Financial Crimes Enforcement Network 

The Role of Domestic 

Shell Companies in 

Financial Crime and 

Money Laundering: 

Limited Liability 

Companies 

November 2006
The Role of Domestic Shell Companies in Financial Crime and Money 

Laundering: Limited Liability Companies 

► Executive Summary 

and Key Findings 

By virtue of the ease of formation and the absence of 

ownership disclosure requirements, shell companies 

– generally defined as business entities without active 

business or significant assets – are an attractive 

vehicle for those seeking to launder money or

conduct illicit activity. While business entities 

generally, and shell companies specifically, have

legitimate commercial uses, this lack of transparency 

in the formation process poses vulnerabilities both 

domestically and internationally. 

The advantages of using these business entities for 

legitimate business purposes are in some senses 

outweighed by the potential for abuse presented by

some entities, and by the risks to and potential 

deleterious effects on the financial system that result 

from lack of transparency regarding beneficial 

ownership. 

Although the focus of this paper is on limited liability 

companies, other business entities, including trusts, 

business trusts, and corporations, are also vulnerable 

to abuse. The intent is to demonstrate the nature of

the vulnerabilities that limited liability companies 

present, provide examples of known abuses, and 

present some specific steps which can be taken to

reduce the risk to the financial system while 

preserving the advantages of limited liability

companies for legitimate business use. 

It is anticipated that attention will be given in the 

future to studying other business entities which are 

subject to abuse and illicit use as shell companies or

to otherwise mask ownership for illicit purposes. 

This report does not attempt to address tax policy 

issues regarding shell companies. The vulnerabilities 

addressed are those that relate to the use of shell 

companies to facilitate money laundering and

financial crime in general. 

Key findings 

The following key findings demonstrate the 

vulnerability of shell companies to misuse, and the 

imperative to formulate appropriate responses to

address the issue. 

• Domestic shell companies (LLCs and other 

varieties) have some legitimate and legal

uses, but the ability to abuse such vehicles 

for illicit activity must be continually 

monitored. 

• Domestic shell companies can be and have

been used as vehicles for common financial 

crime schemes such as credit card bust outs,

purchasing fraud, and fraudulent loans. 

• The use of domestic shell companies as 

parties in international wire transfers allows 

for the movement of billions of dollars 

internationally by unknown beneficial 

owners. This could facilitate money 

laundering or terrorist financing.

• Company formation agents and similar 

service providers play a central role in the

creation and ongoing maintenance and 

support of domestic shell companies, some

of which appear to be used for illicit 

purposes domestically and abroad. 

• Based on our research, states do not appear

to impose effective accountability 

safeguards on company formation agents

and similar service providers to ensure that

the business entities they create, buy, sell, 

and support are not violating state laws

2
specifying that the companies be used only 

for lawful and allowable purposes.1

• There is currently no requirement that these 

service providers report suspicious activity 

involving the shell companies they have

created, bought, sold, or supported, nor are 

there requirements or procedures to identify

beneficial owners in certain jurisdictions if 

illicit activity is suspected. 

• Certain domestic jurisdictions, especially 

when serviced by corrupt or unwitting 

service providers, are particularly appealing 

for the creation of shell companies to be

used for illicit purposes. 

• The LLC, particularly when organized in a

state which does not require reporting of 

information on ownership,2

 provides an

attractive vehicle for a shell company 

because it can be owned or managed 

anonymously and is inherently vulnerable to

abuse.

Steps Forward 

FinCEN is undertaking three key initiatives to deal 

with the issues addressed in this report and to

mitigate risks posed by shell companies: 

1. Concurrent with this report, FinCEN is

issuing an advisory to financial institutions 

highlighting indicators of money laundering

and other financial crime involving shell 

companies, and reminding financial

institutions of the importance of identifying, 

 

1 A few states – most notably Delaware – impose “standards of 

conduct” on persons serving as “registered agents.” For example,

the Court of Chancery in Delaware can enjoin a person from

serving as a “registered agent” if the person has engaged in 

criminal conduct or in conduct that is likely to deceive or defraud 

the public. Service as a “registered agent” forms only part of the 

services that company formation agents and similar service 

providers often offer their clients. Moreover, a business entity 

need not organize or conduct activities in Delaware or any other 

state that imposes “standards of conduct.” 2 Although some states require the reporting of information on 

ownership, no state requires the reporting of information on 

beneficial ownership. An individual may own an LLC indirectly, 

through nominees and other business entities. The Securities and 

Exchange Commission (SEC) addresses the potential through the 

concept of beneficial ownership, which the SEC defines as holding 

the rights of ownership "directly or indirectly, through any

contract, arrangement, understanding, relationship, or otherwise." 

The concept of beneficial ownership would require an LLC – 

when reporting information – to "look through" nominees and 

business entities. 

assessing, and managing potential risks

associated with providing financial services 

to such entities. 

2. FinCEN is continuing its outreach efforts 

and communication with state governments 

and trade groups for corporate service 

providers to discuss identified

vulnerabilities, and to explore ways to

address vulnerabilities in the state 

incorporation process, particularly with

respect to the lack of public disclosure and 

transparency regarding beneficial ownership

of shell companies and similar entities. 

3

3. FinCEN is continuing to collect information

and studying how best to address the role of

certain businesses specializing in the 

formation of business entities in its effort to

reduce money laundering and related 

vulnerabilities in the financial system

through the promotion of greater 

transparency. 
► Uses and Abuses of 

Domestic Shell 

Companies 

The term “shell company” generally refers to limited

liability companies and other business entities with 

no significant assets or ongoing business activities. 

Shell companies – formed for both legitimate and

illicit purposes – typically have no physical presence 

other than a mailing address, employ no one, and 

produce little to no independent economic value. 

Shell companies are often formed by individuals and

businesses to conduct legitimate transactions, such as 

domestic and cross-border currency and asset

transfers, or to facilitate corporate mergers and 

reorganizations. 

Shell companies can be publicly traded or privately 

held. Although publicly traded shell companies can

be used for illicit purposes, the vulnerability of the 

shell company is greatly compounded when it is 

privately held and beneficial ownership can more 

easily be obscured or hidden. Lack of transparency 

of beneficial ownership can be a desirable

characteristic for some legitimate uses of shell 

companies, but it is also a serious vulnerability that 

can make some shell companies ideal vehicles for 

money laundering and other illicit financial activity.

