As Delaware mulls greater corporate transparency, US states confront ‘secrecy haven’ label

The British Virgin Islands may have more appealing weather, and the Seychelles breathtaking scenery, but for tens of thousands of persons seeking to form legal entities, Delaware remains the destination of choice.

The home of more than 1,052,000 companies, the tiny state plays host to the lion’s share of corporations and other business entities formed in the US, and its popularity continues to grow. Last year, 152,897 new entities were formed in Delaware, a 5% increase over 2012.

Increasingly, some of the same characteristics that have fueled Delaware’s rise as an incorporation haven have also come under fire by advocacy groups, US politicians and current and former law enforcement officials. Much of the controversy has focused on Delaware’s corporate anonymity – minimal information is required to form an entity, no data is collected on beneficial owners, and any number of company formation agents will gladly act as nominee directors.

Now, Delaware is taking a step toward greater transparency with two bills that lift the veil of corporate secrecy, albeit slightly.

Last week, the Delaware House of Representatives passed Bills 327 and 328. The legislation amends the state’s Limited Liability Company Act and Uniform Limited Partnership Act respectively to set up a chain of contacts that would ultimately lead to a company’s managers or members or a partnership’s partners. The bills also require LLCs and partnerships to keep records on the name and last known address of managers or partners.

The bills would require Delaware entities to provide to their “communications contact” a name, business address and business phone number of another person who would have access to records on managers or partners. This person could then disclose the name and last known address of managers or partners.

The bills still do not require companies to identify their ultimate beneficial owner, either at the time of incorporation or on request. After following the chain of contacts, a requestor seeking information on managers or partners could end up with the names of nominees, or the name of another corporation or legal entity. The legislation is currently awaiting a vote in the Delaware Senate.

Whether or not the bills will be effective in increasing the availability of information on the owners of Delaware entities, they seem likely to renew the debate over the state’s role as a so-called “secrecy haven.”

Critics say bill does ‘nothing’ to address corporate anonymity in Delaware

Tax and transparency advocacy groups pounced on the bills within days of their enactment in the House, criticizing them as half-measures that did little to alter Delaware’s corporate anonymity.

“This legislation will do nothing to pull back the curtain on who owns and controls Delaware companies,” said Stefanie Ostfeld, Senior Policy Advisor at nonprofit organization Global Witness, in a statement.

Global Witness, along with other groups the Tax Justice Network and Global Financial Integrity, have long pushed for beneficial ownership information on legal entities to be collected at the time of incorporation, stored by state or national corporate registries, and made publicly accessible. Such groups allege that anonymous shell corporations like those able to be created in Delaware are an essential tool for money launderers, corrupt politicians and organized crime rings.

Anonymous corporations are hardly the only reason to incorporate in Delaware. Favorable tax rates and a highly developed business law framework are arguably the bigger draws, and the reason why roughly 65% of Fortune 500 companies are incorporated in Delaware.

Critics of the state, however, point to anecdotal evidence of financial criminals lurking behind Delaware shell entities. Eastern European organized crime figures in particular seem fond of Delaware corporations. Alleged Serbian drug kingpin Darko Saric reportedly moved funds through Delaware companies, as did Laszlo Kiss, a Romanian offshore consultant arrested in 2010 on fraud and money laundering charges. Timothy Durham, who was arrested in 2012 for orchestrating a $207 million Ponzi scheme in Indiana, also utilized Delaware corporations.

US law enforcement agencies like the FBI and Justice Department, as well as industry associations for US financial institutions, have spoken out against corporate anonymity in the past. They argued that anonymous corporations often hamper investigations and hamstring institution’s efforts to conduct due diligence and accurate risk assessments. Even so, until recently, national governments had little appetite for public registries of corporate beneficial owners.

UK, EU announce plans for public corporate registries

Over the past two years, political support for corporate transparency has grown substantially, particularly in Europe. Last year, UK Prime Minister David Cameron announced plans for a public register for companies that would include information on their ultimate beneficial owners. The move would affect an estimated 2.5 million entities formed in the UK.

This past April, Cameron penned a letter on corporate registries to UK crown dependencies and overseas territories, which include offshore financial centers like Jersey, Guernsey, the British Virgin Islands and the Cayman Islands. The letter urged their governments to “consult on a public registry and look closely at what we are doing in the UK.”

The European Union has also taken up the cause of corporate transparency in recent months. In May, the EU Parliament voted to include provisions mandating public registries of corporations and trusts as part of its 4th Money Laundering Directive.

The legislation is still in draft form, but if passed, it would require EU member nations to create central repositories listing beneficial owners of a range of legal entities, including corporations, trusts, foundations and holdings. The amendments on public registries were included over the objections of trust and asset management industry associations.

In US, little action on corporate transparency

In 2006, the Financial Action Task Force conducted a mutual evaluation of the United States, giving the country high marks on compliance with most standards, but finding it non-compliant with one key recommendation – that dealing with the transparency and beneficial ownership of legal entities.

Little has changed in the seven years since then. Some US states reacted to the evaluation’s findings by augmenting the information gathered on owners of legal entities at the time of creation, or implementing measures to make information more accessible to law enforcement.

No federal legislation on corporate transparency or registration has been enacted, although Michigan Senator Carl Levin has repeatedly attempted to pass a bill that would require US companies to disclose their beneficial owners.

Since 2008, Levin has introduced the Incorporation Transparency and Law Enforcement Assistance Act four times, with a range of co-sponsors, only to have the proposed legislation die in committee. When the Act was last introduced, the Justice Department pledged $40 million from its asset forfeiture fund to offset the costs to states of implementing the bill’s provisions.

Without a national policy on legal entities, the degree of information required by each US state varies. Delaware is not the only one to allow for largely anonymous company formation. States like Nevada and Wyoming also require minimal information to create a legal entity, and do not collect data on beneficial owners.

The National Association of State Secretaries (NASS), which represents the branch of state government usually responsible for overseeing corporate registries and entity formation, has staunchly opposed any attempt to impose national standards for legal entities.

NASS argues that the US Constitution grants states the power to regulate of the formation of entities. In the past, NASS has also criticized definitions of beneficial ownership, both those in the FATF’s 40 Recommendations and in Levin’s Incorporation Transparency Act, as overly vague and unworkable.

The business of business incorporation can bring substantial revenues to US states, Delaware in particular. According to a report by the Division of Corporations, the state made $883 million in business entity taxes and fees last year, $16 million more than in 2012.

Non-transparent corporations help make US a tax haven, advocacy groups allege

Since the enactment of the Foreign Account Tax Compliance Act in 2010, the US has engaged in a global tax enforcement push. FATCA requires non-US institutions to report accounts they hold for US persons to the Internal Revenue Service. It has also led the US Treasury to forge intergovernmental agreements with more than 70 other nations committing to varying degrees of financial account information exchange.

Even as the US hunts offshore tax evaders, the nation’s spotty record and uncoordinated policies on corporate transparency have led some European political officials and advocacy groups to level accusations of hypocrisy.

Critics argue that anonymous US corporations are a vehicle for tax evaders in other nations. Advocacy group the Tax Justice Network labeled the US the sixth most secretive jurisdiction in the world in its 2013 Financial Secrecy Index, in part due to its legal entity standards. The Index also stated that the US is largest provider of offshore financial services, accounting for 22% of the global market

“The US protects itself from foreign tax havens, while remaining a tax haven for foreigners,” the report says.