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Your supplier might be a shell company

Your supplier might be a shell company

Due diligence | 2023-12-17

Recent cases have shown that some exporters establish multiple companies with different names yet engage in the same business. These companies are owned and operated by the same team behind the scenes. We refer to this phenomenon as 'Shell Exporters".

"Why do exporters not operate under a unified company and develop a strong brand, instead establishing multiple companies and creating various websites and Alibaba accounts? We have not investigated the reasons behind these Shell Exporters.

However, based on our previous experience, these companies might not possess the solid in-house manufacturing capabilities as advertised in their product promotional materials. They are more likely to be specialized trading companies, purchase from other manufacturers, and resell to buyers. The benefits of exporting through shell companies include the following:

  1. Selling products through multiple company names and websites can be advantageous for reaching a broader range of customers through different channels, especially when selling online. For instance, customers browsing two Alibaba supplier accounts might not realize that the same team operates these two.
  2. Minimizing the impact of negative reviews. If only one company existed, all negative reviews would be directed towards it. Shell companies can disperse and conceal negative comments by the undisclosed relationship.

In our client's case, steel companies A, B, and C are closely connected based on our findings that they share the same contact number, and their shareholders and management members are the same.

We further checked their Alibaba account pages and found that the company profile images, addresses, and factory pictures are very similar.

In such a situation, we advised our client to investigate the supplier further, including the following procedures:

  1. Conduct a complete reverse check on the shareholders and management to identify if other shell companies are used, as well as any significant negative information on these individuals and their associated entities.
  2. Inquire about the reasons behind their operation through multiple companies, 
  3. Conduct an on-site visit to inspect the production facilities and capabilities advertised by the company.

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