Financial Transparency Coalition

This post originally appeared on the blog of Global Witness, a member of the FTC.

Last November, a former special agent for the Treasury Department, John Cassara, wrote an op-ed for the New York Times with the headline “Delaware, Den of Thieves?” Cassara described how the state of Delaware (along with Wyoming and Nevada) has become “nearly synonymous with underground financing, tax evasion and other bad deeds facilitated by anonymous shell companies”. He told of his frustration as a law enforcement officer trying to get information out of Delaware about the real owners and controllers of companies registered in the state.

This week, a debate has started in Delaware about its role as a corporate secrecy haven. One-half of the members of the Delaware State Legislaturehave sent a letter to the Delaware Congressional Delegation, urging them to support bipartisan federal legislation introduced by Senators Levin (MI-D) and Grassley (IA-R) to deal with anonymous companies.

To understand why this is such a big deal, it’s important to understand the extent to which Delaware is a global hub for company formation. More than 1 million companies are incorporated in Delaware, which is more than the actual number of living residents. That number includes 50% of all publicly-traded companies in the U.S. and 64% of the Fortune 500. This is no accident; Delaware law grants attractive tax arrangements and other measures that attract businesses to incorporate there. These measures have paid off – in 2011 alone, Delaware collected roughly $860 million in taxes and fees from these companies – about a quarter of the state’s total budget.

But there’s a shadow side to Delaware’s status as an incorporation hub. Around the world, drug dealers, dictators and arms dealers use networks of shell companies with hidden ownership to launder their ill-gotten gains and evade authorities – allowing them to cause harm to millions of people around the world.

And, while stories about secret shell companies often conjure up images of tropical locales, the reality is that U.S. states – with comparatively strong rule of law and attractive U.S. ‘branding’ that offers an air of legitimacy – are very popular locales for dodgy deals. A recent World Bank report found that the U.S. was the favorite destination of corrupt politicians trying to set up such shell companies. Another academic study found that U.S. states ranked among the easiest jurisdictions in the world to form a company without revealing the identity of who ultimately owns or controls it – with Delaware being one of the easiest of all.

For example, a Delaware anonymous company was at the center of a corruption scandal involving the former Prime Minister of Ukraine. In 2006, Pavel Lazarenko was sent to jail in the United States for laundering tens of millions of dollars of money that rightfully belonged to the Ukrainian people.  How did he do this? In part by using anonymous companies incorporated in Delaware and California. In fact, Lazarenko used one of these companies to funnel money into the United States to buy himself a $7 million house in California.

Now it’s not just corruption investigators raising questions about Delaware’s part in this global money web.  Delaware-based organizations were instrumental in bringing this issue to the attention of the state legislators who are now calling on the Congressional delegation to support federal action.

Led by the Delaware chapter of Americans for Democratic Action, 13 state-based organizations including labor, good government and social justice groups issued a statement raising concerns about the of use of anonymous companies to set up dirty deals in their state’s back yard, and calling on the state to strengthen its own transparency laws. Today’s letter to the Congressional delegation takes that initiative one step further by showing that local lawmakers want Delaware’s Members of Congress to be partners in this effort as well.

This stirs up a bit of a dilemma for Delaware’s Congressional Delegation.  On the one hand, lawmakers such as Senator Chris Coons are known on Capitol Hill for their commitment to tackling poverty in the Global South, especially in Africa.  Shutting down anonymous companies would be a huge contribution to anti-poverty efforts by greatly reducing the ability of corrupt officials to line their pockets by siphoning off resources from the poorest countries in the world.

On the other hand, the Delaware delegation as well as some Delaware officials, working through organizations such as the National Association of Secretaries of State, have also been the most vocally opposed to what we believe are the meaningful reforms needed to collect and disclose information about who really owns and controls the companies involved in these crimes and scandals.

In contrast, other global hubs for company formation, such as the UK, are moving forward to create public registries of beneficial ownership information, with the support of government officials and business organizations alike.

The status quo isn’t working, and millions around the world are suffering as a result.  All this activity shows plenty of people – around the world and in Delaware – believe that support for entrepreneurship and innovation CAN go with transparency for government and business; it doesn’t have to be an either/or equation. Now that citizens and local lawmakers in Delaware are speaking up, will Delaware’s national officials show leadership on this issue in response?

Image used under Creative Commons license / Flickr User: Jim Bowen