The issues around shell companies continue to bedevil national governments, state governments, anti-money laundering regulators and prosecutors and commercial businesses. They continue to be a problem for anti-corruption compliance programs as well. Such programs appropriately place most of their focus on the “how” of bribery and corruption, but shell companies remind that there is a “who” component to be managed. That “who” component was highlighted once again by Ryan Hubbs, global anticorruption and fraud manager for Schlumberger and one of the thought leaders around unmasking shell companies.
In his article in the May/June issue of Fraud Magazine titled, “Anonymous Shell Companies Rising” Hubbs notes that even after the release of the Panama and Paradise Papers, the use of shell companies continues to rise. One of the reasons they are so difficult for anti-compliance practitioners to manage is that they are not uncovered by the traditional due diligence used in compliance programs. Typically due diligence research seeks to uncover red flags such as negative media reports, lawsuits, and hits on sanctions lists. The beauty of a fraudster using a shell company is none of these negative indicia will turn up in such a due diligence investigation. In addition, technology has only acerbated this problem as Hubbs relates that those engaged in corruption can create anonymous shell companies quickly and efficiently.
While government regulation requiring disclosure of ultimate beneficial ownership is certainly a good first step to help stop the use of shell companies by bad actors, it is only one step. Companies must broaden their understanding of due diligence to encompass how they engage in it and how they use it going forward. Simply because a company comes back clean with no negative information it may mean that only a part of its story has been told. Businesses must conduct more robust background checks and must work to improve their internal controls around all third parties to make sure one does not slip through the corporate cracks and cause great damage.