Are your business
partners real or a
Trojan Horse?
Detecting and preventing
anonymous shell companies
What you should know about shell companies
1
What is
driving
the interest
in shell
companies?
• April 2016, the International Consortium of Investigative Journalists (ICIJ) broke the story globally
that they had been investigating a very significant leak of documents from the law firm Mossack
Fonseca in Panama.
• May 2016, the ICIJ released additional records relating to about 214,000 offshore shell company
accounts.
• September 2016, ICIJ leaked documents providing names of politicians and others linked to more
than 175,000 Bahamian companies registered between 1990 and 2016.
• Leaked data indicates that Mossack Fonseca law firm was instructed to set up offshore companies
for clients. Officers of these companies have also been identified in the data.
2
What does
this mean?
• Among the issues for clients is whether the beneficial owner(s) of such entities might have used the
offshore structure or vehicle for the purpose of paying bribes, tax evasion, money laundering or
other financial crimes.
• The data is available to all, including regulators.
• Numerous publicized resolutions with regulators point to shell company involvement in illicit activities.
3
What are
regulators
saying?
• “Agents and intermediaries are of real interest to us. Our natural curiosity is piqued further if those
agents or intermediaries take the form of companies based in a jurisdiction that permits beneficial
ownership to be concealed.” Alun Milford, General Counsel, UK Serious Fraud Office, EY 14th
Global Fraud Survey | Download the entire survey
• Traditional due diligence of customers and vendors is not sufficient. Customers or vendors can
bypass sanction lists by the use of the shell companies, because shell companies do not appear on
sanction lists.
4
What are the
risks?
• Companies may not know who they are dealing with, because the true identities and purpose of the
business relationship may be obfuscated by the use of an outwardly acceptable company name, or
is represented to be run by a management team or governed by a board comprised of members
whose names appear to be acceptable individuals.
• Perceived contractual protections may not exist or may be significantly weakened if the third party
is a fictitious entity.
• Information is now available to address the risks. Not taking reasoned action could subject your
Company to financial and reputational harm for unknowingly engaging in transactions with
criminal, corrupt or sanctioned individuals or entities.
Decreased transparency leads to increased risk
What is your exposure to shell companies? |
1
Responding to this threat
The recent media attention surrounding the use of shell companies in international fraud, corruption and money-laundering scandals has
spawned global interest in the use of foreign jurisdictions for corporate transactions. The risks a company faces from the illicit use of shell
companies are many.
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Employees
and
beneficiaries
Conceal bribes and kickbacks
Corruption
Embezzlement
Conflict minerals
Bypass trade sanctions
Circumvent sanction/PEP lists
Trade-based money laundering
Organized crime
Facilitate fictitious billings
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Customers
Anonymous
company
risks
Corporate
org.
structure
Anomaly detection
tools
Mergers and
acquisitions
Corporate
assets
Joint
ventures
(sales and
purchases)
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Text mining and search
Data output assessment
and review
Conceal ownership
Bid rigging/false bids
Corruption via asset S/P
Asset misappropriation
Enhancing your due diligence is a response to this threat. We see
three main steps to enhancing a company’s diligence efforts:
Enhanced due diligence
Investigation
tools
ICIJ
Bypass trade sanctions
Circumvent sanction/PEP lists
Tax evasion
Trade-based money laundering
Organized crime
Anonymous
company
risks
Structured
Publicly available
data
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EY’s approach to enhancing your due diligence is designed to
efficiently ingest large volumes of structured accounting data to
identify entities and transactions that are at higher risk of being a
shell company.
Vendor and customer
master data
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Conceal ownership
Circumvent sanction/PEP lists
Corruption
Facilitate fictitious billings
Data management
tools
Corruption via fake employees
Embezzlement
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Vendors
and
suppliers
Conceal corporate transactions
Financial statement fraud
Corruption
Asset misappropriation
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1
Data
collection on
customers
and vendors
2
Apply data
detection
tools
3 Due diligence
Summary level due diligence
Panama Papers
entities
Directors,
intermediaries and
beneficiaries
Data refresh or calibrating
SQL and Perl
data processing tech stack
Visualization and risk ranking
Repeat the process:
continuous monitoring
(on-site, centralized, outsourced)
Case
review
Management
review
Findings and
recommendations
2
| What is your exposure to shell companies?
Identify existing
relevant internal
information (e.g.,
customer, vendor,
employee master) and
collect available data on
known riskier entities
(ICIJ, sanctions lists,
government and other
organizations alerts).
Apply data anomaly
detection tools to
identify potential
common threads
between internal and
external data sources.
Aggregate and risk
rank entities.
Assess the due
diligence on
identified entities and
prepare finding and
recommendations.
Why EY
EY can support you
in investigation,
remediation and
ongoing compliance
As part of our commitment to building a better working world, EY can
support you in developing high standards of compliance to safeguard
your company’s reputation and assets.
