Through the back doorBy Bill McConnell
http://www.thedeal.com/newsweekly/2009/03/through_the_back_door/print/The Sept. 11 attacks couldn't generate enough political heat to melt the privacy protections that some state governments offer corporate owners. But the financial crisis just might. Sen. Carl Levin, D-Mich., as part of a broader push to eliminate a variety of corporate tax dodges, has teamed with Kentucky Republican Mitch McConnell to sponsor legislation that would require disclosure of the beneficial owners of all U.S. corporations.
The aim is to prevent criminals from using shell companies to evade taxes or as fronts for nefarious activities.
Since the 2001 attacks, Levin has argued that some state laws allowing corporations to be set up without revealing the identities of their ultimate owners pose a national security threat. He is outraged by advertising pitches from lawyers like one he found on a Web site that offered Delaware as an "offshore tax haven for non-U.S. residents."
Among Delaware's advantages, the ad cited, is that "owners' names are not disclosed to the state." Another Web site for a U.K. firm calling itself formacompanyoffshore.com offered to set up incorporations in Nevada, where the promoters say there is "no IRS information sharing agreement" and "stockholders are not on public record."Despite such advertising, years of law enforcement complaints and mounting evidence of abuse, "many of our states are reluctant to admit there is a problem," Levin said on the Senate floor as he introduced his bill March 11.
"Too many of our states are eager to explain how quick and easy it is to set up corporations within their borders, without acknowledging that those same quick and easy procedures enable wrongdoers to utilize U.S. corporations in a variety of crimes and tax dodges."
Levin's bill would require state incorporation forms to demand identification of a corporation's beneficial owners. If a law enforcement agency issued a subpoena for the ownership information, states would then supply the data on the forms. States would not have to verify the information, but persons who submitted false information would then be subject to penalties.
Levin introduced a similar bill in 2006 but it went nowhere. However, Barack Obama, then a U.S. senator, was a co-sponsor, and as president he has again endorsed the legislation. With the financial crisis casting a light on corporate misdeeds, Levin hopes the White House will make it a priority now.
Nearly 2 million corporations and limited liability companies are formed in the U.S. each year. In most cases, Levin complains, states do not ask who the beneficial owners are. "Right now, a person forming a U.S. corporation or limited liability company ... provides less information to the state than is required to open a bank account or obtain a driver's license."
Criminals exploit this shortcoming, he says, to establish fronts for drug trafficking, money laundering, tax evasion, financial fraud, corruption and possibly even terrorism financing.
Even before the Sept. 11 attacks, the Government Accountability Office was warning of the vulnerabilities posed by the lax state laws. In a 2000 report, the GAO concluded that Russian gangs were likely laundering through U.S. corporations. In one case, GAO found that one person established more than 2,000 Delaware shell corporations without once disclosing the owners' identities and had moved about $1.4 billion through U.S. bank accounts opened in the companies' names.
In a second report in 2006, GAO found that many states have established automated procedures allowing a new corporation to be formed within 24 hours after an online application is filed without any prior review by a state official. Two states, for a big fee, even will establish a corporation or LLC within one hour of a request.A host of federal agencies and local law enforcement organizations have called for greater scrutiny of incorporation procedures. According to the Internal Revenue Service, the secrecy offered in some states rivals the most attractive offshore tax havens. The Treasury Department's Financial Crimes Enforcement Network has identified 768 incidents of suspicious international-wire-transfer activity involving U.S. shell companies.
Levin complains: "Our law enforcement officials have too often had to stand silent when asked by their counterparts in other countries for information about who owns a U.S. corporation committing crimes in their jurisdictions ... because we don't have the information."
Bill McConnell is The Deal's Washington bureau chief.
http://www.thedeal.com/newsweekly/2009/03/through_the_back_door/print/
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