What comes to mind when you hear the term trade ring? Likely, you draw a blank. A trade ring is a way that criminals can commit fraud and mislead for financial gain. Here’s how it works…
A criminal will set up multiple shelf corporations, which can be a legal way to establish the credit of a company. A shelf corporation is a legal entity created for tactical purposes. A shelf corporation is a corporation that is formed on paper, but nothing is done with the corporation for years, and it does not engage in any real business. The only thing that is done with the shelf corporation is that, over time, the owner of the shelf corporation will establish some credit history, file taxes, and open bank accounts in the name of that shelf corporation. This demonstrates that the company has some minimal activity. To learn more about how criminals can use a shelf corporation to commit crimes, view our blog here.
What turns this legal tactic into an illegal scheme is when the criminals start filing fictitious tax returns and inflated credit transactions between them. Self-reporting transactions allow these criminals to build a paper company into an established and creditworthy business.
With this slew of fraudulent information, the criminals will then seek out lenders, creditors, and businesses to give them funds or credit. The companies that are targeted to extend credit will look at the history and financial standing of the company by looking at a business credit report. In the report, they will see that this company has a history of operating successfully.
When the creditor decides that they are willing to take on the risk of extending credit to this company, they may regret doing so. See, the owner of this trade ring can just take the money and disappear, leaving the unsuspecting creditor high and dry. The lender may attempt to go after the company, but in reality, the company has no money or assets; it was all a scam.
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