The New York Times Begins To Connect The Shadow Financial System Dots

July 3rd, 2012

flickr / mmahaffieThree separate articles were published by The New York Times this week, connecting the dots of the shadow financial system. All three articles centered in some way around incorporation transparency – knowing who is the real beneficial owner of the corporation that you are doing business with. This issue is one of the five recommendations advocated for by the Task Force, and is at the center of countless world problems.

The first article, “How Delaware Thrives as a Corporate Tax Haven” looked at how shell companies based in Delaware show up and cause trouble all over the map:

Big corporations, small-time businesses, rogues, scoundrels and worse — all have turned up at Delaware addresses in hopes of minimizing taxes, skirting regulations, plying friendly courts or, when needed, covering their tracks. Federal authorities worry that, in addition to the legitimate businesses flocking here, drug traffickers, embezzlers and money launderers are increasingly heading to Delaware, too. It’s easy to set up shell companies here, no questions asked.

“Shells are the No. 1 vehicle for laundering illicit money and criminal proceeds,” said Lanny A. Breuer, assistant attorney general for the criminal division of the Justice Department. “It’s an enormous criminal justice problem. It’s ridiculously easy for a criminal to set up a shell corporation and use the banking system, and we have to stop it.”

The second, “In the Caymans, Its Simple to Fill a Hedge Fund Board” moves offshore, where many U.S. hedge funds are legally based:

An analysis of thousands of United States securities filings by The New York Times shows that dozens of directors sit on the boards of 24 or more funds in the Caymans, which individually are supposed to be overseeing tens of billions of dollars in assets. Some hold more than 100 directorships, and one particularly busy director sits on the boards of about 260 hedge funds.

It is easy to draw the line between the financial crisis of 2008 and an opaque network of hedge funds. In the Caymans, and many other jurisdictions, people who want their corporations to skirt regulation and law enforcement, and remain anonymous, appoint “nominee” shareholders, board members, and trustees to act as placeholders on their paperwork. In incorporation hubs like the Caymans, Delaware, and Nevada, this has become a big business. Many incorporation agents will even sell their own names as nominees and placeholders, obscuring their clients  from detection.

The final article, an Op-Ed, “Keep the Dictators Out of Malibu“, looked at the United States’ role in enabling the opulent life of Teodoro Obiang, the son of the corrupt dictator of Equatorial Guinea. Obiang lived for years in a lavish Malibu mansion, collecting fleets of expensive cars and millions in Michael Jackson merchandise, and at one point commissioning the construction of a $380 million yacht, despite an official salary as a deputy cabinet minister of under $90,000 per year. How was he able to get away with it for so long? The article reads:

The primary legal shortcoming is that many jurisdictions — from the Cayman Islands to certain American states — don’t require companies to disclose their true beneficial owners (as opposed to their registered owners, who serve as fronts). Dictators and despots can therefore easily hide their assets: instead of buying property in their names, they instead will buy a mansion owned, for example, by a Panamanian trust controlled by a Bahamian corporation that’s run by a company registered in Lichtenstein.

Mr. Obiang hired lawyers and accountants to set up shell companies with bank accounts that were used to launder money into America. His own ties were kept hidden so banks didn’t know they were handling his money. If they discovered his ties, they closed the accounts, prompting him to use even more duplicitous methods.

The lesson from these articles should be clear. Opaque shell corporations need to be eliminated. There is not one persuasive reason why they should exist. Corporations exist to grant limited liability to owners, not to provide anonymity. Companies without transparency are fundamentally unaccountable. Eliminating them is not a costly or challenging endeavor. Passing the Incorporation Transparency and Law Enforcement Assistance Act would make almost overnight make their existence impossible, and wouldn’t increase the deficit one cent. We don’t have to live in a world where criminal, tax evaders, and corrupt dictators can hide their money in the United States.

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Written by EJ Fagan

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