OK, now it gets interesting and here is the story on how the US is one of the world’s largest tax havens.
The release of the so-called Panama Papers threw back the veil on how the world’s ultra-rich hide their wealth in secret offshore shell companies, and critics say Delaware’s incorporation law also allows faceless corporations to legally hide assets.
Delaware is America’s incorporation leader, home to more companies than people, with about 1.18 million legal entities incorporated here –– a number that’s grown by more than a third since 2008. The First State aggressively markets its business-friendly culture, making it simple to create a corporation or an LLC, and touts its more than one century of Chancery Court case law giving companies confidence about how business disputes will be resolved.
Disclosures from the Panama law firm that created shell companies for the ultra-rich have already brought down the prime minister of Iceland, prompted calls for British Prime Minister David Cameron to resign and implicated hundreds more of the world’s most powerful people who used the firm to hide cash.
President Barack Obama has lent his voice to worldwide cries for reform, but Delaware leaders say a federal crackdown on shady financial dealings could benefit the First State because it has the potential to fortify Delaware’s brand worldwide. But any reform must be consistently implemented nationwide, say Senators Tom Carper and Chris Coons, because if left to state discretion a Delaware competitor could allow more lenient rules, leaving the door open for criminal enterprise.
Delaware gets 25 percent of its annual budget from incorporation taxes and fees, and state officials say they will fight any changes that threaten the state’s dominance over the franchise game.
The International Consortium of Investigative Journalists secured files from the Mossack Fonseca law firm in Panama revealing the hidden cash. While all states allow companies to incorporate anonymously, national media reports, watchdog groups and representatives of other states say Delaware’s system essentially mirrors Panama’s in terms of secrecy.
There are dark marks on Delaware’s system.
Among exposed cases are disgraced lobbyist Jack Abramoff and his colleagues, who set up a company in a Delaware beach house and used the firm to launder money pilfered from clients, and notorious Russian arms dealer Viktor Bout, who used at least two Delaware shell companies to move money into legal channels.
But Secretary of State Jeff Bullock said Delaware’s $1 billion in franchise revenue is legitimate and hard-earned, and defends its incorporation system as America’s gold standard.
“You can go on the Internet and copy our law. What you can’t copy is our reputation,” said Bullock. “Think of it like a brand. Our long-term interest is in making sure that the kind of activities that have been revealed in the Panama Papers stop.”
The Panama Papers dumped 11.5 million leaked confidential documents detailing more than 214,000 offshore companies listed by service provider Mossack Fonseca. Documents disclosed amount to the most substantial evidence ever how the wealthy and powerful worldwide are hiding their money to avoid paying taxes.
Relatively few Americans are entangled in the scandal. But the revelations made so far are only the tip of the iceberg — the handful of media outlets that have been given access to the data still are combing through documents, and reports on them are likely to continue for some time.
From leak to publication, it was more than a year of research and reading to release journalists’ findings from the Panama Papers.
Delaware doesn’t track specifically the number of holding companies registered here. A list of the businesses incorporated in the state would be a massive document, and the deputy publisher at Tax Analysts, David Brunori, said digging into it to find which companies are shams would be a marathon undertaking.
“There’s no way. It would take you 20 years,” Brunori said.
As the spotlight pans across the globe, several U.S. states are inevitably mentioned as enablers of shadow finances, and chief among them is Delaware. The machinery of incorporation is the First State’s bread and butter.
“If what you’re talking about is the ability to form a corporation in a filing cabinet within 24 hours, Delaware is the place,” said Scott Dyreng, a tax and business professor at Duke University. “If I wanted to form a Delaware corporation or a Delaware LLC and I really wanted to I could have it done by the end of the week, no problem, because there’s an entire industry set up to do that. It’s what drives Delaware.”
A record-breaking 178,000 new corporations were approved last year, five percent more than the previous year’s record. That’s an average of about 487 companies a day.
Mossack Fonseca, by comparison, creates about 20,000 shell companies a year, one of its partners told the Associated Press.
