As a forensic accounting firm, we have seen numerous cases of shell companies being used to perpetrate fraud. In one case, a large multinational corporation in the manufacturing industry was defrauded by an employee who created several shell companies to receive payments from the company without its knowledge.
The fraudster was a middle-level manager who had significant control over the company’s accounts payable process. He created six separate shell companies that all provided nebulous services related to manufacturing, such as maintenance and repair services or packaging supplies. He then subscribed to a mail drop for these companies and began sending invoices to the company, which were approved and paid without any proper validation.
Due to the size of the project and the poor vendor establishment process, the company disbursed over $4.5 million to the fraudster in a ten-month timeframe. The fraudster was caught after a whistleblower tipped off the company, but the damage was already done. The company suffered significant financial losses, reputational damage, and legal expenses.
This case highlights the dangers of shell companies and the importance of implementing proper controls and procedures to prevent fraud. Here are three steps that organizations can take to protect themselves from shell company fraud:
Thorough New Vendor Establishment Process
When establishing new vendors, it is essential to have thorough procedures that are well-documented and taught to employees. This includes verifying that the business exists at the listed address, evaluating the company’s online presence, making test phone calls and emails, and asking for references.
Conflict of Interest Form
Another essential control is to annually require employees to fill out a form that lists any family, personal, business, and financial relationships they have that are affected by your company.
This form might seem useless because a fraudster is not going to tell you about their shell company. However, when this becomes part of your procedures, it shows your employees that the company is validating vendors, which can change the environment and deter potential perpetrators.
Master Vendor File Compliance Testing
Establishing a process for regular compliance testing of your master vendor file can save your organization a lot of money, time, and frustration. This includes searching the file for duplicate vendor information in connection to your employee database, missing vendor information, recent changes to dormant vendors, competitive bidding manipulation through vendors with duplicate information appearing to be separate companies, vendors with sequential invoice numbers or low starting invoice numbers, and reviewing amounts just below any control thresholds in your company.
While not all of these red flags necessarily mean fraud is occurring, they can serve as warning signs that signal further investigation. By implementing these controls and procedures, you can protect your organization from the dangers of shell company fraud. Additionally, seeking assistance from a reputable forensic accounting firm like Integrity Forensic can further bolster your defenses. Our experienced forensic accountants specialize in uncovering financial irregularities and can help safeguard your organization against fraudulent activities.
Contact us to learn more about how we can help safeguard your organization against financial fraud. At Integrity Forensic, we have a team of experienced forensic accountants to assist you. Call now for a free consultation: 855-673-9999 or send us a message at questions@integrityforensic.com.
