Five people, including convicted fraudster Neale Rothera, were sentenced for their involvement in a fraud and money laundering scheme which cost banks over £500,000 earlier this week. But with the money unrecoverable, how can this type of situation be avoided in the future? 

Rothera set up four separate businesses which claimed to sell furniture and carpets across Leicestershire in 2012. However, they were later proved to be shams and used as vehicles to commit fraud and money laundering.

The Insolvency Service found that the four companies were fraudulently exploiting invoice factoring agreements to steal money from banks. Typically, invoice factoring enables genuine businesses to access the money tied up in unpaid invoices from banks, instead of waiting 30 to 90 days for payment from their customers.

Insolvency Service revealed the customers these companies claimed to interact with either did not exist or had not traded with them in the manner suggested by the invoices. Once the credit had been successfully secured, the funds were either withdrawn in cash by the defendants or transferred into other accounts. In total, £562,901.64 was never recovered by the banks.

Mark Stephens, chief investigator at the Insolvency Service, explained: “Rothera was ably assisted by the others who fronted the companies or helped him launder the fraudulently obtained funds while he acted as a shadow director. None of the individuals involved were exploited or coerced into taking part in this criminal behaviour and we hope these sentences serve a warning to those considering such fraudulent actions.”

While the convictions conclude a successful investigation into this case of fraud, these sentences alone seem unlikely to deter other individuals from exploiting the financial systems in similar ways in the future.

“It’s clear that every year fraudsters are becoming more sophisticated, sometimes executed by highly organised criminal gangs. Whilst there isn’t a silver bullet, it’s important for every firm to keep pace by using the latest detection technology, alongside human intervention, to combat fraud and protect the honest customer,” said Scott Clayton, head of claims fraud at Zurich Insurance.

Countering shell companies

While this case highlights the work done to convict fraudsters in the UK, it appears as though it is just the tip of the iceberg when it comes to shell companies being used to launder money.

Alia Mahmud, regulatory affairs practice lead at ComplyAdvantage, the AI-driven financial crime risk data and fraud detection technology provider, reveals the true extent of this issue: “The use of shell companies to launder illicit funds has long been recognised as a growing threat in the UK. Transparency International counts over 2,250 shell companies that were used in corruption and money laundering schemes over the past 25 years (2022 report).

“The Financial Action Task Force points out that money used for illicit purposes could flow through multiple layers of front and shell companies in multiple jurisdictions before withdrawal, with a majority of such cases involving corporations in foreign jurisdictions.

“Although the Corporate Transparency Act requires Companies House to go further than verifying directors etc, and to verify a company’s nature and purpose, it does not stop a fraudster from creating a company to act as a conduit for cleaning dirty money. This can be accomplished by obscuring the source of funds through the creation of false invoices and supplier contracts to give the appearance of legitimacy.

“To identify potential front and shell companies, financial services firms need to actively monitor transaction volumes and frequencies, while examining clients and counterparties for high-risk indicators such as locations of owners and controllers. Advanced AI technologies can help firms create knowledge graphs to build 360-degree client profiles for risk assessment. This can help identify unusual transactions and complex ownership structures, including those in foreign countries considered tax havens.”

Five million red flags

Ted Datta, senior director, financial crime industry practice at Moody’s, also explains how much of an issue shell companies are creating, and the importance of automated solutions to beat them: “The sentencing of five individuals involved in a £500,000 fraud scheme is a stark reminder of the risks posed by the exploitation of legitimate financial tools.

“In this case, the perpetrators manipulated the invoice system by setting up shell companies and falsifying invoices. This allowed the fraudsters to secure agreements with banks and obtain funds without providing genuine services.

 

“The UK faces the highest incidence globally when it comes to shell companies, with over five million red flags raised in the country alone. As this case demonstrates, even known high-profile fraudsters like Rothera can still bypass the system by enlisting associates to serve as directors of sham companies set up to perpetrate invoice fraud.

“Combatting these persistent challenges requires financial institutions and governments to use cutting-edge automated solutions. Advanced analytics and AI-powered systems can provide valuable insights into risks related to fraud and shell companies, empowering banks to make swift, informed decisions to protect their customers and assets. Only through such robust measures can we effectively counter constantly evolving methods of fraud.”

Identifying every shell company

Maria Opre, senior analyst at EarthWeb, discussed how identifying each shell company earlier is important when preventing this type of fraud in the future: “Identifying these shell companies is critical for stopping fraudsters from abusing the system. Financial institutions must enhance their due diligence to scrutinise new business accounts for potential shell company red flags. Things like a lack of web presence, no physical premises, scattered employee details, and more should prompt deeper vetting.

