companies. Never forget the plaintiffs’ bar who would inundate you with shareholder lawsuits over fiduciary responsibility for failing to safeguard an organization’s assets. Finally, you would have no legal and financial recourse if the third party is a shell company, because after all who do you sue?

Fourth, what steps is your organization taking to prevent and detect anonymous shell companies from infiltrating your organization through surreptitious business relationships or transactions? This would include what, if any, data analytics your company is using? Has your company developed a checklist around shell companies or even used any of Hubbs’ past articles to provide guidance for sales and procurement staff to help identify a potential shell company? Finally, is your organization making any offshore payments and, more importantly, does your compliance function have full visibility into all these issues?

Fifth, and finally, what enhancements can your organization incorporate into its audit, legal and compliance fabric to prevent and detect anonymous shell companies and mitigate their impact on the organization? Here you should communicate and train your teams on key government alerts and government cases involving shell companies. Next, work to enhance processes and procedures to identify red flags of anonymous shell companies. Work diligently with the compliance function to enhance due diligence questionnaires to ask better questions, not simply for third-party agents but all manner of business relationships with your company. This could include mandating the listing of officers and directors with their contact information and the location of the bank accounts and website addresses. If you have not done so previously, implement enhanced due diligence activities and monitoring of all third parties by deploying high-risk entity analytics that focus on shell company red flags and also use data analytics to detect previous and/or current high-risk entities.

Although he might be too reticent to advise it, my final piece of guidance would be to contact Ryan C. 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 tfox@tfoxlaw.com.

© Thomas R. Fox, 2018

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