The U.S. Is a Good Place for Bad People to Stash Their Money

When Viktor Bout—the arms dealer extraordinaire who inspired the 2005 Nicolas Cage movie Lord of War—sought to set up anonymous shell companies, according to a Senate panel, he turned to, of all places, the U.S. So too, court documents indicate, did former Ukrainian Prime Minister Pavlo Lazarenko, a man who has landed on Transparency International’s list of the 10 most corrupt officials. Per a Senate report, the same was true of the accused kleptocrat Teodoro Nguema Obiang Mangue, the son of Equatorial Guinea’s president, who went on to forfeit more than $30 million worth of mansions and sports cars to American officials (but somehow managed to hold onto Michael Jackson’s crystal-studded glove).

For this trio, America happened to provide the proper marriage of a stable, independent legal system and complete anonymity. While traditional offshore havens from the United Kingdom to the Cayman Islands have recently lurched, however unwillingly, toward greater transparency and financial oversight, people like Lazarenko and Obiang eyed the U.S., the jurisdiction that over the past few years has cemented its position as perhaps the foremost shell-company provider globally. “In some places [in the U.S.], it’s easier to incorporate a company than it is to get a library card,” said Joseph Spanjers of the think tank Global Financial Integrity last year, describing the ease with which anyone could set up a shell company in states such as Delaware, Nevada, or Wyoming.

Anonymous shell companies, business entities that exist solely for the purpose of masking ownership of wealth, property, and other assets, serve as a middleman of sorts, helping those behind them move funds from one place to another. Shell companies in and of themselves aren’t illegal, or even necessarily bad: Not only can they help pool investors’ resources or guard trade secrets, but many celebrities use them to keep prying gossip outlets from locating their assets. Shell companies can also provide politicians in less stable countries a place to keep assets safe from kidnappers and thieves.

To that point, Lazarenko's attorney, Daniel Horowitz, described his client's uses of shell companies as perfectly legal defenses against corruption by rival politicians. “It is standard in ALL business to have different companies handling different types of business and transactions,” said Horowitz in an email, objecting to the labeling of his client as a kleptocrat. “To some degree, money, assets and people had to be put outside the control of the dictator of Ukraine so that the democratic opposition could have a war chest.” Meanwhile, the attorney representing Obiang, who is currently on trial in Paris for corruption, has told NBC News, "What Mr. [Obiang] did in his country was perfectly legal." (A lawyer representing Viktor Bout did not respond to a request for comment.)

The problem, though, is that shell companies, through their attendant anonymity, also enable large-scale money laundering. Because of the lack of clarity on who’s benefiting from shell-company ownership, as Transparency International noted last year, “Nobody knows how many shell companies are used for legitimate purposes, and how many for dodgy purposes.”

And as has been the case for several years, anyone with a bit of money can set up their own American shell companies, hiding their wealth from whoever may be after it. This includes arms dealers and despots from sub-Saharan Africa and Central Asia, as well as drug cartels, oligarchs, and autocrats. Anyone trying to keep their malevolence inconspicuous, even those acting directly against American interests, need not look far to cloak their wealth. After all, one of the U.S. companies allegedly tied to Bout was used to funnel arms to the Taliban. As one lawyer specializing in shell companies recently wrote, “It’s not entirely beyond the realms of possibility that ISIS could be operating companies and trust funds domiciled in Delaware.”

The notion that the U.S. is the world’s leading shell-company haven, or that the country’s foes may protect their wealth via American anonymity, may seem laughable. To wit, the U.S. government has led a recent anti-kleptocracy drive that, while still nascent, has already begun paying dividends, targeting and freezing hundreds of millions of dollars tied to countries like Uzbekistan and the aforementioned Equatorial Guinea. The federal government has also recently implemented oversight mechanisms for anonymous real-estate purchases from New York to Miami to San Antonio, helping model how to combat international, property-based money laundering (and at the same time helping to stem the spiraling costs of living in a city, as such purchases drive the price of housing up). And new bipartisan bills introduced in the Senate and the House aim to reduce anonymity in American-based shell companies. While similar bills have failed in the past, these proposed pieces of legislation have sparked an optimism that pro-transparency advocates haven’t known in years.

But at the same time, as I describe in a forthcoming report published by the Hudson Institute, a think tank, the U.S. makes it unbelievably easy to set up a shell company with bad intentions. In the most comprehensive global survey of shell companies to date, a trio of researchers, posing as potential customers, prodded providers across dozens of international jurisdictions for identification requirements. Surprisingly, some of the jurisdictions most concerned with proper means of identification—names, addresses, and the like—were traditional offshore havens, including Jersey, the Isle of Man, and British Virgin Islands.

Meanwhile, the researchers found American incorporation services to be much less likely to take such precautions. Overall, only 1.5 percent of U.S. providers who responded to the researchers provided information complying with international transparency standards, in comparison to 31.7 percent of international providers. As one of the authors, the University of Cambridge’s Jason Sharman, would later write, there’s “strong reason to think that the United States, given its central place in the global financial system and the number of companies involved, is the worst in the world when it comes to regulating shell companies.”

According to the World Bank, the U.S. produces about 10 times as many legal entities each year than 41 tax havens combined. On some level, this makes sense: America has the largest economy in the world. However, the American incorporation-services industry is defined by a lack of oversight, so it’s not known how many of the corporations founded every year are shell companies like the ones said to have been accessed by Bout and Lazarenko, which seem to serve little purpose other than to obscure the source of funds.