One of the common uses for a shell company is in the 

reverse acquisition.

3

 The procedure will often

involve a simple acquisition of a shell company, with

shares of a private company used as consideration. 

The shell company, which at one point may have

been an active company publicly traded on a stock

exchange, issues shares to the shareholders of a 

private company sufficient to give those shareholders 

a majority interest in the shell company, thereby 

effectively taking the private company public without 

the usual costs associated with an initial public 

offering, and giving shareholders of the private 

company control over the shell company. It should

be noted that the shell company in the reverse 

acquisition is often a formerly active company, not 

one created solely to be a shell. 

 

3 Also known as a reverse merger or takeover.

The reverse acquisition process has in the past been

subject to abuse. For example, if the expected value 

of the private company is fraudulently exaggerated, 

investors buying into the company may lose a 

considerable percentage of their investments when 

the company turns out to be worth much less. Those 

who fraudulently promoted the company have at that

point already sold their stock and made a handsome 

profit. These “pump and dump” schemes often 

involve shell companies with low market 

capitalization whose stock trades at pennies per share

on the “pink sheets” (www.pinksheets.com), OTC 

Bulletin Board, or other over-the-counter trading and 

information systems. One indicator of this scheme is 

concentrated trading in normally thinly traded stocks. 

Ralph A. Lambiase, former president of the North 

American Securities Administrators Association

(NASAA) and director of the Connecticut Division of 

Securities, noted in 2004 the existence of “a steady 

stream of fraud and misconduct in the distribution 

and manipulation of shares of shell companies and 

the companies that combine with shell companies.”4

Some steps have been taken to prevent this type of

abuse. For example, the SEC adopted rules on June 

29, 2005 designed to protect investors in the 

securities markets from fraud and abuse involving the 

use of shell companies, while allowing the use of 

shell companies for legitimate corporate structuring

purposes.

5

 The SEC’s rules are disclosure-oriented 

Shell Company 

Domestic Abuses 

Pump and dump 

Credit card bust out 

Fraud 

Over invoicing 

False invoicing 

 

4 “NASAA Wants All Merged Shell Companies to Provide Full 

Disclosure, Transparency,” M2 Financial Wire, 06/28/2004. 5

 SEC Release Nos. 33-8587; 34-52038; International Series 

Release No. 1293; File No. S7-19-04, “Use of Form S-8, Form

 8-K, and Form 20-F By Shell Companies,” 70 FR 42233 (July 15,

2005).
and require the public reporting of information that 

would then be accessible through the Electronic Data 

Gathering, Analysis, and Retrieval system (EDGAR). 

The SEC acknowledged in its rulemaking that

companies and their professional advisors often use 

shell companies for many legitimate corporate 

structuring purposes, such as certain change of 

domicile or business combination transactions. 

Shell companies may play a role in common financial 

crime schemes such as the credit card bust-out, 

whereby credit is built up on cards using false 

identities, then phony transactions with cooperating 

businesses or shell companies are made and the 

phony charges are received as payments from the 

unsuspecting credit card companies. Referring to a

case involving a foreign national who is suspected of

providing bust-out proceeds to terror groups, FBI 

Intelligence Analyst Joseph Enright said, “one of the 

co-conspirators in the bust-out case linked to the New 

York case had an American identity under one name, 

with which he incorporated shell businesses and

obtained checking accounts, and a completely

different ‘new name’ under which he obtained a 

passport from his native country.”6

 Additionally, the 

complicit businesses may change names, director

names, and addresses on official documents to throw 

investigators off the track. 

A technique commonly seen by corporate 

accountants involves an employee over-invoicing or 

creating false invoices and pocketing the difference. 

The director of a nutritional supplement company 

was convicted of money laundering in 2004. He had 

set up a shell company and was paying false invoices 

for the purchase of nutritional supplements. In 

addition, he received kickback payments from

another nutritional supplement company in exchange 

for purchasing their products. His company was 

established by a service provider that also provided

mail and phone forwarding for the shell company.7

The latter example indicates that the individuals or 

companies that create shell companies may play a 

significant role even after the shell is created and 

sold. In fact, a convenient and popular service 

combines formation with ongoing support. 

One Delaware-based service provider provides 

formation services as well as mail forwarding

 

6 “Are bust-out schemes financing terror?,” Vision, FBI New York,

04/07/2005. 7

 “Information issued by U.S. Attorney's Office for the Northern

District of Texas on March 11: Former director of sports nutrition 

at Texas Tech University sentenced to 33 months in federal 

prison,” US Fed News, 03/11/2005.

services, telephone lines, e-mail accounts, and 

accounting services to file tax returns. A number of 

suspected shell companies created by this firm appear 

in Suspicious Activity Reports. 

Forming and supporting small companies is neither 

difficult nor expensive, and requires no special skill 

other than understanding the laws in the various

states. The majority of shell companies sold to 

foreign interests appear to differ significantly from

those used in reverse acquisitions, for example, in

that they appear to have been set up solely for 

purchase and were not “aged” or put on the shelf

after some period of actual operation (though they, 

too, may not be used immediately). This type of

shell appears to have few legitimate uses, and can 

fairly easily be employed to disguise ownership or

movement of assets or to facilitate illicit activity. 

A report by the U.S. General Accounting Office (now

the Government Accountability Office) in 2000

provided information on another service provider

whose business provided approximately 2,000 shell 

companies to clients based in Moscow, Russia. The 

report did not uncover the purpose of these 

companies, but did describe some interesting aspects 

of a phenomenon that appears to be continuing today

on a large scale – the use of domestic shell 

companies to hide the ownership and purpose of

billions of dollars in international wire transfers. 

This phenomenon has been drawing increasing

attention both domestically and abroad due to the 

large amounts of money involved and the secretive 

nature of the companies and their transactions. The 

Financial Crimes Enforcement Network has 

previously examined the use of domestic shell 

companies in these transactions and has provided

input to the Financial Action Task Force (FATF). 

