Shell games: Trust, but definitely verify

Shell company: “An inactive company used as a vehicle for various financial maneuvers or kept dormant for future use in some other capacity.”

– Dictionary.com

Jon C. Shain admits that he is guilty of playing “shell games.” Using a remarkably simple scheme, Shain secured an $884,000 loan from Amcore Bank that he then used to enrich himself.

In my opinion, the bank involved (renamed BMO Harris Bank) failed to adhere to a fundamental principle of due diligence: “trust, but verify.” However, this is not going to be a discussion regarding bank fraud. It’s about trust and not taking it for granted.

In order to convince the bank to lend money to his company, Coating Technologies, Shain created fake invoices detailing expenses payable to Qualified Industrial Services and Industrial Equipment Supply Corp. The bank didn’t know it, but Shain controlled both those companies. The invoices were in fact fake. But wait; there’s much more.

Shain also formed a joint venture with another company to do business as Barron Finishing Technologies. Amcore funded yet another loan for $2 million that was supposed to buy real estate and equipment. Shain again submitted fraudulent invoices, this time to Barron Finishing, that allowed him to pull out the loan proceeds.

He then transferred proceeds from Barron’s loan to Industrial Services (the shell company he used in the $884,000 scheme that I first detailed). Eventually, funds taken from Amcore were used to  purchase personal property in the name of yet another entity – Rock River Reality, LLC.

Confused?! Of course you are! That’s what Shain wanted. Just like the street entertainer that uses actual shells to hide the ball in plain sight, Shain used five different companies to keep the money moving and the bank none the wiser.

The bank made a number of mistakes in funding the loans. They should have done much more to verify that the expenses Shain supposedly incurred were legitimate. Just as importantly, they should have researched his ownership in the shell companies. Certainly, Shain did a good job covering his tracks. However, based on my reading of the case and experience investigating shell companies, the document trail that indicated a fraud was taking place should have been uncovered before the losses mounted.

In a broader sense, what lessons can we learn from this case? You don’t have to be a bank to be on the losing side of a shell scheme, also called a confidence scheme. You trust that your business partners are what they say they are. You trust that they are not going to steal from your organization. Where did this trust come from? How did the business partner earn your trust? Shouldn’t it be earned before it is given?

As the title of this post suggests, trust that your business partners are on the up and up, but always take the time to verify. That applies to banks that lend money, venture capitalists that are funding startups, and new customers that approach your organization to purchase goods or services. Take the time to research who you are about to do business with. There are numerous resources online that can help. Start with the secretary of state’s website to see if the company is registered to do business in your state. Research the principles and registered agents; check out how old their website is (if they have one) and who owns the domain. There are more steps that I typically recommend, but that’s enough to get you started.

Remember, there are lots of good people out there, but there are also some really smart people just like Shain that can literally destroy your company, if you let them.

Trust, but definitely verify.

Need a writer that understands fraud? When you hire me to write an article, blog post, newsletter, or white paper, you get an accomplished writer that is also an expert in fraud.

paul@mccormackwrites.com


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About Paul McCormack
I have over 20 years of experience in corporate fraud and intellectual theft prevention, detection and investigation. Unlike many fraud experts, I have both industry and professional services experience. To date, I have conducted over 800 interrogations of fraud suspects including numerous senior corporate executives. As a freelance writer, I have written over 1,000 articles on a broad range of topics. My areas of expertise include: • Asset Misappropriation • Big Data • Bribery, Corruption, and Collusion • Check, Wire, ACH, and Credit Card Fraud • Consumer Fraud • Corporate Security • Cybersecurity • Data privacy (Europe, Brazil, Russia, India, and China) • Drug Trafficking • Embezzlement • Employee Fraud • Executive Protection • Fintech • Financial Statement Fraud • FCPA • Healthcare fraud • Identity Theft • Intellectual Property Theft • Internal Audit • Interrogation Tactics • Loss Prevention • Mobile Fraud • Money Laundering • Operational Excellence • Organized Crime • Payments Fraud • PCI Compliance • Retail Fraud • Risk Management • Terrorism and Counterterrorism • UK Bribery Act • Workplace Violence

One Response to Shell games: Trust, but definitely verify

  1. Pingback: “She’s just a wolf in sheep’s clothing” « Fraud Happens

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