Shell Games

A common red flag of investment fraud is the creation of a byzantine web of shell companies to create an illusion of corporate legitimacy. These shells masquerade as independent companies, despite being controlled by a common owner.

In the U.S., limited liability companies and corporations can be established relatively anonymously in states, such as Delaware, which offer privacy protections comparable to offshore havens. In Nevada and Wyoming, corporate entities can be organized with 'nominee' officers and directors – hired figureheads, basically – so the name of the principal owner never appears in corporate filings.

In complex frauds, multiple entities are nested together like Russian dolls: one company formed inside another company, inside another, inside another. In such situations, the shell companies serve as the manager, member, or general partner of various other entities. Labyrinth hierarchies of corporate shells can cross international borders and control other anonymous holdings in foreign jurisdictions.

Fraud schemes that launder money through complex webs of corporate shells make it more difficult – but not impossible – for investigators and tax officials to trace the flow of funds. Diligent investigation of corporate affiliations and business interests is an essential component of comprehensive asset searches in cases of investment and securities fraud. Shutting down the ‘shell game’ is a critical component of financial recovery for fraud victims.

About the Author

John Powers is president of Hudson Intelligence, an investigative firm in New York that specializes in the investigation of fraud and financial crimes. He works with clients throughout the U.S. and internationally.

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