“At the same time, regulators should explore policies that limit incorporation anonymity and require more transparency from the real parties behind corporations. Public registries of company beneficial ownership could go a long way in countering criminals’ ability to hide behind layers of shell companies.

“Beyond verifying corporations are legitimate, better detecting and acting on suspicious financial activity patterns is paramount. Banks must invest in advanced cybersecurity, AI fraud monitoring, and stringent adherence to money laundering reporting protocols. Communication between banks, law enforcement, and regulators must be seamless when threats arise.

“While innovation has increased financial sector vulnerability in some ways, we have more tools than ever to identify and stop fraudsters from exploiting the system as Rothera did. With the right proactive stance and public-private collaboration, we can make the UK a decidedly harder target for these criminals going forward.”

The UK has emerged as the global leader in shell company risk flags, surpassing all other nations by a significant margin, emphasising the urgent need for heightened vigilance and rigorous oversight in international finance.

A shell company, which exists primarily on paper, often serves legitimate purposes such as holding assets or facilitating business transactions, but it can also be used for illicit activities.

Moody’s new Shell Company Indicator analyses over 485 million companies, entities, and individuals to flag behaviours that indicate a shell company may require further due diligence to assess its potential for involvement in illicit financial activity.

The Indicator flags seven potentially risky behaviours commonly associated with shell companies – atypical directorships, mass registration, jurisdictional risk, dormancy, financial anomalies, outlier ultimate beneficial ownership, and circular ownership.

In November 2023, Moody’s Shell Company Indicator identified the UK as the global leader in shell company-related risks, with nearly five million flags. This figure significantly surpasses that of China, which secured second place with 3.4 million flags, and is more than double the number in the third-ranked US, which had 1.8 million flags.

More attention needed?

Moody’s analysis implies that the uncomplicated process of forming companies in the UK could be a contributing factor to the elevated count of potential shell companies. In the UK, virtually anyone can own and manage a limited company, provided they appoint at least one genuine person aged at least 16, and the directors’ addresses are non-PO Box registrations.

“The findings reveal concerning levels of shell company risks emanating from the UK, which may require more attention from risk management and compliance teams during their investigations,” said Ted Datta, senior director – head of financial crime compliance practice Europe, Africa, and Americas at Moody’s Analytics.

“With the UK home to such a large volume of flagged entities, organisations face a monumental and highly complex task in conducting proper due diligence across their client base and supply chains. This is especially true given the recent Economic Crime and Corporate Transparency Act and the new failure to prevent fraud offence.

Datta added that proactive measures and advanced detection capabilities are essential to properly identify shell companies, assess their legitimacy, and determine what further action is warranted.

“Though progress has been made in corporate transparency, there is still significant work to be done by both businesses and governments to detect and prevent financial crimes that are underpinned by illegal use of shell companies,” he said.

 

 

Interview by Tom Lyons

We don’t usually associate companies like Shell with blockchain. How long has Shell been in this space?

Shell has had a blockchain team since 2016. We are one of the earlier energy companies involved in the space. We were a founding member of the Energy Web Foundation as well as conveners of various blockchain initiatives in the energy sector. Shell has been involved in exploring how blockchain and Web3 can be applied as a solution to various problems, particularly in the context of the energy transition to a lower-carbon and sustainable energy system. 

What was your original focus, and how have you evolved? 

Our focus initially started off very much around improving existing processes. How can we do what we are doing better, cheaper, and faster by using blockchain? After that, we started looking at ways to use blockchain to enter new markets. And the third piece is where we are now. 

In the age of Web3, NFTs, the Metaverse, and DeFi, this third space is about looking at new business models. Brand new ways of doing things, new sources of customers, exploring and tapping into business opportunities from avenues that weren’t on the table before.

Can you give examples of the new business models you are discussing?

Take the energy transition. We are seeing a shift from centralized to much more decentralized energy production. When producing oil and gas, economies of scale have typically been very important. There are large oil and gas fields that require heavy capital investment. In the energy transition, we are moving towards solar panels on everybody’s roof. We are also looking at electric vehicles that might become energy storage devices, so used both for consumption as well as storage and dispatching. 

This transition means a potentially significant scope for decentralization on the energy production side. Another example is large national grid structures, where power transmission has been primarily in one direction from power producers to power consumers. Now, societies are building two-way systems where “prosumers” can produce power as well and sell it to the grid. 