► Advertised Services for 

Shell Companies 

5

Internet searches reveal that numerous service 

providers advertise services for shell companies, such

as resident agent and mail forwarding services. Shell 

companies may also purchase corporate office 

service packages in order to establish a more 

significant local presence. Advertised prices for 

these packages, which often include a state business 

license, a local street address and an office that is 

staffed during business hours, a local telephone 

listing with a live receptionist, and 24-hour 
personalized voicemail, range from $900 to $1950

per year in the research sampling. In addition,

service providers may offer assistance in opening 

local and foreign bank accounts for the shell 

company. For example, in the GAO report cited 

earlier, it was revealed that two service providers

created 236 accounts at two U.S. banks which were

the recipients of about $1.4 billion in wire transfers. 

Service providers may also sell aged “shelf

companies.” Prices for these companies vary 

depending on the year and state of organization

(older companies commanding higher prices), as well 

as factors such as whether the shelf company has an

employee identification number (EIN), received a 

Paydex score, filed non-activity tax returns, 

previously had a bank account, or currently maintains 

a bank account. Advertisements by some service 

providers contend that the main advantage for 

purchasing a shelf company is to provide the 

appearance of longevity to the business, particularly

for the purpose of meeting minimum age 

requirements when obtaining leases, credit, and bank

loans. 

In order to preserve a client’s anonymity, some 

service providers promote a variety of nominee 

services including: 

 Nominee EIN: Shell companies may obtain an 

EIN without providing the client’s EIN on the 

application.

 Nominee officers and directors: Service 

providers may set up nominees for those offices 

in the shell company that appear on the public 

record in order to eliminate the client’s name

from secretary of state records. In addition, a 

client can retain ownership and operational

control through confidential stock ownership or

appointment to offices that do not appear on the 

public record (e.g., vice president). 

 Nominee stockholders: The client may use 

nominee stockholders to create an additional 

layer of privacy while maintaining control 

through an irrevocable proxy agreement. 

 Nominee bank signatory: A nominee 

appointed as the company accountant accepts

instructions from the client. 

► Limited Liability 

Companies 

Though there are other types of business entity 

available, a very common type formed and operated

as a shell company is the limited liability company 

(LLC). In fact, the LLC makes an attractive vehicle 

for a shell company. Some LLCs can be owned or 

managed anonymously, and are therefore inherently 

vulnerable to abuse. Virtually anyone can own or

manage an LLC, including foreign persons and other

business entities. A member of an LLC is equivalent

to a shareholder in a corporation. A manager, on the 

other hand, is equivalent to an executive officer or a

member of the board of directors. An LLC may lack 

managers, in which case the members would manage 

the LLC. Some states do not require the names or 

addresses of members or managers. In some cases, 

only the names of managers and not members 

(owners) are reported. 

According to the International Association of 

Commercial Administrators (IACA), an organization 

that solicits annual reporting from the states, of the 

states reporting, there were more than 4.9 million 

LLCs active or in good standing at the end of 2005

(See Figure 1).

8

 

6

8 Referenced figures and tables are located at the end of the report.
As reported to IACA, the following five states had 

the most LLCs active or in good standing in 2005

(AK, IN, NM, PA, and WY did not report this 

statistic): 

State 

LLCs Active or in Good

Standing (2005)

Delaware 333,565 

California 325,738 

Florida 293,845 

New York 275,503 

Michigan 274,940 

Out of 35 states reporting (Michigan and Florida,

among others, did not report this statistic), the top 

five states for revenue collected from LLC initial 

filings in 2005 were: 

State 

Revenue Collected in 

2005 (initial filings) 

Illinois $13,639,250

Texas $12,021,100

New York $11,281,600

Delaware $8,779,200

Massachusetts $7,184,000

California was ninth with $4,901,680 collected. See 

Figure 2 for an example from Nevada of the various

fees which contribute to the revenue generated by

LLCs. 

Illinois reported 138,256 LLCs active or in good

standing in 2005. All of the above figures include 

both domestic and foreign LLCs. States use the term

domestic to refer to business entities formed in their 

state. A foreign business entity is considered one

formed in a state or jurisdiction other than the one to 

which it is applying for registration. A foreign LLC

must file with the state in order to “do business” in

that state. It is important to understand that

companies owned by out-of-state or foreign persons 

or entities are formed as domestic LLCs unless they 

were originally formed in another jurisdiction. 

Therefore, newly created shell companies owned by

such persons or entities will often fall into the 

domestic classification. 

Reporting to IACA shows an increase for most states 

in the number of new LLC filings in the last five 

years (see Figure 3), with Florida posting the greatest 

percentage increase – 410.67% – from 2001 to 2005. 

Pennsylvania is next with 215.08%. For 2005, IACA

reports show that Florida was the leader for new

domestic LLCs (123,437 compared to the next

highest by Delaware at 87,360) and the leader in total 

LLCs formed between 2001 and 2005 – 357,239. 

California was the leader in registration of foreign

LLCs in 2005 (10,593 reported, compared to the next

highest by Florida at 7,121). 

► The Vulnerability of

Certain States based on 

their Laws 

Figures 4 through 8 illustrate the trends in LLC 

formation in four states – Delaware, Nevada, Oregon,

and Wyoming – that are representative of those that 

have formation and reporting requirements which

may be attractive to those persons seeking to hide

illicit activity within the framework of shell 

companies. It is important to note that these same

requirements also attract legitimate business activity. 

A comparative discussion of the formation of limited

liability companies in these and other states follows. 

7

LLCs 

Limited liability companies first became 

widely available in the U.S. in the early 

1990s. The German version (GmbH, or

Gesellschaft mit beschränkter Haftung) has 

been in existence since the late 1800s. The 

LLC is a hybrid form of business entity 

that can protect the owners effectively in 

the case of legal action. Like a corporation 

the LLC structure removes the members 

and managers from liability, and, like a 

partnership, it provides certain tax benefits. 

It is considered a “pass-through” 

arrangement because the individuals are

taxed rather than the company (unless the 

company elects to be taxed as a 

corporation.). An LLC is easier to set up

than a corporation and LLCs are subject to

relatively few procedural requirements 

relating to the governance of the business 

entity. 
► Limited Liability 

Company 

Requirements 

Limited liability companies in Delaware, Nevada, 

Oregon, and Wyoming may be formed by one or

more persons. See Table 1 for a comparison of the 

four states’ initial formation requirements and fees. 

