--- begin forwarded text Delivered-To: rah@shipwright.com Delivered-To: clips@philodox.com Date: Tue, 25 Apr 2006 15:15:19 -0400 To: Philodox Clips List <clips@philodox.com> From: "R.A. Hettinga" <rah@shipwright.com> Subject: [Clips] Proliferation Of 'Shell' Companies Arouses Scrutiny Reply-To: rah@philodox.com Sender: clips-bounces@philodox.com <http://online.wsj.com/article_print/SB114592861913534860.html> The Wall Street Journal Proliferation Of 'Shell' Companies Arouses Scrutiny By GLENN R. SIMPSON April 25, 2006; Page A4 The U.S. has created a booming international market for a vehicle increasingly favored in financial crime: corporations that exist mainly on paper but come with American addresses. So-called shell companies "have become popular tools for facilitating criminal activity," the U.S. Government Accountability Office says in a report to be published today, citing data and reports from federal law-enforcement agencies. Last year, Russian and Ukrainian prosecutors filed more than 100 requests with the U.S. Justice Department for help investigating U.S. shell companies. The Federal Bureau of Investigation told the GAO that a majority of its 100-plus cases of market manipulation involve the use of U.S. shell companies. U.S. officials believe shell companies are being used to launder as much as $36 billion from the former Soviet Union alone. Of the 50 U.S. states, the GAO found, 42 impose no extra requirements on foreign individuals seeking to set up a U.S. corporation. In states including Delaware, Kentucky and Nevada, numerous local firms sell so-called limited-liability corporations to foreign buyers with few questions asked. Law-enforcement officials complained to the GAO that many firms submit fake names for directors and officers. The report found that not a single U.S. state seeks to verify the names of officers and directors submitted on new company registrations. "You have to supply more information to get a driver's license than you do to form one of these nonpublicly traded corporations," said U.S. Sen. Carl Levin, a Michigan Democrat who with Sen. Norman Coleman, a Minnesota Republican, requested the study. Many European law-enforcement officials have complained that the problem makes the U.S. look hypocritical because it is so vocal about financial crime. "Just the way we want overseas jurisdictions to be transparent, so we should have transparency here," Mr. Levin said in an interview. An FBI analysis provided to the GAO says U.S. corporate agents operate much like counterparts in offshore tax havens, "using nominee officers to keep the foreign beneficial owner anonymous." But the big advantage of U.S.-based companies is their address, which confers instant legitimacy in international commerce as well as easier access to U.S. bank accounts and dollars. Shell companies generally have no employees, products or physical assets. In the U.S., most shells are limited-liability corporations, a legal entity designed for small businesses that requires very little paperwork to set up. Now, 300,000 more of them are formed annually than are traditional corporations, and their total numbers nearly doubled between 2001 and 2004. A hybrid of a partnership and a corporation, they were first endorsed by Wyoming in 1977 to let owners of small firms enjoy the liability protections of big companies without bearing the paperwork and tax burdens. They have been an unqualified boon to U.S. entrepreneurialism and overwhelmingly are formed for legitimate purposes. But their simplicity and legal protections also make LLCs ideal shell companies for laundering money to hide its origins. In many states, they can be registered by foreign citizens via the Internet in just minutes without any ownership information being supplied. Among the states that U.S. authorities frequently cite as top concerns are Nevada, Delaware and Oregon. In one case reported to the GAO by the Immigration and Customs Enforcement agency, a Nevada LLC received 3,774 wire transfers for $81 million in just two years from locales such as Russia, Latvia and the British Virgin Islands, but agents were unable to even come up with a suspect because the company's true owner was never identified in any records. Top officials at the Treasury Department say they have begun working with state officials to address the longstanding problem, but no agreement has been reached. Registering companies has become big business in many states, much as it long has been in traditional tax havens such as the Cayman Islands or Isle of Man. The U.S.-based agents interviewed by GAO investigators said they generally collect contact information only from their clients. State officials told the GAO that asking for ownership data would drive away legitimate firms seeking confidentiality for competitive or other legitimate reasons. Foreign criminals use state corporation laws to evade key laws against financial crime passed by Congress in recent years, including the USA Patriot Act passed after the Sept. 11, 2001, attacks. While federal laws and international standards require banks to conduct investigations of anyone seeking to become a client and often to determine their sources of income, banks aren't required to find out the true owners of a company seeking to open an account. The GAO said "financial industry representatives," which it didn't name, told the agency that identifying the real owners behind would-be corporate customers "absorbs time and resources, because institutions must sometimes peel back layers of corporations or hire private investigators." As foreign police officials seek information on owners of U.S.-based LLCs, often the Justice Department turns them away empted-handed, the GAO says. Many states never ask who the true foreign owners are, so even a federal subpoena won't produce data that isn't collected in the first place. Mr. Levin said the system can be fixed without losing the advantages of LLCs. "If you don't want to pierce the veil of liability, that is all well and good, that is the whole purpose of corporations," he said. "But it is not acceptable for law enforcement to not be able to know who is behind the corporation in terms of tax evasion or terrorism." -- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire' _______________________________________________ Clips mailing list Clips@philodox.com http://www.philodox.com/mailman/listinfo/clips --- end forwarded text -- ----------------- R. A. Hettinga <mailto: rah@ibuc.com> The Internet Bearer Underwriting Corporation <http://www.ibuc.com/> 44 Farquhar Street, Boston, MA 02131 USA "... however it may deserve respect for its usefulness and antiquity, [predicting the end of the world] has not been found agreeable to experience." -- Edward Gibbon, 'Decline and Fall of the Roman Empire'