April 07, 2016 Update: Reuters reported Wednesday that the US Treasury Department intends to soon issue a long-delayed rule forcing banks to seek the identities of people behind shell-company account holders, after the "Panama Papers" leak provoked a global uproar over the hiding of wealth via offshore banking devices.

The papers offer "validation for those who have been screaming for a decade" about the need for financial institutions in the United States and elsewhere to address risks of money laundering, terror finance and other crime by identifying people who clandestinely control legal entities, former Treasury official Chip Poncy told Reuters.

New York Times report


The US state of Delaware, calls itself the First State, and it is also the world's biggest tax haven which may explain why the revelations this week triggered by a massive leak of over 11m documents from a law firm in Panama, facilitating the hiding of wealth by the rich elite of the world, did not feature Americans as it is much easier to set up anonymous shell companies in the United States than it is in well-known tax havens such as the Cayman Islands, Bermuda or the British Virgin Islands.


Nevertheless, the US has a harsh regime for personal tax evaders using foreign tax havens but the failure to reform the corporate tax regime in the past 30 years has resulted in its top companies engaging in what is effectively tax fraud sanitised by high fee lawyers and accountants coupled with the help of revenue authority officials seeking higher paid jobs. In 2009 the US authorities forced UBS, the biggest Swiss bank, to reveal the names of American personal tax evaders.

This was hypocrisy on a grand scale.  

Delaware is the legal home of almost half US corporations and its lack of transparency has also attracted the attention of Russian arms smugglers, drug kingpins and Ponzi schemers. It is the world's biggest tax haven and is home to companies such as American Airlines, Apple, Bank of America, Warren Buffett's Berkshire Hathaway, Cargill, Coca-Cola, Ford, General Electric, Google, JPMorgan Chase, and Wal-Mart, which according to The New York Times all operate from one building in Wilmington, Delaware's state capital, just over 100 miles from Washington DC.

Up to 300,000 other corporations are based at the Corporation Trust Company — also known as CT Corporation System — offices at 1209 Orange Street, Wilmington, DE 19801.

It takes less than an hour to incorporate a company in Delaware, and the state is so eager to attract businesses that the office of its secretary of state stays open until midnight Monday through Thursday — and until 10:30 pm on Friday.

Jesse Drucker of Bloomberg News who in 2010 broke the story on how Google was saving billions in taxes by using Irish shell companies, wrote on Tuesday:

Places like Switzerland and Bermuda are agreeing, at least in principle, to share bank account information with tax authorities in other countries. Only a handful of nations have declined to sign on. The most prominent is the US. Another, Panama, is at the center of a storm over tax evasion and global cash flight that broke out over the weekend.
A law firm there helped set up tens of thousands of shell companies, according to a report by the International Consortium of Investigative Journalists. ICIJ and other news organizations published reports they said showed global efforts to hide wealth, undertaken by global politicians and the ultra-rich, with the aid of banks and lawyers. The central tool: shell companies that people used to shield the identity of the owners’ assets. While such structures can be legal, they can also support efforts to avoid taxes.

The New York Times said in a report on Delaware in 2012:

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.”

Last year in a Financial Secrecy Index of popular tax havens, produced by the Tax Justice Network, a UK advocacy group, the United States was ranked third, behind Switzerland and Hong Kong, and far higher than Panama, at 13th.

Apart from Delaware, Nevada, Wyoming, and the US-owned Virgin Islands are known for loose regulations and low taxes.

"This firm is one of thousands in the world and there are hundreds or thousands just like it in the US," said Ana Owens, a tax and budget advocate at US Public Interest Research Group (PIRG), a federation of state-level consumer advocacy organizations on Mossack Fonseca, the Panamanian firm from which the tax evasion data dump same. Owens was quoted by NBC. "If a company in the US can do the exact thing for you as this company in Panama, then you might as well do it right here in the US. And its perfectly legal, which is the issue."

She cited a series of stories by the Portland Business Journal last year that revealed federal authorities' failed attempts to catch a California-based "corporation mill" committing fraud, despite evidence of financial crimes by companies related to the firm.

The New York Times reported that Delaware had more registered corporations than it had residents, roughly one million compared to fewer than 900,000 people. Delaware earns $1.1bn a year in revenue from corporate services, roughly a quarter of the state’s annual budget.

Joe Biden, US vice president, was a US senator for Delaware in 1973-2009 and Transparency International last February named Delaware as one of the world’s best examples of “grand corruption.”

The Washington Post reports:

A 2012 study in which researchers sent more than 7,400 email solicitations to more than 3,700 corporate service providers — the kind of companies that typically register shell companies, such as the Corporation Trust Company at 1209 North Orange St. — found that the US had the laxest regulations for setting up a shell company anywhere in the world outside of Kenya. The researchers impersonated both low- and high-risk customers, including potential money launderers, terrorist financiers and corrupt officials.
Contrary to popular belief, notorious tax havens such as the Cayman Islands, Jersey and the Bahamas were far less permissive in offering the researchers shell companies than states such as Nevada, Delaware, Montana, South Dakota, Wyoming and New York, the researchers found.

The newspaper says that part of the reason that the US looks so attractive as a tax and secrecy haven is that the country has not signed on to new global disclosure standards that are forcing anonymous companies to reveal their real owners around the world. Compared with other developed countries, and even traditional offshore destinations such as Switzerland and the British Virgin Islands, the US now appears to be among the most lenient and secure destinations for the fortunes of the global rich.

US, Delaware tax haven, shell companies

1209 N. Orange Street, Wilmington, Delaware — the legal address of up to 300,000 businesses (Wikimedia Commons)

The Post says that in many American states, people registering shell companies do not need to show a form of identification, like a driver's license or passport, and corporate service providers aren't required to verify the identity of the person who owns the company, called "the beneficial owner," or know what the company is for. The beneficial owner may be asked to give their name, address and phone number, but for an additional fee, the corporate service provider can provide a "nominee" to take their place as the public face of the company — a person who controls the company in name but not in reality, disguising the beneficial owner's identity.

In the US Congress, Reps. Carolyn Maloney (Democrat, NY), Peter King (Republican, NY) and Senator Sheldon Whitheouse (Democrat, Rhode Island), have introduced a bill calling for all shell companies registered in the US to report their real owner, called a “beneficial owner.”

But the bill has faced resistance from Delaware, Nevada, Wyoming and other states through an organisation called the National Association of Secretaries of State, who worry about the loss of tax revenues and the burden of regulation.