Anonymous shell companies are impressively flexible tools. They can be used to launder money, evade taxation, covertly channel the payment of bribes, stash away a nation’s stolen wealth, and facilitate trafficking in drugs, weapons, and human beings. It’s a challenge to grasp the scale of the harm they help bring about.
It’s also challenging to find an appropriately scaled response. One place to start is for governments to require all companies within their jurisdiction to disclose their beneficial ownership for inclusion in a central registry—a step already taken by the United Kingdom, Denmark, and Norway. Going further, data from such registries can be aggregated and combined with other public registration materials to produce a gigantic database of company information, such as the one maintained by the UK for-profit OpenCorporates’ project.
This week, The Clearing House Association, a major trade association for U.S. commercial banks, endorsed legislation requiring the collection of information about the real owners of U.S. companies (S. 2489/H.R. 4450). The Clearing House Association is the oldest banking association in the U.S., and it advocates on behalf of the largest U.S. commercial banks, such as Bank of America, Wells Fargo and SunTrust, just to name a few.
Their letter states, “We believe the bill would assist public sector efforts to identify money laundering and terrorist financing through the disclosure of the beneficial owners of corporations. In addition, the legislation would bring the United States further in line with international AML/CFT expectations, such as the recommendations developed by the Financial Action Task Force (FATF). We can see no justification for allowing corporations to shield their ownership.”
In 2015, Citigroup reported to the Security and Exchange Commission that it has 21 offshore subsidiary companies, but it reported to the Federal Reserve that it has 140. Similarly, Bank of America reported to the SEC that it has 21 subsidiaries while reporting to the Federal Reserve that it has 109. All told, 27 financial firms report wildly different numbers to the SEC v. Federal Reserve.
So what gives and which reporting is accurate? It turns out that SEC has less stringent reporting rules, requiring companies only to disclose “significant” subsidiaries. It defines significant as comprising 10 percent or more of the company’s assets. The Federal Reserve requires broader disclosure, but only for financial companies. A CTJ comparison of the disclosures revealed big banks and other financial firms collectively are under reporting to the SEC the number of subsidiary companies by a factor of more than seven.
For three and a half years, a former Pentagon supplier used two shell companies in Wyoming and pretended they were largely owned by ethnic minorities to win preferential treatment for government contracts so that he could profit from supplying substandard parts to the military. These schemes happen all too often. In another, conspirators used sham companies from North Carolina, Nevada and Tennessee to steal more than $2 million from subcontractors that they tricked into fulfilling contracts.
The US Administration is coming upon a key moment tomorrow at the international Anti-Corruption Summit hosted by the UK where it can keep the criminal and corrupt from ripping off our public budget while hiding behind the veil of an anonymous shell company.
The Honorable Jacob J. Lew
Secretary of the Treasury
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, DC 20220
Dear Secretary Lew,
On behalf of the Financial Accountability and Corporate Transparency (FACT) Coalition, I am writing to urge the Department of the Treasury to take all measures within its authority to curtail the ability of corporations to avoid paying taxes by engaging in corporate inversions. Explicitly, FACT believes that the Treasury Department could take further steps to prevent inversions through the use of its regulatory authority under Sections 956 and 7701 of the U.S. Tax Code.
Even as more large companies announce plans to take advantage of the inversion loophole to avoid taxes, Congress has refused to move on commonsense legislation that would put an end to inversions. Fortunately, as outlined in a new letter signed by Citizens for Tax Justice and 54 other groups, there are a number of additional actions that the Treasury Department could take without Congressional approval to stem the tide of inversions.
Although Treasury issued new regulations in response to the surge in inversions in 2014 and 2015, Pfizer’s planned inversion with Allergan demonstrates that the regulations so far have been inadequate to prevent this and similar planned inversions by Johnson Controls and IHS. Perhaps the biggest motivation for Pfizer’s planned inversion is that it could allow the company to avoid an estimated $40 billion in taxes that it owes on the $194 billion in untaxed earnings the company has offshore. Expatriating to Ireland through an inversion will allow Pfizer to avoid paying any tax on its offshore hoard through an accounting gimmick called a hopscotch loan, which effectively allows the new foreign parent company to reinvest its untaxed offshore earnings without triggering the US taxes it would normally owe.
But an Iowa Republican Has a Bill to Do Something about It…
Reporters at the Las Vegas Review-Journal, Nevada’s largest media outlet, are up in arms after an anonymous company—News + Media Capital Group LLC—spent $140 million to purchase the paper while refusing to disclose who owns the company. These dumbfounded journalists have run into the obscure yet increasingly prominent issue of “anonymous incorporation”, which has plagued anti-corruption warriors in developing countries for years.
At the heart of the issue are extreme secrecy rules on the books in states like Nevada, Delaware and Wyoming, which allow individuals forming companies to shield their true identities. Presidential candidate Jeb Bush has entered the fray, joking on Twitter about the paper’s anonymous owners:
Anonymous incorporation allows fraudsters, mobsters, terrorists, money-launderers, tax-evaders and corrupt politicians to cover their tracks and evade the authorities while they rip off the public and engage in all manner of crime and illicit activity. According to the US Departments of Justice and Treasury, anonymous companies have been used to fund al Qaeda and evade sanctions in Iran.
When you think of a tax haven, you probably imagine the far off tropical islands of Bermuda or Grand Cayman, but the reality is that there is a major tax haven even closer to home in the state of Delaware. A new report from Institute on Taxation and Economic Policy (ITEP) explains how one our nation’s smallest states is one of the world’s biggest havens for tax avoidance and evasion.
What makes Delaware a tax haven? First, Delaware is one of the easiest places in the world to set up an anonymous shell corporation. In fact, setting up a company in Delaware requires less information than signing up for some library cards. This means that it is difficult for law enforcement to trace the activities of the anonymous shell corporations to the people who actually own and control them. This is what makes Delaware corporations an ideal vehicle not only tax evasion, but also for illicit activities like drug trafficking, terrorism finance and defrauding the government.
In addition, the state does not require companies to pay any tax on income relating to intangible assets held by companies based in the state. Companies take advantage of accounting gimmicks to shift their intangible income from other states into Delaware in order to take advantage of the zero tax rate on income earned from intangible assets. For example, Toy R Us has avoided millions in taxes by transferring its trademarks and trade names (including “Geoffrey the Giraffe”) into Delaware and charging its subsidiaries in other states for use of its trademarks.
More than 30 Organizations call on U.S. Government to Commit to Collecting and Publishing Information about the Real Owners of Companies Involved in Federal Procurement
Today, Global Witness joined the FACT Coalition and 30 other organizations in calling for the U.S. Administration to make a commitment to collect and publish information about the real owners of companies (also called “beneficial owners”) that participate in federal procurement, under its first National Action Plan on Responsible Business Conduct.
The U.S. government expects to use this plan to demonstrate how it encourages companies to achieve high standards of behavior and to champion those that reach such best practices. The plan is also a way for the government to highlight what it is doing to encourage an enabling environment for responsible business conduct.
To achieve these objectives, the Administration must work to curb fraud and corruption, and to protect against related human rights abuses. Federal procurement is an important area where the Administration has the authority to act without Congress, and to significantly impact fraud and abuse that has devastating consequences to human rights. By leveraging the vast purchasing power of the U.S. government ($445 billion in 2014), the procurement sector has the potential to be a force for good.