EY has extensive experience working with companies to update and
improve their compliance programs in order that they may address
ever-changing threats.
Our leading-edge technologies, paired with our industry knowledge,
allow us to assist our clients in a cost-effective way when they are
subject to government scrutiny and inquiries. Our teams include
Certified Anti-Money Laundering Specialists (CAMS), former law
enforcement officers, former regulators, CPAs, CFEs and forensic
accountants. We can help you with:
• Due diligence and enhanced due diligence
• Anti-bribery and anti-corruption investigations
• Anti-money laundering and sanctions investigations
• Trade-based anti-money laundering investigations
• Fraud risk assessment
• Data/trend analysis of transactional activities
• Recovery and extraction of forensic data
• E-discovery
• High-risk data analytics
What is your exposure to shell companies? |
3
EY FIDS
155 locations in
72 countries
When facing acts of fraud, government investigations, regulatory
inquiries, major litigation, or transactional disputes, clients turn to
EY for timely and experienced assistance. Our forensic accountants
and technologists, most of whom are certified fraud examiners,
anti-corruption specialists, anti-money laundering professionals and
other credentialed specialists work with our clients’ legal counsel,
internal audit teams and compliance departments to investigate and
evaluate complex issues and develop practical solutions that address
operational challenges.
Our multidisciplinary professionals are leaders in their field,
drawn from both industry and the public sector, including the U.S.
Department of Justice (DOJ), Federal Bureau of Investigation
(FBI) and Securities and Exchange Commission (SEC). We apply
the collective knowledge and insight gleaned from working across
industries and geographies to help our clients conduct fraud risk
assessments, institute proactive anti-corruption programs, utilize
forensic data analytics, and address complex business and financial
challenges to help corporations to manage risk and improve
regulatory compliance.
213 partners
4,500+ FIDS
professionals
130+ countries in
which FIDS has
performed
investigations or
compliance work
Industry focus
• Financial services
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defense
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products
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entertainment
• Diversified industrial
products
• Technology
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construction
How we can help
Fraud and investigations
Forensic technology and discovery services
Investigations
Integrity diligence
Forensic data analytics
Cybercrime investigation
• Financial reporting and
securities fraud
• Channel partner and
vendor due diligence
• Anti-bribery/anti-corruption
(ABAC) analytics
• Incident preparedness and
response services
• Bribery and corruption
• M&A target
background checks
• Anti-fraud analytics
• Cyber breach diagnostics
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• Watchlist and sanctions
compliance support
• Dispute and damage
analysis
• Cyber analytics
• Third-party management
program design and
administration
• Predictive modeling
eDiscovery
Information governance
• Preservation and collection
of ESI
• Money laundering
• Employee fraud
• Embezzlement
Corporate compliance,
anti-fraud, anti-bribery
and corruption
• Anti-corruption program
advisory
• Assessments, monitoring,
improvements
• Policies and training
• Program development and
assessment
• Big Data discovery,
inventory and contextual
data classification
• Data mitigation services
for cloud migration or risk
remediation
• Defensible data disposal
• Insider threat analysis
• Computer forensics, data
mining and analysis
• Early case assessment
• Technology assisted review
• Managed document review
• eDiscovery advisory
services
Countries with dedicated
FIDS professionals
Transaction forensics
• Pre-acquisition anti-corruption
due diligence
• Contractual language
assessment
• Post-acquisition analysis and
integration/forensic look back
• Post-closing assistance with
preparation of accounting
mechanism
• Pre-arbitration dispute
analysis
• Fund/strategic acquirer
activities, including pre-IPO
compliance and diagnostic
review
• Portfolio company/subsidiary
activities, including
compliance review
FIDS forensic data centers
Insurance and federal
claims services
Government
contract services
• Damage documentation
• Allowable costs
• Claims preparation
• Audits and investigations
• Assessment of environmental
and sustainability programs
• Business systems
• Financial reporting
• Commercial item acquisition
• Interaction with government
and insurance officials
• Contract pricing and
proposal support
• Identification of leading
recovery options
• Cost accounting standards
• Guidance on applying for
and using recovery funding
• Compliance with legal and
regulatory requirements
• Claims and disputes
Dispute services
• Damage quantification
and analysis
• Calculations of
amounts due
• Expert reports and
witness testimony
• Contract compliance
disputes
• Post-acquisition disputes
• Federal supply schedules
• Intellectual property
disputes
• Grants and cooperative
agreements
• Investigating allegations
in class action litigation
• Indirect cost rates
• Alternative dispute
resolution
• Termination proposals,
both for convenience and
for default
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© 2016 EYGM Limited.
All Rights Reserved.
EYG no. 03894-161Gbl
1610-2100736
ED none
This material has been prepared for general informational purposes only and is not intended to be
relied upon as accounting, tax or other professional advice. Please referto your advisors for specific
advice.
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