In a September 20, 2017 article in Foreign Affairs, Casey Michel discusses how the United States has become has become one of the most important destinations for offshore ownership vehicles, enabling tax evasion, corruption, and crime and offered the world some of the foremost tools for combating crime and grand corruption. The Department of Justice Kleptocracy Asset Recovery Initiative was formed in 2010 to
“curb high-level public corruption around the world. Led by a team of Department of Justice prosecutors working in tandem with the FBI and other federal law enforcement agencies, its mission is to forfeit the proceeds of corruption by foreign officials and, where appropriate, to use recovered assets to benefit the people who were harmed. Individuals with information about possible proceeds of foreign corruption located in or laundered through the United States should contact federal law enforcement or send an e-mail to kleptocracy@usdoj.gov.”
Casey and Ana Swanson author of an April 2016 post How the U.S. became one of the world’s biggest tax havens note that, contrary to popular belief, notorious tax havens such as the Cayman Islands, Jersey and the Bahamas werre far less permissive in offering them (as researchers) shell companies than states such as—primarily, Delaware, Nevada, and Wyoming—but also including Montana, South Dakota, Wyoming and New York.
A combination of lax requirements at the federal government level and the abuse of federalism at the level of the states has created this dilemma. Although the federal government has signed on to international agreements committing the United States to disclose company ownership—and even though many other offshore havens require this basic level of transparency—the US federal government does not force registering companies to identify their “beneficial owners” (those who will ultimately benefit from the company’s business or holdings). Federal officials who do seek such information, moreover, encounter push-back from state-level authorities. For their part, U.S. company service providers—the groups that form “shell companies”* on behalf of anonymous clients—face relatively little pressure to do such identification, certainly not from the states benefiting from the registrations.
Because the negative consequences of their permissiveness mostly land elsewhere—and serve to let kleptocrats plunder their own countries, Michel notes, the states have little reason to introduce stricter rules or to more rigorously enforce those already in place. A 2016 investigation by National Public Radio found that Wyoming had audited only 20 of its 450 company service providers since 2009.
The negative consequences of the secrecy provided by shell companies hit home as well, however. Anonymous companies represent an important nexus of corruption, money laundering, transnational organized crime, and terrorism, which directly harm U.S. interests. As a recent highly-informative post by Jodi Vittori, on the Council on Foreign Relations site, points out the secrecy enables “terrorists, criminals, and their ilk to use American corporations, real estate, and trusts to finance activities that harm the United States and its foreign interests.”
The effects of the secrecy may get Congress to act: current bills include Corporate Transparency Act (S.1717/H.R. 3089) and the True Incorporation Transparency for Law Enforcement (TITLE) Act (S. 1454).
*Anonymous shell companies are often no more than a title in a corporate registry and a name plate on a door; the actual person or persons who own and control the company—the so-called beneficial owners—are either concealed or not recorded at all. These companies enable the powerful and connected to hide their assets from law enforcement, tax authorities, or other interested parties, frequently by nesting these companies inside a complex web of businesses incorporated in different jurisdictions.
Often, shell companies are established through a corporate service provider—a company that can incorporate on behalf of one or more individuals, a firm, a charity, or some other party. Instead of recording the actual beneficial owners, the company can be registered to someone who rents out his or her identity, known as a nominee. This nominee can be a lawyer, law firm, relative, or other person connected to the real owner, or even another company or trust, which itself may be anonymously owned.1
1 Jodi Vittori, How Anonymous Shell Companies Finance Insurgents, Criminals, and Dictators, Council on Foreign Relations.