Shell companies have no physical presence or actual business operations, but are paper corporations that have only one purpose: to facilitate one or more transactions and then eventually dissolve. We explore how corrupt politicians and civil servants misuse shell entities to steal taxpayer funds.
Shells: An overview
Shell companies are paper companies with no "meat," no substance. They're often typically associated with fraud, embezzlement and public corruption crimes. Shells require sophistication and planning not generally present in most fraud schemes such as check tampering, expense reimbursement or payroll schemes.
Shell companies do have a number of legitimate business reasons such as "holding" non-physical assets, including copyrights, trademarks, patents and other intellectual property. Businesses also use them as accounting mechanisms to organize assets. For example, many real estate investment funds own multiple properties, but they, in turn, own the holding companies that physically own each individual property.
Crime and shells
Through the years, we've all seen a spate of cases involving public officials funneling taxpayer funds into shell companies they own or control. Law enforcement is increasingly concerned about corrupt officials, plus drug traffickers and even terrorists, illegally using shell companies to mask transactions. Some states in the U.S. and the U.S. Senate are pursuing legislation to substantially regulate shells and company formation services — businesses that incorporate firms.
In June 2011, Reuters discovered that more than 2,000 companies were registered through just one address — a two-story brick home in an exclusive residential neighborhood — in Wyoming (a state with very low incorporation standards). Several of the companies were tied to criminal operations. (See
Special Report: A little house of secrets on the Great Plains, by Kelly Carr and Brian Grow, Reuters, June 28, 2011.)
Carr and Grow wrote that the house served as a "little Cayman Island." Wyoming Corporate Services "will help create a company, and more: set up a bank account for it; add a lawyer as a corporate director to invoke attorney-client privilege; even appoint stand-in directors and officers as high as CEO," according to the article.
Bromwell's MDE scheme
In 1999, Thomas L. Bromwell Sr. used his influence as a senior Maryland state senator in a scheme to "intervene" in business disputes on behalf of a company named Poole & Kent — a construction firm with major state government contracts.
According to the Superseding Indictment of Oct. 19, 2005, Poole & Kent paid Bromwell's wife more than $200,000 to be a ghost employee with a no-show job. The company did construction work on the Bromwells' home valued at $85,000.
Bromwell used a company, Namco Services Corp. — ostensibly a minority-disadvantaged business (MDE) — to obtain construction contracts for Poole & Kent, which then used the MDE as a payment mechanism to the Bromwells. His wife also pretended to be a Namco Services employee to try to deceive investigators. (Read more about this case at the
Stolen Asset Recovery Initiative.)
MDE contracts are a valuable way to bring in a more diverse contracting force: firms owned by women, veterans and minorities. However, corrupt politicians often take advantage of perceived loopholes or weak procedures in MDEs. Fraud examiners must review contracts, specifications and operations to check for colluding relationships between officials and MDEs.
The bell tolls for thee, Rizzo
On April 14, 2014, Robert A. Rizzo, the former city administrator for Bell, California, was sentenced to 33 months in prison and ordered to pay $255,984 in restitution after pleading guilty to conspiracy and filing a false federal income tax return.
Rizzo admitted to creating a shell corporation to fraudulently claim losses on his income tax return. The losses enabled him to illegally reduce his tax liability on the significant income he was receiving from the city of Bell.
Rizzo created R.A. Rizzo Incorporated (RARI), an "S Corporation," in 2002. He used RARI to claim fictitious net losses on a non-existent rental property in Washington state. Rizzo fraudulently deducted more than $409,731 in losses for 2006 through 2009 on RARI's corporate tax return.
He also used a RARI account to pay for more than $80,000 in personal expenses in 2009 and $120,000 in construction work on his house in 2010 after falsely asserting on his tax returns that these expenses were improvements to his rental property.
Towns and cities often pay good salaries to professionals to manage and administer their operations and, of course, expect them to be honest public officials. As fraud examiners, we must be able to identify conflicts and potential problems like these in public records before they become taxpayers' nightmares. We must always think: preemptive strikes.
(For more information on the case, see the Dec. 12, 2013, FBI report,
Former Chief Administrative Officer for City of Bell Agrees to Plead Guilty to Conspiracy and Tax Charges in Plot to Avoid Income Taxes.)
Carmine's corporation
From 2002 through 2007, Carmine C. Inteso Jr. held multiple governing positions in Toms River, New Jersey, including mayor, deputy mayor and councilman. Beginning in 2005, Inteso began a corporation and then persuaded an insurance broker, who was seeking business with the town, to deposit nearly $300,000 into the account. The mayor used the funds to pay his personal expenses. Inteso also failed to file personal income taxes during the years the scheme was running. Ultimately, he was sentenced to six months in prison, six months of house arrest and two years of supervised release.
Contractors and vendors who seek public business must be attuned to the deposits they're making and conduct due diligence on the ultimate account beneficiaries. For example, management could begin a policy and procedure in which recipients certify they aren't related to, or controlled by, public officials.
(For more information on the case, see the Jan. 6, 2004, FBI report,
Insurance Broker and Former Toms River Mayor Sentenced in Separate Schemes Involving Toms River Officials.)
The accountant who duped Detroit schools
Sandra Campbell was a former Detroit public school system contract accountant and school board candidate. She and her daughter, Domonique, who was a teacher in the district, created a company for purportedly supplying books and materials for the district. The company actually was a shell and didn't provide any products.
Between 2004 and 2008, Sandra and Domonique fraudulently obtained more than $550,000 from the Detroit school system. The Campbells were able to create orders for their shell company through the district's automated ordering system and then create electronic invoices. The district paid the invoices, presumably without doing any due diligence.
Sandra received a 70-month prison sentence, and Domonique was sentenced to three years. (See a
release about the indictment.)
Insiders and trusted personnel — especially in accounting, finance and purchasing positions — are especially susceptible to taking advantage of lax controls and the trust their employers and fellow workers place in them. As always, organizations should use internal controls and background checks to help prevent these insider shell company scams.
Lessons for fraud examiners
We should always be very skeptical of shell companies and should strive to discover the ultimate beneficiaries. A legitimate company will be able to provide a reasonable explanation and logical use for the shell company and provide substantial documents that show its formation, purpose and financial standing.
Most public officials are required to file annual financial disclosure statements, which can provide valuable information and evidence. We should scrutinize them against property, local tax, license and business records to determine if officials haven't disclosed their full interests. The officials also can hold shell companies in the names of family members and friends.
No sham shells
Fraudsters often use shell companies — a significant control risk — to steal public funds from federal, state, local, tribal and other government entities. As fraud examiners, we should use our fraud examination methodologies to prevent, detect, identify, and investigate fraud and public corruption schemes that utilize these sham firms.
Colin May, CFE, is a forensic financial investigator with a government agency (the views in "Starting Out" are his own) in Baltimore, Maryland. He can be reached at: colin.may.cfe@gmail.com.