More than half of U.S. companies listed on major stock exchanges are incorporated in Delaware, including about two-thirds of all Fortune 500 companies. About 86 percent of companies that had Initial Public Offerings for stocks last year chose Delaware as their corporate home.
About 95 percent of companies incorporated in Delaware actually are located elsewhere.
How much the Panama Papers will change such practices – or should – is an open question.
“There is no doubt that the problem of global tax avoidance generally is a huge problem,” President Obama said this week. “The problem is that a lot of this stuff is legal, not illegal.”
Whether that same sentiment will take root across the board is iffy.
“There may be this giant outcry from the whole world that says we have to tell the world who the owners of these businesses are, but America is so well known for our privacy in general that it’s not clear to me people are going to be okay with that,” Dyreng said.
Delaware has wrestled with the conflicts of its incorporation machine for a long time, and its practices would survive scrutiny, said attorney Ellisa Opstbaum Habbart, a founding member of the Delaware Counsel Group which represents the state’s corporations nationally and internationally.
“If someone puts a spotlight on us, we can prove how much we’ve done,” Habbart said. “We don’t need to do anything else.”
Added Bullock: “We’re the big kid on the playground, so we get a lot of attention. To some extent we should get attention because we’re the industry leader. But I think we have to separate the facts from the fiction when you hear things like ‘Delaware is a tax haven.’ ”
Bullock argues Delaware has earned such an outsized share of incorporations for a different reason than Panama or the Cayman Islands: It provides the professional efficiency and legal consistency that businesses crave.
Delaware makes it easy
Delaware’s process for incorporation takes seven steps, according to a guide posted on the Division of Corporations’ website.
The founder has to pick a type of corporation. Unless the business is physically located in Delaware, the founder must hire a registered agent, who will handle the entity’s Delaware responsibilities on behalf of those who created it.
Mossack Fonseca, the company the Panama Papers leak came from, is a registered agent in Panama.
Bullock says a major difference between Delaware and Panama is the community of registered agents, many of which have long histories and strong reputations here. Corporate Services Company, for example, is one of the oldest and largest legal-service businesses in the country, with 1,000 employees in northern Delaware and another 1,000 in 26 satellite offices in the U.S., Europe and Asia.
“CSC has long been committed to working only with legitimate entities operating within all laws and regulations, and we have procedures and policies to proactively ensure full compliance,” Ian McConnel, the firm’s director of governmental affairs, said in a statement to The News Journal. “As we have done in the past, we stand ready to work with both state and federal policymakers, as well as our customers and industry peers, to ensure best practices in the industry.”
McConnel was chief deputy to Beau Biden when Biden was Delaware’s attorney general.
After obtaining a registered agent in Delaware, the business creator must reserve a name, fill out and submit a certificate of incorporation and formation forms and, in some cases, get certified copies of those forms. The filing fee is $50 plus taxes.
Once the business is created, it must file an annual report with the state and pay an annual franchise tax. The minimum franchise tax is $175 and the maximum is $180,000.
Experts like Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, say the state’s incorporation system is faster, easier and has a better reputation for customer service than other states.
“Our law is not designed to promote shell companies. Yes, some people may use it to evade some taxes, but that is not our business model,” Elson said. “Delaware is not set up to rig the game. We have a well respected corporate code and court system.”
Many experts balk at the idea that Delaware is a tax haven, a place where taxes are levied at zero-to-low rates with a degree of secrecy offered to investors. Incorporating in Delaware makes avoiding some state taxes possible, but experts say the rules still require the same level of federal oversight as in other states.
“When someone says Delaware is a tax haven, I think they’re misinformed. Delaware is part of the United States, and the tax system is enforced,” said Lawrence Hamermesh, director of the Widener Institute of Delaware Corporate and Business Law.
Hamermesh said the problem of cleaning up international regulation on shell companies is tough, and the Panama Papers certainly will stoke the desire to do so the world over. It’s a law enforcement problem that needs to be addressed.
Panama fits the definition of tax haven.
