“A growing niche in the shell business is shelf corporations. Like paper-only shells, which enable the secrecy-minded to hide real ownership of assets, shelf companies are set up by firms like Wyoming Corporate Services, then left “on the shelf” to season for years. They’re then sold later to owners looking for a quick way to secure bank loans, bid on contracts, and project financial stability. To speed up business activity, shelf corporations can often be purchased with established bank accounts, credit histories and tax returns filed with the Internal Revenue Service.”
Reuters Special Report, “A little house of secrets on the Great Plains” (June 28, 2011)
“Unless otherwise noted, these aged corporations were incorporated by us and put on the shelf … These are clean aged shelf companies. They have never been used and as such have no credit or assets. A photo ID and copy of your credit card is required when you buy a shelf company.”
Wyoming Corporate Services Inc. website accessed November 27, 2021.
There is nothing illegal about shelf companies. It is perfectly legal to set them up and to sell them. But who needs them, and why? Congressman Patrick McHenry (D. NC), made a statement on the House floor on December 8, 2020 that provides one answer to that question. In speaking in support of the Corporate Transparency Act of 2020 (House Congressional Record at pages H6932- 6933), Congressman McHenry stated:
“Bad actors and nation states, such as China and Russia, are becoming more proficient in using our financial system to support illicit activity. As bad actors become more sophisticated, so to [sic] must our tools to deter and catch them. One such tool is identifying the beneficial owners of shell companies, which are used as fronts to launder money and finance terrorism or other illicit activity.”
The Congressman’s statement that shell companies are used as front companies may be reasonably accurate in equating shell companies with front companies, but not all shell companies are used as front companies, and not all front companies are shell companies. But he is not alone in his blurring of those lines: many people confuse shell companies with front companies, and shell companies with shelf companies.
Even the 2020 National Strategy referred to “shell and front companies” as if they were interchangeable. They’re not. And many of the headlines in the media after the Corporate Transparency Act was passed also got it wrong when they touted “the end of shell companies” in the United States. In fact the Washington Post proclaimed:
Congress bans anonymous shell companies after long campaign by anti-corruption groups
In fact, even though one of the six purposes of the AML Act was to establish uniform beneficial ownership information reporting requirements in order to “discourage the use of shell corporations as a tool to disguise and move illicit funds” (subsection 6002(5)(B) of the AML Act), the AML Act actually didn’t ban anonymous companies, shell companies, or anonymous shell companies: it banned bearer share companies.
With all of this, it appears clear that we need to pause and define (or at least describe) shell companies, shelf companies, and front companies.
Shell Companies, Front Companies, and Shelf Companies[1]
A Joint Report published by the FATF and the Egmont Group in July 2018 provides a great description or definition of each:
Shell company – incorporated company with no independent operations, significant assets, ongoing business activities, or employees.
Front company – fully functioning company with the characteristics of a legitimate business, serving to disguise and obscure illicit financial activity.
Shelf company – incorporated company with inactive shareholders, directors, and secretary and is left dormant for a longer period even if a customer relationship has already been established.
Shell companies are legal entities that exist “on paper” – more likely electronically on a state or Tribal company registry database – but have no physical presence, no activity, and no purpose. There is nothing illegal about shell companies.
A shell company that serves as a vehicle or legal entity for business transactions to pass through, without itself having any significant assets or operations, can be acting as a front company. A front company, on the other hand, may be more than a shell, and as FATF and Egmont note, be a fully functioning company with a physical presence which may be conducting some legitimate business, but its main purpose is to disguise illegal activity. So a shell company can be a front company, but a front company isn’t always a shell company (think of a pizza parlor as a front for drug trafficking, or Madoff Securities as a front company for Bernie Madoff’s Ponzi scheme).
Shell companies that have been incorporated but have been sitting inactive “on the shelf” for months or years are known as “shelf companies”. Like new shell companies, aged shelf companies are perfectly legal. Having a shell company that was created three, four, or more years before provides the appearance of a business history and thus legitimacy. As FATF/Egmont note in their paper, “as shelf companies can also be considered a type of shell company, particularly following their sale or transfer of ownership, it is possible that jurisdictions referred to former shelf companies as shell companies when providing case studies.”
