For investigators, few things are more frustrating than finding yourself hot on the trail of a potentially vital piece of information only to arrive at an insurmountable roadblock. Such is often the case when investigating subjects who use anonymous shell corporations as a cover for behavior that they prefer remain hidden.
For those unfamiliar with the term, shell corporations are companies in name only. They are legal entities registered with a state or national government but that produce no actual goods or services. Rather, they allow for money to be held – some would say sheltered – for the benefit of the company’s owners.
A Boon to Delaware
Shell companies are not unique to any one state, but what is unique is the ability for owners of shell companies to be able to register them without naming themselves, which is allowed in only a handful of states, including Delaware, Wyoming and Nevada. In Delaware, in particular, the ability to form a company anonymously, as well as a business-friendly corporate climate in general, has helped make the state America’s shell corporation capital. In fact, Delaware now has more than one million registered corporations – that’s more companies than it has people – and gets nearly one quarter of its state budget from company incorporation fees.
While shell corporations have legitimate and perfectly legal business uses – for example, as a means for a startup company to amass capital – jurisdictions that allow shell company ownership to remain anonymous have drawn scrutiny as enablers of nefarious activities such as tax evasion and money-laundering.
Panama Papers Illustrate the Problem
For dramatic evidence of how widespread this practice is globally, consider last year’s groundbreaking Panama Papers report, which revealed the extent to which wealthy individuals worldwide – including dictators, drug kingpins and Russian oligarchs – use networks of shell corporations and banks based in offshore tax havens to shelter hundreds of millions of dollars, in some cases to avoid paying taxes, circumvent international sanctions or launder money.
When the Panama Papers story broke, some journalists noted the absence of Americans on the list of high rollers using these offshore accounts. The reason? According to offshoring experts, they have no need to go abroad and can simply create shell companies anonymously here in the U.S.
An Effort at Banning Anonymity
In an attempt to ban the use of anonymous shell companies in the U.S., bipartisan legislation introduced last month on Capitol Hill would require disclosure of the beneficial owners of any U.S. corporation. The measure, called the True Incorporation Transparency for Law Enforcement Act, or TITLE Act for short, is co-sponsored by senators Sheldon Whitehouse of Rhode Island, Dianne Feinstein of California, and Chuck Grassley of Iowa. A companion bill, called the Corporate Transparency Act, was introduced in the House at the same time. The bill’s stated aim is helping law enforcement “in detecting, preventing, and punishing terrorism, money-laundering, tax evasion, and other criminal and civil misconduct involving United States corporations.”
A similar bipartisan bill was introduced last year in Congress but died in committee. It’s hard to imagine why Congress wouldn’t pass such legislation, especially in light of increased concerns about terrorist funding in our post-9/11 world. But you can bet that the state of Delaware, companies providing corporate registration services for individuals who wish to remain anonymous and others benefiting from the status quo will try to make sure it never passes.
As an investigator I, for one, hope it does. Not just for the selfish reason that it would make my job easier in some cases, but, more importantly, because the benefits so clearly outweigh any possible drawbacks. I don’t doubt that having to list their name alongside that of the shell companies they own would create what I’ll politely call an inconvenience for some shell company owners. But it’s a bit of added transparency that is likely to benefit the greater good.