In the 1920s, Wall Street executives helped the Panamanian government craft legislation allowing anyone to set up anonymous and tax-free corporations within its borders. In the 1980s, the country’s loose laws attracted the cash flow of drug cartels.
Companies formed there don’t have to file tax returns or have their accounts audited. Its existing regulatory reporting requirements are weak, and it wasn’t until February that the international Financial Action Task Force pulled it from a list of countries with weak money-laundering laws.
When foreign leaders and celebrities funnelled funds into those shell corporations, experts said, they assumed the money was invisible to the governments who expected a cut from it. That changed when the Panama Papers dropped.
What might reform look like?
The United States now accounts for one fifth of the global market for offshore financial services, which along with its relative comfort with secrecy placed it at No. 3 on the Tax Justice Network’s list of worldwide tax havens. Some experts, like Hamermesh, reject this notion.
The Network claims these practices harm ordinary citizens of foreign countries, whose elites are using the United States to stash looted wealth.
Bullock said one of the important steps the federal government could take would be to make it easier for law enforcement to access who the beneficial ownership of a corporate entity is, meaning the real human that benefits from the corporation.
The Internal Revenue Service already collects information on the ‘beneficial owners’ of corporations, but old statutes place hurdles in the way of that information getting into the hands of agencies like the FBI and the Justice Department.
Unlike many groups that advocate for financial transparency, Bullock does not want those records to be publicly available, saying there is a right to privacy when it comes to a person’s property. But he said it should be “common sense” for criminal investigators to be able to get that information easily.
U.S. Sen. Tom Carper said he is working on a proposal to give law enforcement easier access to records.
“I have long believed it should be easier for law enforcement to access identity information about criminals who manipulate our corporate laws to hide their nefarious activities,” Carper said in a statement. “Congress has a ripe opportunity to make changes to current rules that will give law enforcement more tools to crack down on crime, while preserving a nurturing environment for American businesses to grow and thrive.”
Carper’s colleague, Sen. Chris Coons, agrees with Carper and supports his idea.
“We also must ensure the legitimate businesses are able to invest in the U.S., create jobs and grow our economy,” Coons said in a statement.
Another reform Bullock supports is making it a criminal offense to falsify information when incorporating. That would make agents who surreptitiously act on behalf of people who don’t want their names tied to a shell company think twice before lying to cover for that person.
“These are not really big, complicated things, and they ought to be things we’re already doing, to be honest,” Bullock said.
The key is having the federal government make these changes. If states implement them piecemeal, “bad guys” will simply seek the state with the weakest rules, Bullock said.
But Delaware already is and has been home to bad actors abusing the easy system of incorporation.
Timothy Durham, known as “the Midwest Bernie Madoff” for scamming 5,000 investors out of $207 million, kept a business incorporated on Orange Street in Wilmington.
The American International Center was part of Abramoff’s lobbying scandal to receive and redistribute clients’ funds for personal and political gain. Incorporated in Delaware, the front organization was headed in name by David Gorsh, a lifeguard who admitted to Congress he was part of the scam and operated the shell business from his Delaware beach house.
It’s believed Mexican drug lord Jaquin “el Chapo” Guzman incorporated his tequila business in Delaware. Bout, known as “the merchant of death,” used two Delaware addresses.
Bad actors can keep their ownership of shell corporations secret anywhere in the United States, Dyreng said, but might choose the First State because it’s so accommodating.
“If you get enough corporations there’s going to be some bad ducks in the mix. You don’t have to worry about it that much if you’re Idaho, there’s just not that many corporations and there’s not going to be as many bad ducks so it’s not as big a problem,” Dyreng said.
Bad ducks quack for the same price as the good ones, but it’s impossible to target one group without weakening the appeal of Delaware as a place to do business altogether. The advantage of using Delaware is ease of incorporation and more shareholder protections than most if not all states, Brunori said.
“It’s not going to change in Delaware. Delaware has set itself up to be a very corporate-friendly place,” Brunori said. “It’s a business-friendly state and they’re not going to do anything to mess with that. There’s zero incentive to do that.”