Wyoming is known for both shell and shelf corporations: where a new “shell” company might cost $250 – $500 to set up, an aged “shelf” company can cost thousands of dollars. See Dusting off the Congressional Version of an “Aged Shelf Company” – RegTech Consulting, LLC. In fact, Wyoming is featured in Casey Michel’s just-published (November 2021) masterpiece, “American Kleptocracy: How the US Created the World’s Greatest Money Laundering Scheme in History” (St. Martin’s Press, 2021), available online at https://read.macmillan.com/lp/american-kleptocracy/. Wyoming’s role in this American money laundering scheme begins on page 64, and Wyoming Corporate Services and its President and Director, Gerald Pitts, are mentioned on page 66:
“The man behind Wyoming Corporate Services was a local named Gerald Pitts. Pitts later told reporters that he fully recognized that the LLCs his company set up ‘may be used for both good and ill,’ which was at least more than most company service providers would admit. FN. But Pitts apparently didn’t care, revealing that he would go so far as to set up bank accounts for his anonymous clients, and would sometimes even add lawyers as company directors for his clients in order to provide a layer of attorney-client privilege that no investigator could ever crack.” FN – Kelly Carr and Brian Grow, “Special Report: A Little House of Secrets on the Great Plains”, Reuters, 28 June 2011, https://reuters.com/article/oukwd-uk-use-shell-companies-idAFTRE75R22L20110628
Speaking of Shelf Companies – The Corporate Transparency Act Seems to Have Addressed Them
The Corporate Transparency Act (CTA) creates a new section in title 31 – 31 USC section 5336 – that requires a “reporting company” to submit its beneficial ownership information to the to-be-constructed FinCEN central registry or database of beneficial ownership information. A reporting company is defined in section 5336(a)(11)(A) as “a corporation, limited liability company, or other similar entity that is (i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or (ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe.”
Subsection 5336(a)(11)(B) provides that a reporting company “does not include” twenty-four types of entities. Included in that list is what appears to be a classic shelf company: a company created by a corporate formation agent that does no business, has no employees, etc., and simply sits “on the shelf” of the corporate formation agent, waiting for someone to buy it and use it. Subsection (xxiii) provides that a reporting company does not include:
(xxiii) any corporation, limited liability company, or other similar entity
(I) in existence for over 1 year;
(II) that is not engaged in active business;
(III) that is not owned, directly or indirectly, by a foreign person;
(IV) that has not, in the preceding 12-month period, experienced a change in ownership or sent or received funds in an amount greater than $1,000 (including all funds sent to or received from any source through a financial account or accounts in which the entity, or an affiliate of the entity, maintains an interest); and
(V) that does not otherwise hold any kind or type of assets, including an ownership interest in any corporation, limited liability company, or other similar entity
Although the intent of Congress was likely to exempt companies that had been in business at one point but had been dormant for at least a year, what they came up with is literally the definition of a US shelf company. But what happens when that shelf company is taken off the shelf and purchased by someone? It appears from the definition in (xxiii)(IV) that it is no longer a shelf company: it has “experienced a change in ownership” and no longer qualifies as a dormant company that is exempt from providing beneficial ownership information.
The Act contemplates that a change in beneficial ownership will trigger a reporting requirement. Subsection 5336(b), “Beneficial Ownership Information Reporting”, provides in part:
(D) UPDATED REPORTING FOR CHANGES IN BENEFICIAL OWNERSHIP.—In accordance with regulations prescribed by the Secretary of the Treasury, a reporting company shall, in a timely manner, and not later than 1 year after the date on which there is a change with respect to any information described in paragraph (2), submit to FinCEN a report that updates the information relating to the change.
Based on the explicit wording of section 5336(b)(D), only reporting companies need to submit a report to FinCEN when there is a change in beneficial ownership. A shelf company (a subsection xxiii dormant company) is not a reporting company, but a shelf company that is taken off the shelf and purchased becomes a reporting company because of a change in ownership. And once taken off the shelf, it could act as a front company to disguise nefarious activity. It is no longer excluded from the definition of “reporting company” and would have to register its beneficial owners. But updated reporting for changes in beneficial ownership only applies to reporting companies that have a change in ownership, not to non-reporting companies that become reporting companies because of a change in ownership.
