Delaware leaders back Obama's shell company reforms

• The Obama administration has announced plans to crack down on tax evaders, financial crime and money laundering.
• The measures are in response to the release of the so-called "Panama Papers."
• Delaware gets about a fourth of state government's operating budget in incorporation taxes and fees.

Top state and federal leaders are backing President Barack Obama's push to give law enforcement officials access to more information about secretive shell companies and offshore accounts in the wake of the so-called Panama Papers global scandal. Delaware also has been criticized for having few requirements for businesses seeking to incorporate, which generates millions of dollars in fees for the state.

The Obama administration has announced plans to crack down on tax evaders, financial crime and money laundering in light of the scandal, in which leaked documents of the Panama City-based Mossack Fonseca revealed how wealthy people and officials from around the world mask their identities by using shell companies, shielding assets and avoiding taxes.

The release has prompted international calls for reforms, and Obama wants Congress to increase transparency. "Given our prominence in this area, we have a responsibility to be leaders in addressing the legitimate concerns that are raised, particularly by law enforcement," said Jeff Bullock, who as secretary of state oversees Delaware's incorporation system.

Panama Papers could cast shadow on Delaware

While those documents concern activity in Panama, many experts and advocates say similar activity is almost certainly happening on a massive scale in the United States, which allows the owners of shell companies to largely stay in the shadows. Delaware has been called a tax haven in several national and international news stories, an accusation state leaders vigorously deny.

The state is the unquestioned incorporation capital of the United States, thanks to a uniquely friendly legal, bureaucratic and political environment. The state Chancery Court has a long, consistent history of resolving business disputes, the state's bureaucracy for incorporation is famously convenient and political leaders have a reputation for responsiveness to business concerns.

Two-thirds of all Fortune 500 companies are incorporated here. The state rakes in about $1 billion — or a fourth of state government's operating budget — in incorporation taxes and fees.

Panama Papers reveal at least 36 Americans accused of financial crimes

The Treasury Department announced two new measures aimed at forcing companies to better track and disclose ownership to the IRS. Aiming to curtail the sorts of activities described in the Panama Papers, the Obama administration unveiled proposed rules last week that would require companies to disclose who their "beneficial owners" are, the people who truly own and benefit from the entity's creation.

One, the so-called customer due diligence rule, was finalized Thursday after four years' consideration. The rule dictates how banks keep records on who owns the companies that use their services.

A second proposed rule would close a loophole that allows a narrow class of foreign-owned companies to avoid reporting to the IRS.

Delaware is one of a handful of states, including Wyoming and Nevada, in which proof of identification isn't required for those setting up a company.

Currently, the true beneficiary of a shell company needs only find somebody to sign incorporation documents — disgraced lobbyist Jack Abramoff and his associates infamously recruited a Delaware lifeguard to "run" a shell company on their behalf. Mexican actress Kate del Castillo, allegedly tied to infamous drug kingpin Joaquin "El Chapo" Guzman, was connected to a tequila business that incorporated in Delaware and was scrutinized by federal officials.

While money launderers and tax evaders could likely still find intermediaries to file paperwork, requiring beneficial ownership information means those people would be easier to pin down and investigate, Bullock said.

"There will be a real live human being who is associated with these entities that they will be able to crack down on," Bullock said. "If you are a U.S. citizen who is concerned about crimes like money laundering or tax evasion, you should care about this because it will give law enforcement the kinds of tools it needs to investigate and prosecute."

Bullock has been working with Delaware's Congressional delegation to create similar legislation. Obama has said his rule changes are only the first step and called on Congress to pass laws enshrining the requirement for disclosure of beneficial ownership.

The three members of the delegation in a statement said they supported Obama and would work to pass such a bill.

"I share the administration's objective to ensure that our law enforcement community has the information needed to better crack down on terrorist financing, money laundering and tax evasion," said Sen. Tom Carper, D-Delaware. "In order for our country to get serious about improving our efforts to tackle financial crimes, Congress must act."

Echoed U.S. Rep. John Carney, D-Delaware: "There's no doubt that Congress can and should do more to ensure that law enforcement has timely access to the information they need to take down bad actors."

State officials like Bullock have emphasized the need for federal-level reforms. State-by-state changes, they say, would both endanger Delaware's competitive advantage on other states and allow bad actors to slip through the cracks.

Reps. Carolyn Maloney. D-New York, and Peter King, R- New York, and Sen. Sheldon Whitehouse, D-Rhode Island, also have legislation calling for all shell companies registered in the U.S. to report their actual owners.

Ian McConnel, director of government affairs for the Corporation Service Co., a Delaware-based firm that manages incorporation for businesses worldwide, said the firm agrees with the changes.

"CSC strongly supports industry-wide regulatory changes that are designed to discourage bad actors from exploiting the U.S. financial system," McConnel said in a statement. "We have long been committed to working only with legitimate entities operating within all laws and regulations, and we look forward to workig with state and federal policymakers to proactively address fraud and abuse."

Some national experts worry the Obama administration's rules could be easily undermined and want Congress to take a tougher tack.

"We were in favor of requiring banks to know who the beneficial owner was, but the definition of beneficial owner in this final rule is so weak as to actually result in many institutions collecting less information," said Heather Lowe, Legal Counsel & Director of Government Affairs for Global Financial Integrity, a research and advocacy organization.

The problem, Lowe said, is that the rule defines "beneficial owner" as someone who owns 25 percent or more of the company. For other regulations, the bar is 5 or 10 percent.

"All you'd have to do is find four other people to help you set the company up and you could avoid it," Lowe said.

The regulation also, Lowe says, would allow companies to simply list a CEO or other executive as beneficial owner, allowing the real owners to avoid scrutiny.

The proposal also does not go as far as some transparency advocates would like because it would not open beneficial ownership information to the public.

Bullock said he's not sure that's a good idea, but more practically he argues it would be a non-starter in Congress.

"We're having enough trouble getting a proposal like this enacted by Congress this year," Bullock said. "I don't think there's any chance whatsoever of Congress enacting legislation that includes a public registry."

The Associated Press contributed to this report. 

Contact Matthew Albright at malbright@delawareonline.com, (302) 324-2428 or on Twitter @TNJ_malbright.