What type of fraud scheme involves creating a fictitious entity to receive payments for forged invoices?

• A. Pass-through scheme
• B. Cash larceny scheme
• C. Shell company scheme
• D. Pay and return scheme

Answer: (C)

This hinges on the idea of a shell company: a fictitious entity created solely to receive payments. In this fraud, the perpetrator sets up a fake vendor in the accounts payable system, submits forged invoices for goods or services never delivered, and directs payment to the shell’s bank account. Because the entity isn’t real and the invoices look legitimate, internal controls may fail to challenge the payment, allowing funds to be fraudulently transferred and hidden in the shell. This is different from cash larceny, which involves stealing actual cash from a drawer or account, and from pay-and-return, where a legitimate payment is made and a portion is returned as kickback. It can also differ from a pass-through scheme, which routes funds through a vendor to obscure the final recipient but may involve real entities rather than a fictitious one created purely to receive forged invoices.