How Dishonest Employees Use Shell Companies to Commit Fraud

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02 Apr How Dishonest Employees Use Shell Companies to Commit Fraud

For many entrepreneurs, obtaining a ‘doing business as’ (DBA) certificate enables them to open a small business. However, DBAs also can be used to open shell companies. These businesses, which have no assets of their own, may be legitimate. For example, when they are used to hold another company’s assets. However, they also can be used to perpetrate fraud.

Stealing on the cheap

For most businesses, the biggest threat posed by shell companies is that unscrupulous employees will use them to perpetrate billing fraud. Such schemes can take two forms.

  1. An employee sets up a shell company to send out (and collect on) fictitious bills. Of course, perpetrators do not even have to send the bills for nonexistent goods and services to the company for which they work, but it is easier, and can help them evade detection, if they do.

Consider, for example, an accounting employee who knows that her company rarely scrutinizes invoices for less than $2,500. She gets a DBA certificate for a fictitious business, using a post office box, and opens a business account at a local bank. Voila! She is ready to bill her employer for services that cost less than $2,500 per invoice.

  1. An employee sets up a shell company to sell products to their employer at a marked-up price. Because the employee’s shell company 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 do not 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
  • 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 create a system, which enables you to catch billing fraud before it begins. Contact us for help.