The certificate of formation required to form LLCs in 

these states must include the name of the LLC and 

the name and address of the registered agent and 

registered office. See Figure 9, Delaware’s

Certificate of Formation, for an example. 

A critical element in the formation of a shell 

company to be used for illicit purposes is the lack of

transparency regarding ownership. States whose 

laws do not require LLCs to report the identities of

members or managers will be most attractive to

persons seeking to form a shell company for illicit

purposes. (However, even a requirement to identify a

member or manager can be thwarted through the use 

of nominees or fictitious identities.) 

The categories that follow are based on degrees of

transparency assigned on the basis of FinCEN’s

preliminary understanding of each state’s reporting 

requirements. The states in the first category offer 

the least transparency. All limited liability 

companies organized or “doing business” in a state 

must file one or more of the following documents – 

articles or a certificate of formation or organization, 

periodic reports, and an application for registration as

a foreign entity. We have placed states in categories 

based on whether a limited liability company must 

report information in at least one of these documents. 

In addition, we have placed states in categories based 

on whether the limited liability company must report 

information on at least one person – and not all of 

them. To illustrate, if a state requires a limited

liability company to report in a certificate of 

formation the identity of only one member and only 

one manager – and requires reporting of the 

information in no other document -- then the state 

will have been placed in the last category. 

The statutes of a few states include language 

requiring the execution or signing of a document by a 

person whose identity the limited liability company 

need not report in the body of the document itself. 

For example, a statute may impose no requirement to

report the identities of either members or managers. 

The statute may nevertheless indicate that “a member 

or manager must sign documents filed with the 

Secretary of State.” Since the language is intended to

ensure that the filing of a document is duly

authorized – and not to ensure that the limited

liability company includes information on members 

or managers – the language has no effect on the 

category in which the state would fall. 

Fourteen states impose no requirement to report the 

identities of either members or managers. These 

states are listed below: 

Arkansas Mississippi 

Colorado Missouri 

Delaware New York

Indiana Ohio

Iowa Oklahoma 

Maryland Pennsylvania 

Michigan Virginia 

Eight states and the District of Columbia require a

limited liability company to report the identities of

managers only. These jurisdictions do not require a 

limited liability company to report the identities of

members, even when the limited liability company 

has no managers:

Massachusetts Tennessee 

North Carolina Vermont

Rhode Island Wisconsin 

South Carolina District of Columbia 

South Dakota 

Twenty-four states require a limited liability 

company to report the identities of members, but only 

when the limited liability company lacks managers. 

These states are listed below:

California Nebraska 

Connecticut Nevada 

Florida New Hampshire 

Georgia New Jersey

Hawaii New Mexico

Idaho North Dakota 

Illinois Oregon 

Kentucky Texas 

Louisiana Utah 

Maine Washington

Minnesota West Virginia 

Montana Wyoming 

8

The following four states are the only ones that

require a limited liability company to report the 

identities of members regardless of the existence or

number of managers:
Alabama Arizona 

Alaska Kansas 

Therefore, 47 jurisdictions in the U.S. exist in which

ownership of an LLC may legally remain unreported, 

depending on how the LLC is structured. (And, as 

noted above, the conclusion does not address the 

potential for concealing identity through the use of

nominees or similar mechanisms.) 

The 14 states that impose no requirement to report 

the identities of either members or managers provide 

the least transparency. The following table identifies 

their ranking in terms of number of new LLCs 

formed in 2005 and the percentage increase (if

available) from 2001 to 2005 according to reporting 

to IACA (also see Figure 3): 

States with 

Lesser 

Transparency 

Rank 

( of 47 reporting): 

New LLCs - 2005

% Increase in 

New LLCs

2001-2005

Delaware 2 102.13%

New York 5 111.87%

Michigan 8 86.28%

Colorado 9 133.37%

Ohio 11 92.77%

Virginia 13 136.08%

Maryland 15 106.81%

Missouri 16 N/A

Pennsylvania 19 215.08%

Oklahoma 30 N/A

Mississippi 32 N/A

Arkansas 35 107.29%

Iowa 37 109.20%

Indiana N/A N/A

Similarly, taking the average increase for each of the 

four groups of states yields the following

comparison: 

Comparison of states 

Level of Transparency 

(Least to Most) 

% Increase in New 

LLCs 

2001-2005

No Reporting of Managers

or Members 120.09%

Reporting of Managers Only 112.00%

Reporting of Members 

When an LLC Lacks

Managers 146.68%

Reporting of Managers and 

Members 138.75%

Average of all states 

reporting: 133.37%

• The average increase in new LLCs from

2001 to 2005 for the states with the least 

transparency was 120.09%. 

• The states that provide the next level of 

transparency averaged a 112.00% increase 

from 2001 to 2005. 

• The states that require information on 

members only when an LLC lacks managers 

had an average increase of 146.68%. 

• The four states that provide the greatest 

level of transparency averaged an increase 

of 138.75%. 

• The average increase in number of LLCs 

(2001-2005) for all states reporting to IACA

was 133.37%. 

 

In terms of percentage increase in new LLC filings 

there appears to be no definitive correlation between

level of transparency and preference of a state for 

LLC formation. States with more transparency have 

exhibited slightly higher growth on average than

states with less transparency, but there is much 

variation within each category. Other factors appear 

to account for the relative popularity of certain states 

over others. 

Of the four states which are often recognized as being 

particularly appealing for the formation of shell 

companies (Oregon, Wyoming, Nevada, and

Delaware)9

, only Delaware falls in the group offering

the least transparency. The other three states fall in

the group offering a moderate level of transparency. 

A preliminary conclusion based on the above 

information suggests that having all states require 

LLCs to report the identities of members and 

managers would not significantly affect the number 

of LLCs formed or the relative balance among states. 

Therefore, it appears that the vulnerabilities of the 

states which provide less transparency could be 

reduced through requiring greater transparency 

without a major effect on revenue generated for those

states. In contrast, the ensuing benefits to law 

enforcement and regulatory entities of greater 

transparency could prove significant. 

