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The Federal Deposit Insurance Corporation (FDIC) was recently alerted by the Better Business Bureaus of possible fraudulent or improper activity involving businesses advertising that they can assist borrowers, who may not otherwise be able to qualify for a loan, obtain an unsecured business line of credit. These businesses do this by selling a "shell" or "shelf company" to the potential borrower. The potential borrower is then able to substitute the creditworthiness and business history of the shell or shelf company for their own in an attempt to obtain credit. While financial institutions may use different underwriting based on their risk tolerance, in one example, potential borrowers were advised to request a line of credit below $150,000, suggesting that bank underwriting standards at this level are less stringent. These businesses promise that the borrower will not have to provide business or personal financial statements, income tax returns and personal guarantees, and that the lending financial institution will not pull a personal credit report. These businesses promise positive results while typically charging large upfront fees.
The term "shell company" generally refers to a limited liability company and other business entity with no significant assets or ongoing business activities. The term "shelf company" refers to a shell company that is created and left with no activity—or put on the "shelf" to season. The shelf company can then be sold to someone wishing to start a company without going through steps to create a new one. Common reasons for purchasing a shelf corporation include:
If a company is thought to be "seasoned" or have historical longevity, it may boost investor, lender and consumer confidence and give the appearance of an established history of creditworthiness.
Shell and shelf companies typically have no physical presence other than a mailing address, have no employees and produce little, if anything, with independent economic value. They can be created domestically or in a foreign country. Shell and shelf companies are often formed by individuals and businesses to conduct legitimate transactions. However, they can be and have been used as vehicles for common financial crime schemes such as money laundering, fraudulent loans and fraudulent purchasing. By virtue of the ease of formation and the absence of ownership disclosure requirements, shell and shelf companies are an attractive vehicle for those seeking to conduct illicit activity.
Providing financial services to shell and shelf companies involves varying degrees of risk, depending on the ownership structure, the nature of the customer, the services provided, the purpose of the account, the location of services, and other associated factors. The potential to abuse shell and shelf companies for illicit activity must be recognized, and financial institutions should be vigilant in monitoring such companies on an ongoing basis. Financial institutions should assess the risks involved in each shell or shelf company relationship and take steps to ensure that the risks are appropriately and effectively identified and managed.
Financial institution management should establish appropriate due diligence at account opening and during the life of the relationship to manage risk in these accounts. Longstanding regulatory lending guidance advocates that financial institutions request the identity of the shell or shelf corporation's principal(s) and evaluate the appropriate factors of creditworthiness when extending credit. Important information for determining the valid use of these entities includes the type of business, the purpose of the account, the source of funds and the source of the wealth of the owner or beneficial owner.
Financial institutions should act promptly when they believe fraudulent or improper activities have occurred related to activities of a shell or shelf company. Appropriate actions may include, but are not limited to, filing a Suspicious Activity Report (SAR) in accordance with suspicious activity reporting regulations. The Financial Crimes Enforcement Network encourages using the narrative section of the SAR form to completely and sufficiently describe the suspicious conduct. The narrative should use the term "shell," as appropriate.
For your reference, FDIC Special Alerts may be accessed from the FDIC's website at www.fdic.gov/news/news/SpecialAlert/2009/index.html. To learn how to automatically receive FDIC Special Alerts through e-mail, please visit www.fdic.gov/about/subscriptions/index.html.
Distribution: FDIC-Supervised Banks (Commercial and Savings)
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