Ghost Businesses: How Fraudsters Create Entities That Don't Really Exist

The application claims five years in business. The bank statements show consistent revenue. The owner's credit looks reasonable. Everything checks out—until you pull the Secretary of State filing date and discover the entity was registered five days ago, not five years.

This is a ghost business: an entity that exists on paper but has no real operating history. A business fraud prevention API catches these fabrications by comparing claimed business age against actual state registration dates, exposing the discrepancy before you fund a fraudulent application.

What Makes a Business a "Ghost"

Ghost businesses differ from shell companies. A shell company is a legal entity with no operations—it exists but does nothing. A ghost business is a fabrication: an entity created specifically to deceive lenders into believing they're funding an established operation.

Characteristics of ghost businesses

Fabricated history: The core deception involves claiming an operating history that doesn't exist. The application states "established 2019" but the entity was registered last month. The business claims locations, employees, and revenue that never existed.

Documentation fraud: Ghost business applications typically include fabricated supporting documents: • Fake bank statements showing manufactured transaction history • Forged tax returns with invented revenue • Counterfeit business licenses predating actual registration

Urgency patterns: Ghost business applications often push for rapid funding—the fraudster wants capital before verification catches the discrepancy.

According to Resistant AI research, "68% of business loan fraud is caught after the account is established," making early detection through entity verification critical to preventing losses.¹

The Filing Date Signal

The simplest and most reliable ghost business detection method is comparing the claimed time in business against the actual Secretary of State filing date.

How the comparison works

Application data: • "Years in Business: 5" • "Established: 2019" • "Operating Since: January 2019"

SOS verification data: • Filing Date: December 2024 • Status: Active • Entity Age: 12 days

Discrepancy: 5 years claimed vs. 12 days actual = High-priority fraud signal

Threshold configuration

Not every discrepancy indicates fraud. Businesses do restructure, change entity types, or re-register after dissolution. Configure your detection logic with reasonable tolerances:

Auto-reject triggers: • Claimed age exceeds actual age by more than 2 years • Entity registered within last 30 days but claims 1+ year history • Filing date is after the loan application date

Review triggers: • Claimed age exceeds actual age by 6 months to 2 years • Entity registered within last 90 days claiming established history • Recent re-registration after prior dissolution

Acceptable variance: • Claimed age within 6 months of actual filing date • Recent re-registration with documented history of prior entity

Edge cases to consider

Legitimate explanations exist: • Entity conversion: Sole proprietorship operated for years, recently converted to LLC • State re-registration: Business moved states and re-registered • Restructuring: Prior entity dissolved, new entity formed to continue operations

These scenarios require human review, not automatic rejection. The filing date discrepancy triggers the review; the underwriter determines legitimacy.

Beyond Filing Date: Additional Ghost Signals

Filing date comparison catches the most obvious ghost businesses. Sophisticated fraudsters create entities months in advance to age them. Additional signals help detect these more careful fabrications.

Registered agent anomalies

Ghost businesses often use commercial registered agent services that handle thousands of entities:

• High-volume agent addresses: Same registered agent address appears on hundreds of entities • Virtual office addresses: Registered address is a known mail drop or virtual office provider • Mismatched geography: Registered agent in Delaware, claimed operations in California, owner address in Florida

Officer information gaps

Legitimate businesses have officers and directors on file. Ghost businesses may show:

• No officer data: States that publish officer information show none listed • Circular ownership: Business owned by another entity owned by the first entity • Nominee directors: Officers with names appearing on many unrelated entities

Activity indicators

Real businesses leave traces. Ghost businesses often don't:

• No web presence: No website, no social media, no online reviews • No physical location: Address is vacant, residential, or doesn't match business type • No regulatory footprint: Professional businesses lack required licenses

Combining Entity Data with Financial Verification

Entity verification alone doesn't prove business legitimacy. A real entity can still submit fraudulent financials. The power comes from combining entity data with other verification streams.

Cross-referencing patterns

Bank statement verification: • Compare depositor name on statements to legal entity name from SOS • Verify account age aligns with entity age • Check transaction patterns against claimed business type

Tax document verification: • EIN on tax returns should match entity • Business name on returns should match legal name • Revenue timeline should align with entity age

Business license verification: • Professional licenses should predate or align with entity registration • License holder name should match entity officers • License jurisdiction should match operating locations

For deeper analysis of how entity verification connects to financial health assessment, see our guide on connecting financial health to entity data.

Building Detection Workflows

Effective ghost business detection requires systematic verification at application intake.

Automated screening rules

Rule 1: Entity age calculation

entity_age = current_date - filing_dateclaimed_age = years_in_business from applicationdiscrepancy = claimed_age - entity_age‍IF discrepancy > 2 years:    flag = "HIGH_RISK_GHOST"ELIF discrepancy > 6 months:    flag = "REVIEW_REQUIRED"ELSE:    flag = "PASSED"

Rule 2: Recent formation filter

IF entity_age < 30 days AND claimed_age > 1 year:    flag = "AUTO_REJECT"

Rule 3: Formation date sanity check

IF filing_date > application_date:    flag = "IMPOSSIBLE_TIMELINE"

Manual review triggers

Queue for human review when:

• Filing date discrepancy between 6 months and 2 years • Entity age under 90 days regardless of claimed history • Registered agent flagged as high-volume commercial service • No officer data available in states that publish it • Address verification fails or returns suspicious results

Documentation requirements

When discrepancies appear, request supporting documentation:

• Prior entity registration showing operating history • Conversion or restructuring documentation • Business licenses predating current entity • Tax returns showing prior-year operations

Legitimate businesses can explain and document their history. Ghost businesses cannot.

The LexisNexis Findings

Industry research confirms entity age verification as a critical fraud detection point. The LexisNexis 2024 SMB Lending Fraud Study found that "stolen legitimate business identity and stolen consumer/owner identity have emerged as the most common type of SMB lending fraud."²

The study recommends "checks for fake or suspicious identification numbers, such as Social Security Numbers (SSN) and Tax Identification Numbers (TIN)" as part of early-stage fraud detection.³

Entity verification—including filing date comparison—serves as a foundational check that catches fabricated businesses before more expensive verification steps execute.

Fraud Economics

Understanding why ghost businesses exist helps detect them.

The fraudster's calculation

Creating a ghost business requires: • State filing fee: $50-500 depending on state • Registered agent service: $100-300/year • Document fabrication: Variable (bank statements, tax returns)

Potential return: • Successful loan fraud: $25,000-500,000+

The economics heavily favor the fraudster. A $200 investment in entity creation can yield six-figure returns if the lender doesn't verify.

The lender's calculation

Entity verification cost: • API verification: $1-5 per lookup

Fraud prevention value: • Avoided loss on ghost business: $25,000-500,000+

The ROI on entity verification is effectively infinite when it catches even one ghost business per year.

Integration Points

Add ghost business detection at these workflow stages:

Application intake: • Capture claimed years in business • Require state of formation • Collect EIN for cross-reference

Initial screening: • Run entity verification immediately • Calculate filing date discrepancy • Apply auto-reject and review rules

Underwriting: • Include entity age data in underwriting package • Flag any discrepancies for underwriter attention • Require documentation for resolved discrepancies

Pre-funding: • Re-verify entity status before disbursement • Confirm no status changes since initial verification • Document final verification in loan file

The Bottom Line

Ghost businesses are paper entities designed to look like established operations. The filing date check exposes them: when an application claims five years of history but the Secretary of State shows five days, you've caught a fabrication before funding it.

This single data point—comparing claimed time in business against actual filing date—prevents losses that dwarf the cost of verification. Every application deserves this check before capital leaves your account.