Paper companies are the “getaway cars for global financial crime,” and new legislation is unlikely to do much to resolve the issue — especially not in Delaware.
WASHINGTON — Civil society groups are dismissing as inadequate proposed legal reforms in Delaware aimed at tightening transparency requirements in the state, one of the world’s most important homes to anonymous “shell” corporations.
Delaware’s loose regulations, coupled with the state’s aggressive positioning of itself as corporation-friendly, have increasingly come under national and international focus. Shell companies typically exist on paper only and shield the identity of a corporation’s ultimate (or “beneficial”) owner, allowing for the easier laundering of illicit funds.
These entities have come under the scanner for their role in facilitating tax evasion, particularly as governments have searched for new revenues in the aftermath of the 2008 economic downturn. Yet shell companies have also repeatedly been found at the center of international fraud, trafficking and even terrorist plots.
“In our investigations into corruption and state looting, we find that anonymous companies are the getaway cars for global financial crime and corruption,” Stefanie Ostfeld, a senior policy advisor with Global Witness, an international watchdog group working on corruption and natural resources, told MintPress News.
“Delaware is one of the easiest places in the world to set up an untraceable shell company. It takes less identifying information to set up a company than it does to obtain a driver’s license or register to vote … These anonymous companies are being used to launder money into the banking system and hurt everyday people.”
Delaware shell companies have been implicated in numerous domestic and international laundering cases, including those involving drug trafficking and fraud. For instance, Viktor Bout, the infamous Russian arms dealer arrested in 2008, was found to have used two Delaware paper companies to camouflage his operations. Jack Abramoff, the former lobbyist who was convicted of corruption in 2006, likewise used the Delaware system to hide millions of dollars. Other such cases have involved everything from foreign drug smuggling to schemes to defraud Medicare.
“Delaware has become the face of anonymous companies in America and it is hurting its reputation,” Ostfeld said. “Global Witness is advocating that it is time to take away the keys by ending the ability to incorporate anonymously in the U.S. and around the world.”
Yet many are expressing disappointment in the latest efforts to legislate some reforms in Delaware’s incorporation requirements, seeing them as a missed opportunity. Indeed, Ostfeld goes even further, referring to two new bills as mere “window dressing.”
“Delaware should take this opportunity to lead by example and make it no longer possible to incorporate in the state without disclosing the beneficial owners of the company,” she said.
“Unfortunately, the legislation as written won’t do anything to fix the problem or improve Delaware’s reputation. It … does not make it any easier for law enforcement to uncover the beneficial owners of companies.”
Delaware is not the only U.S. state offering easy access to those looking to create an anonymous corporate entity, with Wyoming, Nevada, California and others likewise being implicated.
Indeed, the United States more broadly has repeatedly been found to be one of the most prominent homes to shell companies, alongside Kenya. Most U.S. states do not have the robust disclosure requirements that watchdog groups and tax-evasion specialists have long pushed for, particularly regarding beneficial ownership.
Delaware, however, is receiving special scrutiny because it aggressively courts would-be incorporators both around the country and around the world. In so doing, it specifically highlights its “business-friendly government” and the ease with which a Delaware company can be set up.
This campaign has been remarkably successful. In the U.S. alone, more than half of publicly traded corporations are incorporated in Delaware. Advocates say the preponderance of filing and related fees required to keep any corporation legally alive makes up a significant part of the state’s budget. Inevitably, those revenues also create a strong rationale for not tinkering with the status quo.
But this reputation is increasingly seen as harmful to Delaware’s image at home and abroad. The Delaware secretary of state recently addressed this problem head-on, adding asection to the state’s website aimed at debunking “myths” related to its perceived regulatory laxity.
As to whether Delaware is the country’s “onshore tax haven,” for instance, the site notes that the state’s corporate and tax laws aren’t the question. Rather, it suggests that the key to dealing with global tax evasion is strong enforcement on the part of the federal government and strengthened anti-laundering efforts in countries with poor regulation.
The site also touts what it describes as pioneering transparency initiatives, noting that in 2012 the state “cracked down on company formation agents that marketed shell and shelf companies or anonymity and secrecy.” But it admits that Delaware, like most U.S. states, does not collect information on beneficial owners, instead requiring disclosure only of a company’s directors.
The new legislative proposals, which are to be taken up by the state Senate this week, would do little to change this. The bills are concerned only with limited liability companies and limited partnerships, and merely offer new requirements under which these entities’ managers or partners can find out the identity of other members or partners.
“They can’t even figure that out right now,” Heather Lowe, legal counsel and director of government affairs at Global Financial Integrity, a Washington watchdog group, told MintPress.
“But when we talk about beneficial ownership, that’s the people who ultimately control a company. Members and partners, on the other hand, are often simply other companies, so you’d have to get through several additional corporate layers to get to that final information. These new bills don’t even come close to that.”
Meanwhile, Delaware’s interests appear to be impacting broader national and even international efforts to crack down on tax evasion and related problems arising from the misuse of anonymous corporations.
Here in Washington, legislation is currently pending in both the U.S. House and Senate that would require greater transparency on a company’s ownership. The Senate version would require that states collect this information, while the House version would have the Treasury do so. (When it was first introduced in 2008, the bill was co-sponsored by then-Sen. Barack Obama.)
Advocates of greater transparency measures in this regard say these current proposals — the result of six years’ worth of negotiation and compromise — stand a better chance of passing now than at any time in the past. But Lowe says the bills still need to get around a significant obstacle: the Delaware delegation.
“The blockers on the Senate end are absolutely the Delaware senators, as they have been for years – very vehemently. They know this is a big issue for [the state],” she said.
“My organization would have liked this law to be stronger in various ways but we also understand the need for compromise. At the same time, we can’t be soft on whether actual beneficial ownership is collected — and that seems to be a nonstarter” for Sen. Tom Carper, a former Delaware governor and now the state’s senior senator.
Meanwhile, the U.S. is quickly falling behind other developed countries on the issue. When the United Kingdom last year chaired the Group of Eight leading industrial nations (now the G-7, since Russia was suspended in March), Prime Minister David Cameron put tax avoidance and corporate transparency at the very top of the grouping’s influential agenda.
Yet the U.S. was singled out for criticism after the summit failed to adopt a plan, pushed by Cameron, to require the creation of public country-level registries with detailed information on corporate ownership and activity. Although the U.S. did unveil important new pledges at the time to crack down on shell companies, critics noted that Washington had not outlined how it would implement the commitments, which would still not put corporate ownership information into the public domain.
The U.K. has gone ahead anyway, announcing in October that it would be creating public registries of beneficial ownership and urging all Crown dependencies to do the same. In addition, the European Parliament in March voted to approve strongly worded draft revisions to money-laundering regulations that, if approved, would require all 28 European Union countries to create public registries of company and trust ownership.
At 643-30, the European Parliament vote was overwhelming. Lauding the move at the time, Economic and Monetary Affairs Committee rapporteur Krisjanis Karins said, “Today is a good day for law-abiding citizens, but a lousy day for criminals.”