This week, efforts to crack down on offshore tax evasion and illegal flows of money were stymied by the U.S.'s own tax haven, Delaware. The Financial Secrecy Index ranks Delaware as the world's number one secrecy jurisdiction and this week one of the state's Senators fought to maintain its ranking.
Last year, Senators Levin, Grassley, and McCaskill introduced a bill (S. 569) to require states to collect information on the beneficial owners (i.e., whoever ultimately owns and controls a company) when a corporation or LLC is formed. A summary of the bill's provisions can be found here. The Senate Homeland Security and Government Affairs Committee (HSGAC) had scheduled a markup of the bill this week, but that was postponed when an alternative bill was proposed by Sen. Carper (D-DE). In addition to other problems, Carper's bill would allow the beneficial owner on record to be a shell company, rather than requiring it to be an actual human being. This would defeat the whole purpose of the bill.
In hearings last year on S. 569, Senator Levin told of a single Utah company that had been engaged in suspicious wire transfers of $150 million. When Immigrations and Custom Enforcement (ICE) investigated, they discovered a web of over 800 companies formed in all 50 states, all controlled by the same Panamanian entities involved "in a massive shell game in which U.S. companies were being used to disguise the movement of funds and mask suspicious activity." The Utah company had been set up by a Delaware corporation, and the investigation hit a dead end when ICE was unable to discover who the beneficial owners of the corporations actually were.
Or, take the case of Viktor Bout, which Senator Levin described in another hearing last year. Bout, an indicted Russian arms dealer who was the inspiration for the book Merchants of Death (and the Nicholas Cage movie), used Florida, Texas and Delaware companies to carry out his activities, including moving millions in dirty money. In 2008 he was indicted for conspiracy to kill United States nationals, the acquisition and use of anti-aircraft missiles, and providing material support to terrorists.
As Senator Levin explained:
In July 2009, Romania filed a formal request with the United States for the names of [Bout's] company’s owners and other information. But it is unlikely that the United States can supply the names since, as this Committee has heard before, our 50 states are forming nearly 2 million companies each year and, in virtually all cases, doing so without obtaining the names of the people who will control or benefit from those companies. The end result is that a U.S. company may be associated with an alleged arms trafficker and supporter of terrorism, but we are stymied in finding out, in part because our States allow corporations with hidden owners.
Shell companies — as they are called because they don't do any real business — are used for all kinds of illegal purposes, including laundering money from illegal activities and financing terrorists. They are also used extensively for tax evasion. S. 569 would help law enforcement authorities combat these illegal activities and many law enforcement agencies have voiced support for the bill.
Sen. Carper is obviously concerned about his state's ability to maintain its status as the incorporation capital. But that can hardly take priority over addressing criminal activities and threats to national security. Let's hope his colleagues on HSGAC are less myopic than he is.