Federal Deposit Insurance Corporation announcement on lending to shell and shelf companies MortgagePress.comFDIC, Better Business Bureaus, fraud, shell and shelf companies
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 activityor 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:
• Saving the time involved in the process to create a new
corporation;
• Creating an appearance of corporate longevity; and
• Gaining easier access to investment capital and credit.
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 more information, visit www.fdic.gov.
