Shell companies and the who of corruption

While corruption is one type of fraud, there is a big difference between more traditional fraud and corruption in that corruption involves the payment of monies stolen from a company, through a variety of mechanisms, to a customer or other person to induce that person to purchase goods or services. The customer or other person is the recipient of the stolen monies, as opposed to traditional fraud, where the perpetrator steals something of value from a company and keeps it. 

A key part of any fraud scheme are the attempts to keep it hidden, meaning those involved in bribery and corruption have to work in some manner to hide the scheme from not only their company but also from regulators’ prying eyes. This goes beyond simply trying to hide the acts of bribery and corruption, but also includes the disguising of identities of those benefiting from the crimes. While most companies are attuned to the “how” of corruption, they are paying less attention to the “who” of corruption. Unfortunately, many due diligence programs fail in this regard when it comes to shell companies. 

A shell company is, by design, created to hide the true or ultimate beneficial ownership of the individuals who are the final beneficiaries of the corporate structure. While there can be legitimate reasons for shell companies, they are often much more nefarious in nature. The problem for the Foreign Corrupt Practices Act and greater anti-corruption world is that too often due diligence is designed to uncover individuals or companies that are reported to be bad actors in the public record. Whether it be a search of U.S., EU, or UN sanction lists, open record searches, or other open source material, persons and companies on these lists often create shell companies to shield themselves from such due diligence inquiries. 

The bottom line is that many criminals, fraudsters, and those soliciting bribes set up shell companies to help them carry out their illegal activities. If companies are relying only on third-party due diligence providers to investigate the background in the public record of such third parties, they may well employ shell companies whose ultimate beneficial owners are bad actors preparing to engage in illegal activities.