Phew. It’s complicated. Can shelf companies that become front companies avoid the beneficial ownership information disclosure laws? Probably not. Subsection 5336(b)(2)(E) provides:
(E) REPORTING REQUIREMENT FOR EXEMPT GRANDFATHERED ENTITIES – In accordance with the regulations promulgated by the Secretary, any corporation, limited liability company, or other similar entity that is an exempt entity described in subsection (a)(11)(B)(xxiii), shall, at the time such entity no longer meets the criteria described in subsection (a)(11)(B)(xxiii), submit to FinCEN a report containing the information required under subparagraph (A).
That seems to cover off situations where shelf companies could become shell companies or front companies. But …
Oddly Enough, Shell Companies That Become Front Companies May Be Exempt From Registering Their Beneficial Owners
Finally, there’s another oddity in the Corporate Transparency Act. An existing shell company must register its Applicant (the natural person who files the application with the state or Tribal government to create or register the corporation or LLC) and Beneficial Owner(s) with FinCEN within two years. Suppose, though, that this shell company is indirectly owned and controlled by two drug traffickers who are using it as a pass-through entity to “layer” transactions and launder drug proceeds. Those drug traffickers would be well-advised to convert their shell company to a front company by leasing a warehouse space and some trucks, finding twenty “mules” to act as paid employees, and ensuring that they generate more than $5 million in revenues. If they can accomplish that – converting their shell company to a front company within two years – they can avoid registering an Applicant and Beneficial Owners.
This loophole, and others, and the AML Act of 2020 and the Corporate Transparency Act generally, are discussed in greater detail in Richards on the AML Act – The Good, The Bad, and The Ugly.
Wyoming Corporate Services’ Shelf Companies – Still Going Strong
I began this article with quotes from a 2011 Reuters special investigation on Wyoming shell and shelf companies that referred to Wyoming Corporate Services and its shelf companies. That report also provided: “On its website, Wyoming Corporate Services currently lists more than 700 shelf companies for sale in 37 states. The older they are, the more expensive, like Scotch whisky. Brookside Management Inc., formed in December 2004, sells for $5,995, while Knotty Management LLC, formed in May [2011], costs just $645.”
Ten years after this report and Wyoming Corporate Services is still going strong. I downloaded the state-by-state lists of shelf companies offered by Wyoming Corporate Services (WCS) on two occasions: on April 1, 2021 and again on November 27, 2021. Whereas in 2011 WCS had more than 700 shelf companies for sale in 37 states, it now has less than 700 (672) shelf companies for sale in 24 states. The prices appeared to be based on the age of the company, as the 2011 Reuters report indicated, but also on the state of organization and whether the shelf company has an Employer Identification Number, or EIN. The cheapest companies cost $645 and were created in February and March of 2021 (they were brand new at the time). The most expensive cost $4,895 and $4,995: twenty-two (22) Wyoming shelf companies created in 2007.
On April 1st WCS had 617 shelf companies (with 169 created in Wyoming) from 24 states for sale. It had companies created as early as 2007 and 2008, then nothing until 2018 (I don’t know why there was a 10-year gap).
On November 27th WCS had 672 shelf companies (with 206 created in Wyoming) from the same 24 states for sale. It still had 31 companies that were created in 2007, but had apparently sold their inventory of 2008, 2018, and 2019 companies. In total, in the roughly eight months between those two dates, WCS had sold 277 of its April 1st inventory, and had created or purchased 332 new shelf companies to add to its inventory.
Between April 1st and November 27th, WCS sold 277 shelf companies. As a result, 277 shelf companies are no longer shelf companies. But what are they now? Are they legitimate operating companies? Are they shell companies? Or are they being used as front companies? Let’s take a look at them.
Year of Formation Count
2007 43 (25 are LLCs)
2008 20 (6 are LLCs, one came with a URL)
2018 7 (all 7 were sold with an EIN, 6 of them were created in Texas on the same day, and 5 of them shared the same address and registered agent)
2019 12
2020 150 (8 are LLCs, including Bitcoin Funding, LLC, a Wyoming entity)
2021 45 (28 are LLCs, including Cyber Solutions Group, LLC and NFT Trading Company, LLC, a Wyoming entity)
Total 277
Forty-three shelf companies created in 2007: what are they up to today?
