Attracting the Wrong Kind of Crowd

September 30th, 2011

You probably already know that the Swiss Alps and tiny Caribbean islands aren’t the only places to hide illicit activities behind a veil of banking secrecy. Maybe you know that tax evaders and money launderers are increasingly looking to Asian centers like Hong Kong and Singapore to store their ill-gotten and government-evading dollars. Maybe you even know that some of the best places to hide your black money aren’t in the developing world or on a remote island. They’re in places like Delaware, London, and Nevada.

In Delaware and Wyoming, for example, clients can anonymously set up shell corporations (companies that are used exclusively for business transactions and do not have any real assets or operations).  Nevada, one of the worst offenders, does not require banks to even request the names of account or company shareholders, nor do they need to share that information with the federal government.  This means it’s easier to set up a corporation in Nevada than it is to get a library card.

In fact, as Jason Sharman, a political scientist at Australia’s Griffith University who studies tax haven issues, has put it: “In practice OECD countries have much laxer regulation on shell corporations than classic tax havens. And the U.S. is the worst on this score, worse than Liechtenstein and worse than Somalia.”

It’s been this way for quite some time. Nevada in particular has tried to woo businesses by obscuring transparency. In fact, it was about ten years ago that Nevada enacted some of the loosest disclosure and liability laws for corporations that this nation has ever seen. Its laws protect corporate officers and directors from “liability for breaches of duty, bad faith and self-dealing – acts that can be the basis of lawsuits in other states.” It was the State’s intention that the policy would spur business incorporation—in hopes of leading to economic growth.

But now Nevada has begun a cautious crackdown on these entities. Early in September Nevada Secretary of State Ross Miller shut down a registered agent and revoked the corporate status of its 427 corporate clients for fraud. Miller stated that his actions should be a warning and that his office intends to “aggressively enforce” the state’s “statutes and regulations.” Miller also noted that the “state’s ‘business friendly’ ethos…should not be interpreted to mean ‘haven for bad actors.”

I’m not sure if Miller can believe this “business friendly” mumbo jumbo. Nevada’s statutes aren’t business-friendly. They’re criminal-friendly. It’s like a city advertising the fact that it’s going to drawdown its police force and then feigning surprise when a bunch of criminals move to town and flaunt the rules. Of course you’re going to increase financial crime and fraud when you decrease transparency. C’mon.

This case sharply underlines yet another reason that Congress should pass the Incorporation Transparency and Law Enforcement Assistance Act of 2011. This Act, which Senator Carl Levin and Senator Chuck Grassley introduced in the Senate, would require States to obtain the identities of the persons behind corporations. It would essentially outlaw the type of egregious lack of transparency thatNevada exhibits.

Senator Levin has noted that this federal legislation is necessary because “a single State can’t solve the problem on its own…if one State starts requiring names, people seeking to use corporations for nefarious purposes can switch to another State with weaker requirements.” Legislation would “level the playing field among the fifty States” and “get them to obtain corporate ownership information so it is available to law enforcement investigating corporate wrongdoing.”

Senator Levin is right. The only way to solve this problem is with federal legislation that will disallow this type of rouge action. It’s good for honest taxpayers. It’s good for the country. And, quite frankly, it’s good forNevada, too.

Written by Ann Hollingshead

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