 

9

9

 See, e.g., Money Laundering Threat Assessment Working 

Group, “U.S. Money Laundering Threat Assessment,” (Dec. 2005)

at pp.47-50; U.S. Government Accountability Office Report No. 

GAO-06-376 to the Permanent Subcommittee on Investigations, 

U.S. Senate, “Company Formations: Minimal Ownership 

Information is Collected and Available” (April 2006).
Abuse of LLCs

The LLC can be used as a vehicle or tool in

a wide range of illicit activity. The 

potential lack of transparency and ease of 

formation could make it useful for money

laundering and other financial crime. 

Examples include: 

Becs International LLC was a key

company in a high profile case which 

broke in 1999 involving Russian money 

moved through the Bank of New York and 

a large network of shell companies. 

Capital Consultants, LLC was at the 

center of an elaborate scheme to defraud 

benefit plan investors of hundreds of

millions of dollars. Investigations started

in 1993 and ended with the indictment of

11 individuals, seven of whom pled guilty 

and one of whom was convicted in a bench 

trial. Several shell companies were 

involved, including Sterling Capital LLC, 

Brooks Financial LLC, and Beacon 

Financial LLC. In a statement given to 

the Senate on June 9, 2005, Alan D. 

Lebowitz, Deputy Assistant Secretary for 

the Department of Labor’s Employee 

Benefit Security Administration (EBSA)

said, “The scheme was of great 

sophistication and had a veneer of 

respectability provided by the cooperation 

of so many professionals including

attorneys, accountants, and investment

advisors. EBSA's investigation uncovered 

a complex scheme to defraud investors 

through the unprecedented use of newly 

created shell companies, paper 

transactions, and false reports.” 

A lawyer in Oregon was sentenced to 

prison in February 2004 and forced to pay 

restitution of more than $400,000 for 

engineering several fraudulent loan 

schemes. He used a shell company to help 

defraud five different financial institutions. 

Again, other factors may be at work in determining 

the preference of one state over another for the 

organization of a shell company. These might 

include considerations of convenience as well as 

availability. For illicit purposes, the services and

advice of particular service providers may be another 

key factor. 

There are additional issues concerning business 

activity conducted by LLC shells. While a shell 

company by definition has little or no assets, it may 

act as a conduit for the transfer of funds between

third parties and members of the company. There are

no requirements that the company report activity as a 

conduit. Many states do not consider the LLC to be 

“doing business” in the state simply because it 

maintains an account at a bank in that state. In that 

case, the LLC need not be registered with the state as 

a foreign business entity if it is not otherwise active 

there. Similarly, many states consider “isolated 

transactions” as falling outside the definition of 

“doing business” in the state. Therefore, an LLC 

conducting isolated transactions as a conduit may 

have no obligation to register as a foreign business 

entity. The LLC could organize in a state offering

the least transparency and conduct activities in a 

number of other states without reporting the identities 

of members or managers. 

There are additional ways to further obscure 

ownership and activity. For example, because an 

LLC can be owned or managed by one or more other

business entities – a corporation, a limited

partnership, a general partnership, a trust, or even

another LLC – layers of ownership can be devised

which make it highly unlikely that relations between

various individuals and companies can be discerned,

even if one or more of the beneficial owners are 

actually known or discovered. In Delaware and other 

states, an LLC serving as a member or manager for 

another LLC is not considered to be “doing business” 

in the state solely by reason of being a member or

manager of the other LLC. An LLC serving as 

member or manager of another LLC could organize 

in a state offering the least transparency and conduct 

activities in a number of other states without

reporting the identities of members or managers. 

An additional benefit that applies equally to LLCs (or 

corporations) formed in any state is the air of 

legitimacy afforded foreign owners in operating a 

U.S.-based company. Further legitimacy may 

possibly be obtained by organizing in a state without

an international reputation for privacy of ownership. 

10
► Suspicious Activity 

Reporting 

Research in the FinCEN Financial Database found 

1,002 Suspicious Activity Reports (SARs) filed from

1996 through the beginning of 2005 which identify

activity that appears to be related to shell companies. 

This is a sampling which almost certainly does not 

contain all of the SARs related to domestic shell 

company activity. The filing institution may not

recognize the involvement of shell companies or may 

not indicate its suspicions clearly in the SAR. 

Preliminary analysis of SARs filed since this research 

was conducted indicates that financial institutions

continue to file SARs on shell company activity. 

Much of the increase in the last several years may be

attributable to heightened awareness of shell 

company “red flags” (see The SAR Activity Review, 

Issue 7, Aug. 2004, p. 7) as well as to agreements 

entered into by several major banks with their 

primary federal or state bank regulators to address 

deficiencies relating to compliance with applicable 

federal and state anti-money laundering laws, rules, 

and regulations. 

These SARs reveal a wide variety of domestic and 

offshore financial center activity. Suspected shell 

company locations include the United States, the 

Cook Islands, Vanuatu, Bahamas, the United

Kingdom, Panama, the Cayman Islands, Nigeria, and 

Antigua. 932 SARs identify activity involving

suspected U.S.-based shell companies. 67 SARs 

identify activity primarily involving shell companies 

in typical offshore financial centers with some 

connection to a U.S. entity or financial institution. 

(38 of these SARs identify suspected shell banks in

foreign locations such as Uruguay, the Cook Islands,

St. Lucia, and St. Vincent/Grenadines.) The

activities or location of the suspected shell companies 

in the SARs have some nexus with the United States. 

Because the SAR filers frequently do not or cannot 

provide information regarding the location of 

suspected shell companies (business location, mailing

address, address of registered agent), the actual 

number of U.S.-based shell companies cannot be

accurately determined. Many of the SARs identify 

multiple companies as possible shell companies. 

Of the SARs describing recent domestic shell 

company activity in the United States, there are 

examples of a suspected Ponzi scheme, pump-anddump stock fraud, telephone “cramming” by

organized crime, possible money laundering by

politically exposed persons, and various other 

suspected frauds and suspicious movements of

money, particularly through wire transfers. 

