How Shell Company Fraud Works

It was the perfect crime.  For only $35, Paul was “in business.” That small investment bought a fictitious-name or DBA (doing business as) certificate — which was the key to his grand plan to defraud his employer.

He used the certificate to set-up a business checking account and then added his new enterprise as a vendor in the accounting system.  A few days later he submitted his first invoice for payment.  His boss, the owner of the company, never noticed.  Paul stole nearly $500,000 over the next three years.

Unfortunately, this story is far too common when it comes to small business fraud.  According to experts, shell company schemes, where a fake entity is established by a dishonest employee to bill a company for goods or services it does not receive, represent about half of all fraudulent disbursement schemes.

All it takes is a greedy employee.  In many cases the scheming can last for years.  Recent research by the Association of Certified Fraud Examiners (ACFE) pegs the median loss from shell company schemes at nearly $600,000.

Worried yet?  You should be if you’re a small business owner.  According to the ACFE more than 30% of all fraud is committed at companies with less than 100 employees, and it often takes more than 18 months to discover that a fraud has even been committed.

The simplest thing you can do is take the time to regularly review your transactions.  Make sure you recognize the names on the vendor list — and, of course, you should probably know what the invoice was actually for.  Pay extra attention to whether any of the new vendors are missing an email or physical address.  Legitimate companies should have both. Call if you have any questions at all.

Is someone you’ve done business with for years suddenly showing up as a new vendor?  Check the vendor list for similar sounding names.  Fraudsters may attempt to hide a shell company by using a name that is similar to a legitimate vendor.  For example, Riverbrake Supply might be legit, while a new vendor named Riverbreak Supply could be suspect.

These tips won’t catch all the possible problems, but they can help.  Make it a habit to review transactions once a month, or more often, to spot possible problems sooner rather than later.

About CP Morey

CP Morey is vice president of products & marketing at AuditMyBooks, an Intuit App Center company that automatically double checks accounting records to detect errors and fraud.Morey is also a member of the Intuit Partner Platform Advisory Board, the Principle Investigator for a National Science Foundation research project on small business fraud and a frequent speaker at industry events.
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