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Fraud with bonds: what are “empty shells”?


The term empty shell stems from the financial world. It can relate to securities (such as, for instance, trackers or bonds) that do not have a countervalue approaching the nominal value or official exchange rate because the deposit on issue has not flowed into the capital of the issuing entity.

Special purpose vehicle

An example from legal practice of an empty shell is a bond loan that is not fully paid up by the enterprise that issues the bonds. For instance, one can think of a construction whereby the bonds are administratively processed in the financial system so that it appears as if they are fully paid up. For instance, it could be the second tranche (issue) of a legal, fully paid up bond loan with a unique ISIN-code and a stock exchange listing, later followed by a second tranche that is not paid, that is placed outside the issuing obligor via an external vehicle (another company that has no connection to the obligor, or a “special purpose vehicle” (an SPV). In a subsequent phase of the operation the tranches are combined under one number. This is an indication that the intention is that the separate treatment of the unpaid second tranche is not discovered.

Penetration into the official world

The bonds can then be delivered by the external vehicle to an investor who buys securities on the stock market via his own bank. This investor can (in all good faith) be under the delusion that the securities bought or delivered have a real value, while in reality they have never been paid up. The chances are that the securities are worthless because the issuing company has been unable to invest the proceeds of the bond loan, while substantial debt has been contracted. Meanwhile the unpaid securities can generate other cash flow via the SPV in another country, for example by speculation or borrowing. Empty shell operations often have an international character. This hinders discovery and hampers supervisory bodies because only a part of the puzzle comes under their jurisdiction.

Shadow banking

Empty shells do not belong in the official investment world: they are usually illegal financial operations that the average investor normally never encounters unless (intentionally or not) mistakes are made by the executors of the operation. There could be criminal intent that penetrates into the “official world” simply due to the fact that at some point the movement of money has to take place through official banking and administrative channels.

Reputation risk

The leaking and becoming known of an empty shell operation can lead to considerable reputation damage for the enterprises involved. The public can gain the impression that reputable financial institutions are involved in the issue of a complicated form of counterfeit money. Securities such as bonds are after all titles of ownership, that are not only bought by investors. Securities can also be borrowed and thus serve as guarantees for (securities) credit, and last but not least it is possible that securities are transferred in order to meet a payment obligation. It is therefore essential that securities have a real value, especially in the case of bonds.

Follow the money

When considering criminality, the creation of empty shells can be seen as a scam, forgery or another form of fraud. However, it is very difficult to identify empty shells and produce proof, although it is certainly not impossible, because there is after all an (illegal) cash flow attached that can be followed (“follow the money”). There is also the possibility of information leakage from enterprises, for instance via disgruntled employees fired as a result of fraud. Another possibility is that information is gathered via research, data analysis or intelligence services.


A duped investor can initiate proceedings against the parties involved, provided they can produce sufficient evidence to prove their case. This is not the kind of case that quickly attracts publicity. If a victim does produce enough evidence of liability the chances are that the institutions involved will offer compensation to protect their reputations. A court case will surely result in a larger circle of people hearing of it and the press can get wind of the case. There are many interests at stake with this kind of legal dispute.

Money laundering

An empty shell can point to a connection with an illegal economic activity such as the payment or receipt of bribes, a money laundering operation, the secret financing of a state activity that should be kept from the media or which only a few people may know about, or a movement of capital that does not officially appear in the books (off balance financing). 


An empty shell that leaves the illegal circuit and lands in the official circuit can contaminate the financial system. It can unintentionally lead to bankruptcy of the company that has entered into commitments, whereby the value of the securities is lost. It can, perhaps unintentionally, also lead to ‘collateral damage’, but often it is impossible for the victims to track down the underlying details as these will be concealed by means of any trick in the book. Even if victims succeed despite this in penetrating to the nucleus of the matter they will be faced with an intensive trajectory to get compensation for the damage. The creators of these constructions will naturally do everything in their power to remain invisible.