Foreign Abuse of 

U.S. Shell 

Companies 

A review of SAR data on both a macro and 

micro scale indicates that suspected shell 

companies incorporated or organized in the

United States have moved billions of

dollars globally from accounts at banks in

foreign countries, particularly those of the 

former Soviet Union, and predominantly 

the Russian Federation and Latvia. Most 

of these companies are LLCs and 

corporations. 

Many of the U.S.-based suspected shell companies 

were observed to maintain banking relationships with 

Eastern European financial institutions, particularly 

in Russia and Latvia. Of the 1,002 SARs identified,

768 involved suspicious international wire transfer 

activity involving domestic shell companies which 

follow certain recurring patterns and share common 

characteristics. These SARs identify what appear to

be 1,361 different suspect individuals and business 

entities, including 329 U.S.-based LLCs, as SAR 

suspects.10 In addition, 504 of the SARs identify 

Russia and 449 identify Latvia as locations of activity 

in the narrative portion. See Figure 10 for a 

breakdown of countries frequently associated with

activity in these SARs. The aggregate suspected

violation amount reported by these SARs is nearly 

$18 billion.

11

In contrast to the SARs identifying domestic or 

typical offshore center activity, these 768 SARs 

provide even less information on suspects owing to

the lack of information provided in wire transfer

communications and the anonymity provided by the 

use of shell companies. 

The wire transfers described in many of these SARs

originated at accounts in Russia or Latvia held by

 

10 The number of truly unique subjects is probably slightly less due 

to alternate spellings, misspellings, incomplete identification, etc. 

11

11 As with the other SARs in this sampling, the actual total is 

somewhat less.
what appear to be U.S. shell companies, passed

through the correspondent accounts of major U.S.

banks or branches of foreign banks, usually in New 

York, and then were sent back overseas, often to a 

wide variety of beneficiaries in many locations. 

There are many variations of this basic flow. See 

Figure 11 for a model of the typical flow of funds in

this pattern. Reporting of such activity has increased

considerably since 1999 – see Figure 12. 

Because this type of SAR is only filed if a U.S.-based

bank or branch is involved in the wire transfer chain,

it is conceivable that banks outside of the United

States may be handling similar activity that is not 

being reported through the U.S. system. 

The following elements of suspicious activity in these 

SARs are cited repeatedly: 

• Insufficient or no information available to

positively identify originators or 

beneficiaries of wire transfers (using 

Internet, commercial database searches, or 

direct inquiries to a correspondent bank). 

The lack of identifying information on the 

transactors is one of the most frequently 

cited concerns

• U.S. company with Latvian or Russian bank

account in U.S. dollars formed in U.S. state 

that does not require the reporting of

information on ownership 

• Foreign correspondent bank exceeds its 

client profile for wire transfers in a given 

time period or individual company exhibits

unusually high amount of activity, 

sometimes in bursts inconsistent with 

normal business patterns 

• Payments have no stated purpose, do not

reference goods or services, or identify only 

a contract or invoice number 

• Goods or services, if identified, do not

match profile of company provided by

correspondent bank or character of the

financial activity; companies reference 

remarkably dissimilar goods and services in

related wire transfers (for example,

computers, footwear, steel, meat products, 

dairy products, sporting goods, lids, auto

parts, film extruders, sugar, coolers, pet

resins, tissue, furs, mining machinery,

maintenance and support, tutoring, 

marketing); explanation given by foreign

correspondent bank is inconsistent with 

observed wire activity 

• Transacting businesses share the same

address, provide only a registered agent’s

address, or other address inconsistencies 

• Many or all of the wires are sent in large, 

round dollar, hundred dollar, or thousand

dollar amounts

• Unusually large number and variety of

beneficiaries receiving wires from one

company 

• Frequent involvement of high-risk offshore 

financial centers, especially as location of

beneficiaries; sometimes many jurisdictions

involved 

• Use of nested correspondent banking

situations in Russia or Latvia12

• Repeated SAR filings on same suspects (i.e., 

ongoing activity over a period of months) 

Many additional suspect entities (business entities 

and individuals) are identified by name in the SAR 

narratives, which often contain what limited 

originator, beneficiary, and wire reference 

information may be available to the U.S.-based bank

filing the SAR. Because in most cases the filing bank 

is simply a middle link in the wire transfer chain,

there is little information on the originator and 

beneficiary entities – often just a company name with

no other identifying information. Definitive 

identification of shell companies solely from wire 

transfer records is therefore rarely possible.

The owners of the companies involved in these 

transactions are very difficult or impossible to

identify. However, it is possible that some

identification may be made by correspondent banks, 

though this information is often considered by the 

filing institution to be insufficient proof that the 

transactions are legitimate. 

The combination of correspondent banking and

domestic shell companies provides an opportunity for 

foreign or domestic entities or individuals to move

money via wire transfers or other methods without

disclosing their true identities or the nature or

 

12

12 “Nesting” refers to the use of a foreign bank’s correspondent 

account with a U.S. bank by another foreign bank to gain access to 

the U.S. banking system.
purpose of the transactions. In effect, the domestic 

shell company could be a vehicle to launder money, 

move money derived from crime, or finance terrorist

activities and groups, all completely anonymously. 

SAR information indicates that some U.S. banks have

closed their correspondent accounts with foreign

banks which did not provide adequate identification

of the wire transactors or purpose of the wires. 

Requests from

Foreign FIUs 

Case data suggests that foreign Financial

Intelligence Units (FIUs) have an interest 

in U.S. companies that may be shells. For 

example, through the first half of 2005, 

15% of research requests made to FinCEN

from the Latvian FIU, 21% from the 

Bulgarian FIU, 25% from the Slovakian

FIU, 33% from the Russian FIU, and 55% 

from the Ukrainian FIU identified an LLC 

as the primary subject. 

Because of the lack of ownership information for 

these companies, U.S. banks holding correspondent 

accounts for foreign banks will have difficulty 

corroborating the foreign banks’ claims that the 

foreign correspondent banks know their customers. 

In addition, law enforcement often is forced to

investigate these companies through requests to 

Financial Intelligence Units (FIUs) in the appropriate 

countries. Despite these companies being formed in

the United States, successful identification and 

research sometimes may be possible only through 

requests for investigative efforts overseas. 

