Watchdogs: 'Shell' Schemes Are on the Rise

When corporate identities and credit histories are for sale, the potential for fraud is part of the package

By John Tozzi

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The idea for "Watchdogs: 'Shell' Schemes Are on the Rise" came from BusinessWeek reader Gary Bares, the founder and CEO of Verifraud, a fraud risk management company based in Phoenix

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Two months ago, Agilysys, (AGYS) a small IT firm, shipped a dozen point-of-sale devices to a new customer called Manybol Enterprises in South Florida: cash registers, touch-screen monitors, receipt printers, and barcode scanners that sold for a total of $53,802. The order struck Agilysys' sales rep as strange, according to a Ohio police report the company filed later. After all, the customer bought it immediately after getting a price quote, whereas most companies take weeks or months to place such orders. The rep ran it by his managers, who approved the shipment because the information Manybol provided on its credit application checked out with Dun & Bradstreet (DNB), the main bureau for business credit reports.

After the goods shipped, the sales rep tried to reach Manybol, but the phone, fax, and e-mail address he had stopped working. The invoice was never paid. On Oct. 9 Agilysys reported the fraud to local police in Solon, Ohio, where the 1,250-employee firm is headquartered.

The con exploited what experts say is a gaping hole in the security net designed to thwart better-known scams such as stolen credit cards or fake checks: business-to-business frauds involving shell companies that appear legitimate on paper. The targets range from mammoth global banks to small trade suppliers. Firms that sell to other companies typically use trade credit agreements that don't require the buyer to pay until a set period after the sale, often 30 days. That, combined with the ease of setting up or buying shell companies—and the anonymity they provide—leaves manufacturers, wholesalers, and distributors vulnerable to shell company fraud.

Disputed Ownership

Manybol appears to have once been a legitimate sports collectibles dealer, based on directory listings and filings with the Florida Secretary of State. But by the time the entity placed an order with Agilysys, it had been dormant for several years. State records don't reveal the owners of corporations, but the officers listed on Manybol's filings had changed twice since 2005. The Fort Lauderdale company also falsely claimed to Dun & Bradstreet to be a branch of a St. Louis janitorial supply distributor, a claim that company's owner disputed and reported to Missouri authorities when he learned of it. Several calls to Manybol from BusinessWeek went to a voice mailbox that was full. Dun & Bradstreet declined requests for comment, as did Agilysys beyond the statements the company made in its police report.

It is not clear how widespread shell company fraud is, although watchdogs say it is rising. "We are seeing more of a migration of fraudsters going from consumer type fraud to business type fraud," says Kristan Keelan, a product marketing manager for global credit bureau Experian, EXPN.L, that compiles data on business and consumer credit. "It's so much more difficult to verify and validate business information."

That difficulty is a prime reason criminals find shell company schemes attractive. For one thing, thefts can be far larger than in consumer frauds because businesses have bigger credit lines. And with the time-lag for payment, perpetrators have weeks to disappear before their victims realize they've been conned. The cases are often low priorities for law enforcement when no consumers are directly harmed. What's more, some firms may not even recognize the loss as fraud and simply write it off as uncollectible debt, a cost of doing business. When they are reported as fraud, these crimes are tough to investigate because of the anonymity shell companies provide. Senator Carl Levin (D-Mich.) has introduced a bill, favored by financial crime authorities, that would force states to collect more information about the true owners of corporations.The bill is before the Senate Committee on Homeland Security & Governmental Affairs, which held a hearing on Nov. 5.

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