Whilst this decentralization is taking place in the energy system, we have a similar decentralization occurring on the web. So, Web3 and Blockchain technologies can offer unique advantages in managing decentralized systems. We see these two shifts marrying very closely. 

Then comes the sustainability piece. When a company makes sustainability claims, they are saying something to the market, regulators, and customers about, for example, the origin or carbon intensity of its energy products (chemicals, fuels, or electrons). These claims need to be substantiated with transparent verification. 

Blockchain can bring a layer of certainty to customers that the products they purchase are from, say, renewable sources or that the carbon credit scheme they signed up for represents the removal of carbon from the atmosphere and is not double-counted. As blockchain can track renewable energy from source to consumption, it can give customers additional insight into its low-carbon attributes. 

Are you working on any specific projects in terms of sustainability?

Yes. Avelia, a platform to accelerate the adoption of sustainable aviation fuel (SAF), is one of our flagship projects and is about just this type of use case. Avelia tracks when SAF is injected into the complex, global jet fuel network and when it is consumed by an airline or corporate flier. It allows these buyers to claim the use of SAF that they have paid for, even though it may not be physically available at a specific airport but is burned elsewhere in the sky. 

Avelia uses Energy Web Chain, which is an EVM-compatible public blockchain. Using public blockchain is an important aspect because the philosophy we have within our team is to focus on public verifiability in order to really enable transparency and traceability. 

We have other projects and PoCs as well in the space. We strongly believe that leveraging emerging digital technologies such as blockchain will help accelerate the energy transition whilst ensuring trust in our sustainability claims and those of our customers. 

What other projects are you working on?

Another major project that has recently gone live is Falcon, which we co-developed with Wipro and piloted in our operations. Falcon is a platform for industrial supply chain management, which was built with Wipro and launched on the Polygon chain. 

Falcon essentially eliminates the need for a physical paper trail for heavy industrial equipment, which makes traceability and auditability difficult. Instead, Falcon uses digital product passports to make data more accessible and trustworthy.

In addition, we’ve also worked on the traceability of sustainable chemical products. We ran a couple of PoCs with two different players to show if plastic is produced from a bio-based source or a circular source (recycled), differentiating it from virgin plastic. Here, we are using blockchain to provide traceability through every point in the supply chain, from material source to end-customer.

You recently announced a collaboration with Gitcoin. What was the aim there?

This initiative is focused on regenerative finance or ReFi. ReFi is explicitly exploring how Web3 infrastructure and governance models can support sustainable or regenerative economies. This space is really quite nascent, and we were asking ourselves how we can work with and support startups that are building the enabling solutions. 

The collaboration with Gitcoin came about because we love what Gitcoin is doing; it’s a novel way of funding using the wisdom of the crowd to support projects in many areas, including climate action. We felt their approach was most appropriate given the early stage of maturity of ReFi. 

Shell provided grant funding to Gitcoin for four of their climate rounds, and projects can opt-in if they want to receive a share of these funds. It’s the community that is deciding which projects to fund and by how much. 

This, by the way, is the first time that Shell has worked with a DAO.

Turning to Ethereum, what are the most important developments you see in the business Ethereum ecosystem today?

Key Ethereum developments are the switch to a proof-of-stake consensus mechanism, moving away from proof-of-work, and the increasing enterprise shift from private to public blockchains. 

Initially, we did a lot of work with private chains. Naturally, we are focused on data security and privacy, and therefore, initial efforts consisted of de-risking the technology and proving compliance. But our key pillars are traceability, trust, and transparency. And it’s very clear that that can only be delivered at scale by public blockchains. With solutions such as zero-knowledge proofs, we can see a greater ability to use public blockchains while maintaining the security and privacy of data where needed. 

Another advantage to using a public blockchain is the ability to gather a larger ecosystem of players. These ecosystems are far more likely to form around a public, permissionless setup than in a private chain with a walled garden. 

And when talking about public blockchains, one factor that really speaks for Ethereum is the number of EVM-compatible chains. That makes for a larger ecosystem but also, by definition, provides some level of interoperability. That is also something key for us to consider. Because we want to ensure that as we apply Web3 to the decentralized energy system of the future, our different solutions can talk to each other if we want them to. 

Vikram Seth serves as the Blockchain and Web3 Innovation Manager at Shell, where he plays a pivotal role in integrating blockchain and Web3 technologies into the energy sector. With over a decade of experience in this industry, Vikram is deeply committed to leveraging these technologies for global sustainable development. He has a particular focus on using DeFi, cryptocurrency, and NFTs in projects aimed at sustainable and regenerative development.