Thursday, June 18, 2009

Wilmington, Delaware, receives unwelcome attention

Tax havens aren't what they used to be. Graham Greene famously coined the phrase "sunny places for shady people", but images of islands in the sun are quickly receding as more and more of these secrecy jurisdictions come under the spotlight.

The latest, and apparently most surprising (not least to US citizens) secrecy jurisdiction to come under the spotlight, is Wilmington, Delaware, home to around 60 per cent of America's Fortune 500 companies.

Delaware, no island in the sun, has hit the headlines at home and abroad for two reasons: firstly, it rather rankles in Luxembourg, Vienna and Zurich that they made the OECD's grey list, whilst London, Wilmington and others did not. Not surprisingly they called foul when the list was published in April, and are now playing a jolly game of pointing fingers at big power hypocrisy. Second, and more importantly, today sees the start of the US Senate hearing into the proposed Incorporation Transparency and Law Enforcement Assistance Act, which aims to require information disclosure about beneficial ownership, amongst other things.

Further details about today's hearing have just been circulated in the following press release:

WASHINGTON - On Thursday, June 18th, at 2:30 p.m. in Room 342 of the Dirksen Senate Office Building, the Senate Homeland Security and Governmental Affairs Committee will hold a hearing on S. 569, the Incorporation Transparency and Law Enforcement Assistance Act, a bill to help law enforcement stop the misuse of U.S. corporations. S. 569 was introduced in March by Sen. Carl Levin, D-Mich., Sen. Chuck Grassley,R.-Iowa, and Sen. Claire McCaskill, D-Mo.

"At the same time that we are calling for an end to offshore secrecy,"said Levin, "we need to put our own house in order and meet our international commitments by obtaining ownership information forcorporations formed within the United States. The Levin-Grassley-McCaskill bill would do just that."

Currently, nearly two million corporations and limited liabilitycompanies (LLCs) are formed within the United States each year. The States generally form these corporations without asking for the identityof the corporation's beneficial owners, meaning the real owners. Lawenforcement and national security problems have resulted when some ofthese corporations have become involved with money laundering, tax evasion, or other misconduct. S. 569 would require the States to obtain beneficial ownership information for the corporations formed under theirl aws and to provide access to this information to law enforcement upon receipt of a subpoena or summons.

The Senate Permanent Subcommittee on Investigations, chaired by SenatorLevin, has been pursuing this issue since 2000, when the Government Accountability Office (GAO) conducted an investigation, at the Subcommittee's request, into an individual who set up over 2,000 Delaware shell companies, established bank accounts for some of those companies, and without revealing their identities, moved $1.4 billion dollars through the bank accounts.

In April 2006, the GAO prepared another report at the Subcommittee's request entitled, "Company Formations: Minimal Ownership Information Is Collected and Available." This GAO report reviewed the legal requirements in all 50 states to setup corporations and LLCs, found that most states failed to request beneficial ownership information, and reported that the absence of this ownership information impeded law enforcement investigations of suspectcorporations.

In November 2006, the Subcommittee held a hearing in which the GAO report was released, and officials from the Department of Justice (DOJ), Internal Revenue Service (IRS), and Treasury Department's Financial Crimes Enforcement Network (FinCEN) testified about an increase in the use of U.S. shell companies for illicit activities, and the problems caused by the lack of beneficial ownership information. The Subcommittee has collected numerous examples of these shell company problems, including the following:

* The Manhattan District Attorney's Office recently announced several cases which involved the movement of funds through New Yorkbanks by entities controlled by the Iranian military and two relatedmatters in which U.S. shell companies were established to hide secretIranian interests.

* The Immigration and Customs Enforcement (ICE) arm of theDepartment of Homeland Security (DHS) uncovered a network of nearly 800 U.S. companies in 2004, that were located in nearly all 50 states, were engaged in hundreds of millions of dollars in suspect money transfers, and were associated with shell entities in Panama, an offshore secrecyjurisdiction. None of the 800 incorporation forms identified a true company owner. Nearly 200 had been formed in Utah by the same Utah company formation agent, which told ICE it had formed them at the request of a Delaware company formation agent. Neither the Utah nor Delaware company formation agent could provide information on the true company owners, since that information is not required by law. The ICE investigation was unable to proceed due to the lack of ownership information.

* A company formation agent called Corporations Today Inc.offers to sell U.S. "aged" companies via the Internet, claiming: "We have the largest inventory of aged shell corporations in the United States." Corporations Today recently offered for sale, for a price of nearly $6,000, a Wyoming shell company with 4 years of tax returns and an Employer Identification Number issued by the IRS, even though it had never actually been used since incorporation.

* A 2005 analysis by FinCEN of suspicious activity reportsindicated that as much as $18 billion in suspicious transactions haveoccurred through international wire transfers utilizing U.S. shellcompanies.

* In recent years, the U.S. Department of Justice and DHS have received, but have been unable to answer, hundreds of requests from foreign law enforcement agencies for beneficial ownership information on U.S. companies suspected of criminal misconduct.


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