Why We Need the Incorporation Transparency and Law Enforcement Assistance Act

flickr / James & Villja

An anonymous shell company is a corporation where it is impossible to know who the beneficial owners are. Beneficial owners are those people who ultimately benefit from, and are responsible for, the operations of the company. The result is a new corporate entity that can open bank accounts, sign contracts, receive payments, and perform all sorts of business without anyone knowing who they are actually doing business with.

Corporations serve a very important role in the economy. They allow multiple parties to work together without individually being liable for the potential failure of the joint venture. However, anonymous shell corporations are not formed to limit liability. They are formed one purpose and only one purpose: to hide the identity of the real people responsible for an action. This is a historical accident, not something that society would ever have a reason to intend.

There is no good reason to allow corporations hide the identities of the real people doing business. We see tremendous negative consequences as a result of anonymous shell corporations. Some recent cases include:

A man in Miami used a shell company to commit $4.5 million in Medicare fraud.
The SEC froze trading with 379 shell companies which were accused of creating shady ‘pump and dump’ schemes to manipulate the stock market.
A shell company called W Spann LLC donated $1 million to Mitt Romney’s Super PAC, then immediately dissolved.
The Central Bank of Iran used a shell company called Assa to own a 36-story Manhattan skyscraper near Rockefeller Square despite sanctions, funneling millions in rent back to Iran which may have been used to help fun their nuclear program.
Arms dealer Viktor Bout, the real-life subject of the 2005 Nicholas Cage movie Lord of War, used 12 U.S. shell companies to launder the proceeds of illegal weapons trafficking.
Teodorin Obiang, son of the kleptocrat dictator of Equatorial Guinea, used shell corporations to funnel as much as $70 million of corrupt money into the United States.
Swiss bank Wegelins used shell companies to help their high-end clients hide their identities and evade taxes.

These are just a few of the individual cases of shell company abuse that we know about. The hard work of investigators in civil society, government, and the media have uncovered a few potent examples. But in all liklihoods, many more cases lurk beneath the surface, covered by the easy anonymous cover that our broken incorporation system offers.

We make it very easy to incorporate in the United States. Costs vary by state, but the median feee is just $95, and registration can be completed in as little as five minutes. While some states require you to list shareholders, managers, trustees, or board members as part of the registration, it is easy to assign ‘nominee’ shareholders to those positions who stand in for the real owner without any connection to the company’s operation. In many states, the incorporation will even fill those shoes themselves, for a fee. While some states create a more secretive incorporation system than others, such as Nevada or Delaware, no U.S. state has a real beneficial ownership standard.

We can change this. It not technically difficult, and imposes no significant burdens on law-abiding citizens doing legitimate business. U.S. law enforcement considers it so important that the Departments of Treasury and Justice have offered their closely-guarded asset forfeiture funds to pay for implementation – a rare move for agencies under constant budget constraints. We can require that beneficial ownership information be collected, which is physically not more difficult than adding a few lines to a form, and publish online in public databases. At minimal cost, we can remove an incredibly important tool from the criminal’s toolbox.

We can get there by passing the Incorporation Transparency and Law Enforcement Assistance Act. The bill would require states to collect beneficial ownership information, publish it online in databases, and hold incorporation agents accountable in the case of misconduct. It is fully paid for from the above mentioned Treasury and Justice funds.

Today, 41 civil society organizations, including Task Force members Global Financial Integrity and Global Witness, sent a letter to Congress to press for action on the bill to,

Curb corruption and tax evasion, promote an equitable market economy, reduce the opacity of corporate campaign contributions, help ensure a fair and level playing field for small- and medium-sized businesses, foster global development and enhance national security.

Congress needs to act on the Incorporation Transparency and Law Enforcement Assistance Act today. Every day we wait, we allow more criminals to abuse our system for their own personal gain.