Accurate Marketing Services LLC was listed on April 1, 2021 as a 2007 Wyoming shelf company available for $3,895. It was not listed on November 27, 2021, suggesting it had been sold. Wyoming state records show that on April 16, 2021 its name was changed to Timechange Wholesales LLC and its address was shifted from Suite 100 to Suite 500 at 1712 Pioneer Avenue, Suite 500. Both filings were submitted by the LLC’s agent, Corporate Agents LLC. On May 28, 2021. A sampling of five of the other forty-two 2007 shelf companies shows a pattern of changing the name of the entity and changing its address to Suite 500. For example, Accurate Marketing Services LLC changed its name to Timechange Wholesales LLC on April 21, 2021; Advanced Security Technologies Corp. changed its name to Pryme Investments Corp on May 19, 2021; and Blue Sky Funding Corporation changed its name to “iinno transportation inc” (no capital letters, no punctuation) on April 13, 2021. Timechange, Pryme, and iinno are all located at 1712 Pioneer Avenue, Suite 500.
1712 Pioneer Avenue, Cheyenne, Wyoming
The “little house of secrets” in the 2011 Reuters report was the then-office of Gerald Pitts and Wyoming Corporate Services located in a residential bungalow located at 2710 Thomas Avenue in Cheyenne. A year after the report was published, Pitts and WCS moved to their current offices at 1712 Pioneer Avenue, Cheyenne. The Wyoming Secretary of State’s records show that six corporate registered agents are located at this address and they are all connected to each other:
- Wyoming Corporate Services, Inc., located in suite 101 – Gerald Pitts President; Therese M. Hoard, Resident Agent
- USA Corporate Services (Wyoming) LLC, located in suite 600 – organizer Wyoming Corporate Services; manager USA Corporate Services; Resident Agent Wyoming Corporate Services
- Therese M. Hoard, located in suite 101
- Capital Administrations LLC, located in suite 115 – organizer Wyoming Corporate Services; Resident Agent Corporate Agents, LLC
- Corporate Agents, LLC, located in suite 100 – organizer and Resident Agent Wyoming Corporate Services
- Corporations Today, Inc., located in suite 200 – Gerald Pitts President; Resident Agent Wyoming Corporate Services
So it is probably safe to write that these six registered agents are, in fact, one enterprise run by Gerald Pitts, and that the individual suites are not, in fact, individual or unrelated, but all tie back to the Pitts enterprise. So it follows that any entity that uses this address is somehow related to Pitts and WCS.
A simple Google search shows ninety-eight businesses located at 1712 Pioneer Avenue: eighty of those businesses have no consumer reviews. And none of the ninety-eight match the names of the WCS “shelf companies”.
And there are Paycheck Protection Program (PPP) loan recipients located at 1712 Pioneer Avenue. The Small Business Administration (SBA) published a list of all PPP loan recipients. That data includes the name of the borrower and its address. SBA data shows ninety businesses located at (or using) 1712 Pioneer Avenue received a total of $11.6 million in PPP loans used to protect 971 jobs. None of these ninety PPP recipients’ names match the names of the 600+ shell companies or the ninety-eight “Google” entities. One of the recipients was Mountain Creations Inc. It received a $2,000,000 PPP loan from Capital Plus Financial LLC to (ostensibly) protect 222 jobs. A Google search finds nothing on this entity located in Wyoming: there is a Mountain Creations Inc. in Wexford, Pennsylvania that appears to make log cabins. The Better Business Bureau shows no reviews and no complaints.
Mysteries abound about 1712 Pioneer Avenue, its shelf companies, companies located there or using the address, and many of the PPP loan recipients that listed this address. As a Wyoming state representative told Casey Michel, “we call it business friendly”. Indeed! But one thing we know for sure: Wyoming shelf companies are flying off the shelf! Where they land, though, remains a mystery.
[1] This is a play on a heading “Shell, Front, and Shelf” in an article “Follow the Proliferation Money” by Professor Moyara Ruehsen and Leonard Spector, published in the Bulletin of the Atomic Scientists 2015, Vol. 71(5) 51–58 (September 2, 2015). The article provides an excellent description of the differences between shell companies, shelf companies, and front companies. As referenced in the body, the joint FATF/Egmont paper, “Concealment of Beneficial Ownership”, offers perhaps the best descriptions and examples of shell, shelf, and front companies and how they are used to conceal true beneficial ownership and to disguise illicit activity. I highly recommend it.