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April 13 — As ongoing revelations from the Panama Papers rivet world attention to the use of shell companies, tax evasion and money laundering, the U.S. states most frequently cited as onshore tax havens say they have no plans to change their policies.
Authorities from Delaware, Nevada and Wyoming told Bloomberg BNA their states already made many changes to their business incorporation policies after international criticism bubbled up more than a decade ago.
“Our states that have been at the center of the storm have actually done more things than most jurisdictions,” Richard J. Geisenberger, Delaware’s deputy secretary of state, told Bloomberg BNA April 11.
South Dakota, an increasingly popular destination for trusts, didn't respond to Bloomberg BNA questions about whether it had plans to change.
Only Oregon, called out as early as 2006 for lax reporting requirements on shell companies, told Bloomberg BNA that it is working on changes to its beneficial ownership reporting requirements and the responsibilities of registered agents. Those changes, however, were in the works long before April 3, when the International Consortium of Investigative Journalism (ICIJ) published the first wave of 11.5 million leaked confidential documents from Panamanian law firm Mossack Fonseca & Co., exposing more than 214,000 offshore accounts of world leaders and wealthy celebrities.
“Recent international developments are of interest to us, but are not the impetus for our work on shell companies,” Molly Woon, communications director for the Oregon Secretary of State's Office, told Bloomberg BNA in an April 12 e-mail. Oregon has been working on the changes since last year, motivated in large part by an investigation by the Portland Business Journal about how an ex-con who served time for cocaine smuggling and wire fraud was able to set up a corporation mill, she said.
Details of the changes aren't yet available. The Secretary of State's Office is working on legislative solutions, and requests for bills are due June 3, Woon said.
Issues around shell companies in the U.S. are nothing new.
In November 2006, a report from the Treasury Department's Financial Crimes Enforcement Network (FinCEN) identified Delaware, Nevada, Oregon and Wyoming as four states that had formation and reporting requirements that could attract illicit activity through shell companies.
And a July 2015 report about money laundering and terrorist financing from the International Monetary Fund (IMF) rated the U.S. noncompliant with international standards concerning transparency and beneficial ownership reporting for corporations, noting that “there has been no real progress” since the issues were first raised in 2006. The formation, operation and dissolution of U.S. corporations are governed by state law, the report notes, and many states don't require filing documents to contain basic ownership information. Trusts aren't required to be registered, except for filing certain information with the Internal Revenue Service, the report said.
According to the IMF and FinCEN reports, 14 states have no requirements to report either shareholders or managers. Eight states and the District of Columbia require limited liability companies to report the identities of managers only. Twenty-four states require a limited liability company to report the identities of shareholders, but only if it lack managers. And only four states—Alabama, Arizona, Alaska and Kansas—require a limited liability companies to always report the identities of shareholders.
A July 2013 survey by the National Association of Secretaries of State (NASS), the most recent of its kind available, also revealed a wide range of requirements surrounding company formation. Only a dozen states required all business entities to file annual reports, for example. The majority of states listed their role in filing as “ministerial” rather than regulatory. Penalties for failing to follow statutes relating to incorporation range from administrative to civil to criminal, depending on state and statute.
At the time, nine states reported that they were in the process of considering or had just recently passed legislation concerning changes to the company formation process: Alabama, Arizona, California, Delaware, Massachusetts, Montana, Nevada, South Carolina and Wyoming.
Without nationwide mandatory requirements to document the beneficial owners of a company, the U.S. continues to allow “weak links” in the states that can be exploited by organized crime, Garry W. G. Clement, executive director of the Association of Certified Financial Crime Specialists (ACFCS), told Bloomberg BNA April 11. “Traditional crime groups, motorcycle groups: they do a phenomenal job of using whatever weak link is available to them.”
Clement, who is based in Ontario and once ran the financial crime program for the Royal Canadian Mounted Police, said Delaware, Nevada and Wyoming “came to my attention 30 years ago” and he is “not aware that there's been any fundamental change.”
The problem goes beyond tax evasion, drugs and terrorism, Clement said. Shell companies are used for all types of financial crimes—from the female flesh trade to elder fraud, he said.
The legal industry in North America also contributes to the problem, Clement says. Europe has laws that require attorneys to report suspicious financial transactions, he said—Canada and the U.S. don't.
Clement said North America's insistence that solicitor-client privilege be sacrosanct creates another weak link that should be examined.
“Lawyers can be duped,” he told Bloomberg BNA. “I think we've created a weak link and we've created a target, because lawyers will be targeted by organized crime.”
“There’s no reason that corporations have to have this cloak of secrecy around them,” he said.
States say they are aware of the problems, but many argue that the fight needs to happen at the federal level.
“We're saying that states recognize that there are issues with shell companies, but they are filing offices,” Kay Stimson, a spokeswoman for NASS, told Bloomberg BNA April 11. The group argues that the federal government is better equipped to collect beneficial ownership information and share it with law enforcement authorities. Insisting that states collect and verify beneficial ownership information is trying to make the incorporation process into something that it isn't meant to be, she said.
Since 2010, NASS and its members have proposed a federal solution that would allow the White House and Congress to provide greater transparency and sharing with law enforcement, without new burdens on states or compliant businesses, Stimson told Bloomberg BNA. The group argues that corporate entity ownership is better tracked through federal tax filings and financial disclosure statements, rather than by requiring a new reporting system in more than 50 states and territories.
Delaware, Wyoming and Nevada say they have already made changes in their states. A white paper released in 2014 details the changes they made in the past decade.
In response to the Panama Papers, Nevada and Wyoming both launched investigations into Mossack Fonseca subsidiaries.
Mossack Fonseca has registered 24 limited liability companies (LLCs) in Wyoming, filed by its registered agent, M.F. Corporate Services Wyoming LLC, according to a list Bloomberg BNA obtained from the Wyoming Secretary of State's Office.
In Nevada, M. F. Corporate Services is listed as the commercial registered agent for 1,024 LLCs registered with the Office of the Secretary of State, with 193 of those LLCs listed as “active,” the Nevada Secretary of State's Office told Bloomberg BNA in an April 11 e-mail. M. F. Corporate Services also serves there as its own commercial registered agent and is registered as a domestic corporation, Kaitlin Barker, the office's spokeswoman, told Bloomberg BNA.
Delaware isn't currently aware of any activity by M.F. Corporate Services creating entities in the state, C. R. McLeod, chief community relations officer at Delaware Department of State, told Bloomberg BNA in an April 12 e-mail. “However, should we find activity by a Mossack Fonseca agent, we'll take appropriate action.”
South Dakota's business registrations don't track ownership, listing only the registered agent, Jason Williams, spokesman for the South Dakota Secretary of State, told Bloomberg BNA in a May 13 e-mail. South Dakota doesn't know if Mossack Fonseca operates any subsidiaries in South Dakota because it is “outside our purview,” Williams said.
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