Various reports provide a further indication of the 

level of foreign concern about the abuse of U.S. shell

companies. A lawsuit filed in Delaware’s Chancery 

Court alleges that the Russian Izmailova “mafia” 

laundered millions of dollars through U.S. shell

companies.13 The Wall Street Journal reported that 

law enforcement agencies in Russia and 13 other 

countries made more than 100 requests to obtain

subpoenas on Delaware companies in a four-year 

period ending in September 2004.

14

 

13 “Is Russian mob exploiting Del. law?; Chancery Court lawsuit 

claims criminals are using ‘corporate veil' to launder money,” The

News Journal (Wilmington, DE), 11/26/2004. 14 “Laundering queries focus on Delaware,” Wall Street Journal, 

09/30/2004.

A possible solution which tackles the problem at its 

root is to examine the laws and requirements which

prevent law enforcement and regulatory authorities 

from conducting effective investigations into the 

ownership of business entities. Such steps as 

requiring company formation agents and similar 

service providers to obtain and maintain records of

beneficial ownership for the companies they service 

could be considered. The information could then be

made available at the request of government 

authorities under appropriate circumstances. In

addition, greater transparency in reporting

requirements under state law could reduce the value 

of business entities as vehicles for illicit activity. 

► Steps Forward 

FinCEN is undertaking three key initiatives, set forth 

below, to deal with the issues addressed in this report 

and to mitigate risks posed by shell companies,. 

1. Issue an advisory to alert financial 

institutions maintaining accounts for 

domestic non-publicly traded business 

entities about the particular risks 

associated with domestic shell companies. 

To assist U.S. financial institutions in identifying and 

mitigating potential risks associated with accounts 

maintained for shell companies, FinCEN is issuing,

concurrent with this report, an advisory that

highlights some indicators of money laundering and 

other financial crime involving such entities. 

The advisory provides an overview of shell 

companies and agent and nominee service providers, 

describe some of the vulnerabilities posed by these 

business entities and service providers, describes 

indicators of money laundering, highlights published

reports concerning shell companies, and outlines how

to manage the risks of providing services to shell 

companies by reference to the provisions of the 

Business Entities (Domestic and Foreign) section of

the FFIEC BSA/AML Examination Manual, dated 

July 28, 2006.15 

 

13

15http://www.ffiec.gov/pdf/bsa_aml_examination_manual2006.pdf. 
2. Conduct outreach to state governments 

and appropriate trade groups. 

FinCEN continues its outreach to financial

institutions, state governments and appropriate trade 

groups to explore ways to address vulnerabilities in

the state incorporation process, particularly with

respect to the lack of public disclosure and 

transparency regarding beneficial ownership of shell

companies and similar entities. Positive experiences 

with Delaware on the issue of bearer shares lead us to

believe that some states could be motivated to take

prompt steps to remedy weaknesses in their statutory

schemes. Other states may be less willing to take

those steps.

3. Continue to study what role certain 

businesses specializing in the formation of

business entities may play in addressing

existing vulnerabilities. 

FinCEN is continuing to collect information and 

studying how best to address the role of certain 

businesses specializing in the formation of business

entities in its effort to reduce money laundering and

related vulnerabilities in the financial system through

the promotion of greater transparency. 

Given their role in forming and supporting business

entities, these service providers – which could

include attorneys, trustees, and other intermediaries 

specializing in the business of providing services 

relating to the formation and support of business 

entities – are in a unique position to know and obtain 

information about beneficial owners, to determine 

whether these entities are to be used illicitly, and to 

recognize suspicious activity. They have information

that can be critical to law enforcement, regulatory 

authorities, and other financial institutions in

combating the use of shell companies to promote 

illicit finance. Moreover, they are in the best position

– in the first instance – to discourage abuses by

reducing the ability of the beneficial owners of these 

entities to operate anonymously (and, consequently, 

with relative impunity). 

14
Figure 1 

Source of data: International Association of Commercial Administrators (IACA), Annual Report of the Jurisdictions, 

2006. AK, IN, NM, PA, and WY did not report this statistic.

15

2005 total LLCs active or in good standing

0

50,000

100,000150,000200,000250,000300,000350,000400,000

DELAWARE

CALIFORNIA

FLORIDA

NEW YORK

MICHIGAN

NEW JERSEY

OHIO

TEXAS

ARIZONA

GEORGIA

CONNECTICUT

MISSOURI

COLORADO

WISCONSIN

ILLINOIS

VIRGINIA

NORTH CAROLINA

LOUISIANA

MARYLAND

WASHINGTON

NEVADA

SOUTH CAROLINA

UTAH

ALABAMA

OREGON

KENTUCKY

MINNESOTA

OKLAHOMA

MISSISSIPPI

TENNESSEE

IOWA

KANSAS

NEW HAMPSHIRE

IDAHO

MONTANA

ARKANSAS

HAWAII

NEBRASKA

RHODE ISLAND

MAINE

DISTRICT OF COLUMBIA

WEST VIRGINIA

MASSACHUSETTS

VERMONT

SOUTH DAKOTA

NORTH DAKOTA
Figure 2 

16

 
. 

Figure 3 

New LLCs 2001-2005

(reported to IACA)

106.44%

120.21%

N/A

100.44%

N/A

91.06%

215.08%

75.32%

141.59%

N/A

106.81%

110.82%

136.08%

171.60%

92.77%

147.08%

133.37%

86.28%

211.94%

111.68%

111.87%

176.04%

116.50%

102.13%

FLORIDA 410.67%

DELAWARE

CALIFORNIA

TEXAS

NEW YORK

NEW JERSEY

ARIZONA

MICHIGAN

COLORADO

GEORGIA

OHIO

NEVADA

VIRGINIA

NORTH CAROLINA

MARYLAND

MISSOURI

WASHINGTON

CONNECTICUT

PENNSYLVANIA

WISCONSIN

ILLINOIS

LOUISIANA

SOUTH CAROLINA

OREGON

UTAH

percentage

increase

2001-2005

2001

2002

2003

2004

2005

17

(Continued next page)
(Continued)