“Because so little information is collected on U.S. companies, it is impossible to tell how many [companies formed in the U.S.] are shell companies and not operational companies,” the World Bank found, even though “U.S. law enforcement consistently ... indicated that the number is high enough to cause grave concerns.” The Department of Justice’s most recent National Money Laundering Risk Assessment echoed this, pointing explicitly to, in Eastern European organized crime, the “systemic use of sophisticated schemes to move and conceal their criminal proceeds using … U.S. incorporated shell companies.”

It doesn’t have to be this way, of course. The U.S. has made repeated commitments to increase transparency initiatives, most especially via the kind of ownership registries that the U.K. recently implemented, and which offshore staples like the Cayman Islands are now discussing. And as the most prominent signatory to the Financial Action Task Force (FATF), an international body tasked with setting anti-money-laundering standards, the U.S. has formally promised to identify the “beneficial,” or true, owners of the companies.

And yet, thanks to a combination of inertia, public indifference, and a thriving incorporation-services industry at the state level, no such ownership registry has come to exist. Instead, anonymity prevails—an all-too-predictable outcome given how these industries have developed in their respective states. As Representative Dina Titus, a Democrat from Nevada, said when she was a state senator in 2001, when Nevada began expanding its secrecy provisions, “What a terrible message we are now sending to the business world. We might as well hang out a shingle, ‘Sleazeballs and rip-off artists welcome here.’”

National efforts to pull back the veil on shell-company owners in the U.S. have stalled against opposition from groups like the U.S. Chamber of Commerce and the National Association of Secretaries of State. For instance, in 2013, the Chamber of Commerce signed a letter stating that legislative attempts to shine light on shell companies "place new, unnecessary regulatory burdens on American businesses that would have harmful consequences for job creation and economic growth." Even concerted efforts from the Obama administration to pry away secrecy provisions—which allowed agents in states such as Nevada, Wyoming, and Delaware to form companies without bothering to check who’d be on the receiving end—faltered, with states preferring a race to the bottom that has allowed them to ignore transparency requirements while bringing in ever more revenue from registering companies.

For states, the motive to increase shell-company registrations, rather than tamp down on or heavily regulate them, “appears to be simple: mountains of cash,” wrote Steve Reilly of USA Today. Indeed, it’s easy to see how shell companies have glommed onto local economies. Even though forming a company only costs a bit more than $100 in Delaware—which now is home to more companies than people—the state brings in over $1 billion in revenue from such registries. In Nevada, the industry goes directly to helping pay teachers’ salaries. In Cheyenne, Wyoming’s capital, shell-company providers have spread through the city’s sparse downtown, replacing restaurants and mom-and-pop stores.

In Nevada, even small cities participate. An hour outside Reno, the dusty town of Fernley boasts one of the state’s foremost shell-company gurus, located in a nondescript, staid house, complete with a doormat that welcomes visitors to the “No-Spin Zone.” Robert Harris, who also spends his days writing apocalyptic Christian fundamentalist literature, says he makes a decent living setting up companies for anyone willing to pay a small fee, and doesn’t make any attempt at identifying those who call in. His unpolished website does not exactly give off a sense that he will be scrutinizing any potential corporate owners; perhaps its appearance is in this way something that entices them. Asked if he’s felt any pressure from the state to unmask his customers, or if he thinks Nevada is going to move any closer to global transparency norms, he laughs, responding, “I don’t think Nevada is gonna quit.”

He’s probably right, if the U.S.’s reaction to the leak last year of the Panama Papers, a ream of sensitive financial documents from a Panamanian firm called Mossack Fonseca, is any indication. Despite the sheer scale of the operations unveiled in the leak (the revelations cost one European prime minister his job) and the fact that Mossack Fonseca pointed clients to states such as Nevada and Wyoming, the U.S.’s response has been negligible. If anything, it’s been worse than insignificant: Not only is the U.S. no closer to any kind of ownership registry than it was before the leak, but, when asked a couple days after the Panama Papers’ release whether or not his state would push toward any kind of shell-company oversight, Wyoming’s secretary of state showed no interest in the idea. “The release of the ‘Panama Papers’ has led to some renewed calls for transparency and the revealing of beneficial ownership information for entities registered not just in Wyoming, but across the United States. Such a move would increase red tape and limit business formation and innovation in Wyoming,” a statement from the secretary of state’s office read. “We are not naive as to the importance of the release of these ‘Panama Papers,’ but we will not compromise the privacy of our customers.”

Wyoming's stance is understandable, in a sense—but only if one ignores the fact that such "customers" are sometimes arms dealers and kleptocrats. Meanwhile, countries like the U.K. implement the sorts of ownership-tracking regimens the U.S. sorely needs. Indeed, Britain’s recent beneficial-ownership registry—hailed by the nonprofit Global Witness last November as a "big step forward for transparency"—has already revealed dozens of company owners whose names are on American sanctions lists.

Recently proposed legislation, if passed, would force the disclosure of beneficial owners planting their companies on American soil. Of course, if such legislation becomes law, the companies might just go elsewhere. But enlisting the earnest efforts of the biggest economy in the world would be an important step in the right direction.