N/A

N/A

N/A

113.63%

122.74%

107.71%

135.64%

89.47%

80.55%

113.21%

118.80%

N/A

191.81%

111.18%

109.20%

78.58%

107.29%

N/A

193.05%

N/A

119.59%

N/A

142.61%

N/A

125.74%

198.08%

0

10,0

0

0

20,0

0

0

30,0

0

0

40,0

0

0

50,0

0

0

60,0

0

0

70,0

0

0

80,0

0

0

90,0

0

0

100,

0

0

0

110,

0

0

0

120,

0

0

0

130,

0

0

0

140,

0

0

0

MINNESOTA

ALABAMA

KENTUCKY

MASSACHUSETTS

OKLAHOMA

TENNESSEE

MISSISSIPPI

IDAHO

MONTANA

ARKANSAS

KANSAS

IOWA

NEW HAMPSHIRE

HAWAII

WYOMING

MAINE

WEST VIRGINIA

NEBRASKA

RHODE ISLAND

DISTRICT OF COLUMBIA

VERMONT

SOUTH DAKOTA

NORTH DAKOTA

INDIANA

NEW MEXICO

ALASKA

New LLCs filed

18

Source of data: International Association of Commercial Administrators (IACA), Annual Reports of the

Jurisdictions covering 2001-2005 Missing data bars indicate the data was not reported to IACA for that year.
Figure 4 

Delaware - New Corporations and LLCs

(Domiciled in Delaware)

34,377

87,360

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

2000 2001 2002 2003 2004 2005

Year

N

u

m

ber

of N

e

w C

o

m

panies 

NEW CORPS

NEW LLCS

Figure 5 

Delaware - New Corporations and LLCs

(Foreign Domicile)

868

432

0

100

200

300

400

500

600

700

800

900

1,000

2000 2001 2002 2003 2004 2005

Year

N

u

m

b

er of N

e

w C

o

m

panies 

NEW FOREIGN

CORPS

NEW FOREIGN

LLCS

19

Source of data: Delaware Department of State (2000-2003), IACA Annual Reports of the Jurisdictions 

 (2004-2005)
Figure 6 

Nevada - New LLCs

(2001-2005, Domestic and Foreign)

39,045

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

2001 2002 2003 2004 2005

Year

N

u

m

b

er of N

e

w LL

C

s

Figure 7 

Oregon - New LLCs

(2001-2005, Domestic and Foreign)

21,609

0

5,000

10,000

15,000

20,000

25,000

2001 2002 2003 2004 2005

Year

N

u

m

ber

of N

e

w LLCs 

20

Source of data: IACA Annual Reports of the Jurisdictions, 2003-2006 
Figure 8 

Wyoming - New LLCs

(2001-2005, Domestic and Foreign)

5,739

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

2001 2002 2003 2004 2005

Year

N

u

m

b

er of N

e

w LL

C

s

21

Source of data: IACA Annual Reports of the Jurisdictions, 2003-2006 
Table 1 – LLC formation requirements comparison

Requirements: Delaware Nevada Oregon Wyoming 

Number of Organizers One or more One or more One or more One or more** 

Name/Address of

Registered Agent/Office 

Yes Yes Yes Yes

Name and Address of

Members*

No Yes Yes*** Yes

Name/Address of

Beneficial Owner(s) 

No No No No 

Cost to File (2005) $90 

($100 foreign) 

$75****

($75 foreign)

$50 

($50 foreign)

$100

($100 foreign) 

*Management by members is optional. To protect the identity of members, managers can assume management

responsibility. 

**One person may form the LLC, but it must have two or more members, unless it is a flexible LLC, in which a

member may assign his/her interest to another person. 

***The name of one member or manager is also required for a foreign LLC.

22

****This fee was lowered from $175 in 2003. 
Figure 9 

23
Figure 10

Shell company wire activity SAR sampling -

Selected countries referenced in narratives

449

199

185

122

95

74

55

50

35

34

31

25

23

17

13

12

7

6

5

3

504

125

0 100 200 300 400 500 600 700

RUSSIA

LATVIA

CHINA

CYPRUS

SWITZERLAND

UKRAINE

LITHUANIA

TURKEY

KAZAKHSTAN

HONG KONG

KYRGYZSTAN

ESTONIA

ROMANIA

BULGARIA

SINGAPORE

ARMENIA

BELARUS

LEBANON

TURKMENISTAN

SLOVENIA

UZBEKISTAN

PAKISTAN

Number of SAR narratives (out of 768) referencing country

24

Note the frequency of occurrence for China, Cyprus, and Switzerland, which were often identified in the SARs as 

destinations of wire transfers from suspected shell companies formed in the United States that had opened accounts

in Eastern Europe. 
Figure 11

25

The movement of money may vary. However, the flow typically described by the majority of SARs filed on this

pattern of activity begins with a foreign account owned by a U.S.-based shell company, often in Russia or Latvia, is 

sent through the correspondent account of a major U.S. or U.S.-based bank, and goes back overseas to various

individual and/or company beneficiaries. The domestic shell company can serve as originator or beneficiary. 

Additional intermediary banks are often involved. 
Figure 12

SAR sampling - domestic shell companies/

Eastern European pattern wire activity

0

50

100

150

200

250

300

350

1999 2000 2001 2002 2003 2004 2005

(through

Year 4/6)

N

u

m

b

er of S

A

R

s id

e

ntifie

d

The apparent increase does not necessarily indicate an increase in activity of the magnitude shown, but simply 

reflects an increase in filing of SARs on this type of activity and the increased ease of identifying activity as being 

related to domestic shell companies. More likely this is a graphic representation of the lack of reporting in earlier 

years, as many of the SARs are reviews of past activity filed after the fact. Regulatory and other actions involving

ABN Amro Bank, NY and Union Bank of California, for example, have caused those banks to review their records 

and file more SARs on this activity. These two banks filed 290 of the 768 SARs (37.76%) in the Eastern 

European/U.S. shell pattern sub-group of the sampling. In addition, a lawsuit filed by a Hong Kong investment

group against ABN Amro Bank alleged the bank allowed itself to be used by First Merchant Bank (based in the 

“Turkish Republic of Northern Cyprus”) for money laundering. FinCEN issued a proposed rule regarding First

Merchant Bank in August 2004: see http://www.fincen.gov/waisgate1.pdf and 

http://www.fincen.gov/311fmbextension.pdf. 

26