Wyoming, Nevada propose tightening rules that have allowed foreigners to hide money

The Wyoming State Capitol building framed by downtown Cheyenne, Wyo. Wyoming is the least populous and the second least densely populated of the 50 United States but a very popular location for the formation of offshore corporations because one can set up a LLC in Wyoming without one's name having to be in the State Register.
The Wyoming State Capitol building framed by downtown Cheyenne, Wyo. Wyoming is the least populous and the second least densely populated of the 50 United States but a very popular location for the formation of offshore corporations because one can set up a LLC in Wyoming without one's name having to be in the State Register. McClatchy

Wyoming and Nevada lawmakers will consider legislation early in 2017 to tighten rules that have allowed foreigners to incorporate in their states and hide assets.

An investigation in 2016 exposed that several U.S. states, including Delaware, allow non-U.S. residents to create shell companies that shield their identities and money.

There are legitimate reasons for seeking the anonymity a shell company provides, but these business entities can and do hide stolen money, drug profits and offshore government corruption.

Reporting by McClatchy, as part of a collaborative team of journalists across the globe, showed how Wyoming’s laws allowed companies opened by foreigners to list a contact who had nothing to do with these companies. The loophole made it impossible to determine the true owner.

Wyoming’s legislature meets soon and lawmakers will consider a bill supported by Secretary of State Ed Murray to change who qualifies as a communications contact for companies incorporating there.

In Nevada, McClatchy’s reporting found that the state had little power under statute to audit or investigate companies that have incorporated there unless law enforcement asks for it.

As a result of the reporting, the office of Secretary of State Barbara Cegavske on Nov. 16 had a state Senate bill pre-filed on its behalf to obtain that power in the coming legislative session.

“The Secretary of State has proposed legislation which would revise existing law and authorize the Secretary of State to conduct periodic, special or other examination of the records,” said Gail Anderson, a spokesman, adding that the changes would allow more insight into registered agents. Those are the companies that help individuals and businesses incorporate.

More than 2.7 terabytes of data from a Panamanian law firm, Mossack Fonseca, was leaked to journalists, who wrote a series of stories in 2016 called the Panama Papers.

McClatchy reporters were among 370 working together for a year under the umbrella of the International Consortium of Investigative Journalists to analyze the leaked emails, incorporation documents and even passports. They revealed that close allies of Russian leader Vladimir Putin, some of them subject to U.S. sanctions, secretly moved billions of dollars through offshore shell companies and bank accounts in Cyprus and Switzerland.

The collective reporting toppled the government of Iceland, hastened the exit of British Prime Minister David Cameron and prompted investigations from Malta to Pakistan to the European Union.

Mossack Fonseca is known worldwide for its expertise as a registered agent that creates shell companies. Among its global offices were operations in Wyoming and Nevada. There, the law firm set up companies or trusts for people who used the two states much like rich Americans might use the Cayman Islands or other offshore tax havens.

In Nevada, where Mossack Fonseca incorporated 1,024 companies, some of the shell companies were tied to a broad government corruption scandal in Brazil that helped bring down the ruling government in August.

Wyoming had a smaller number of companies created by Mossack Fonseca, but the state had scant information about the true owners or ways to reach them. McClatchy, through the leaked documents, exposed how little information is collected by U.S. states when foreigners establish a shell company in America.

“Our office’s work on this bill was already underway before the release of the Panama Papers,” Murray’s office said in a statement to McClatchy. “Secretary Murray ran on a platform of fighting fraud, and this bill works to address the same.”

But in multiple interviews with McClatchy earlier this year, Wyoming officials never acknowledged shortcomings or indicated they planned to tighten their rules.

Karen Wheeler, Wyoming’s deputy secretary of state overseeing compliance, told McClatchy in a February 2016 interview that “we are very happy with the progress that we’ve made.”

Wheeler pointed to a provision that required companies to list a communications contact.

“It was someone associated with the entity who law enforcement could go to,” she said, noting companies had to provide “a real live breathing person who is associated with that entity. And when law enforcement would go to that agency, they’d have to give them that information.”

Except when the state and law enforcement asked for this information in April, during the Panama Papers revelations, Mossack Fonseca didn’t have it on file as required.

And McClatchy’s reporting showed how these contact people were often nominees who sat on boards of thousands of companies, with no direct knowledge of the companies. Some were actually other shell companies with no clear contact and located in places like the Seychelles, an island nation in the Indian Ocean almost 1,000 miles east of Africa.

Wyoming’s pending bill, which would take effect next July 1, gets rid of current language that allows for “any designated agent of the entity” to serve as a communications contact.

Under scrutiny from Murray’s office, Mossack Fonseca effectively quit the state. The 24 companies it had created were informed that they had to find another registered agent or shut down. Twenty-two were dissolved.

Only two Wyoming companies found in the Panama Papers remain active, Authentic Produce LLC and Valbor Trading LLC.

Authentic Trading is a web and graphic design firm in Helier, Jersey, the island off the English coast known itself as an offshore tax haven. Internal Panama Papers documents show its true owners sought to establish it for “holding some domain name assets” and receiving payments through the company.

Wyoming’s business registry shows Valbor Trading is still active but facing dissolution for non-payment of taxes and fees. Someone in July switched the company to a new registered agent after Mossack Fonseca shut down in Wyoming.

Internal Panama Papers documents show that Valbor was created for the influential Uruguayan law firm owned by Juan Pedro Damiani. He was a member of the ethics committee of the world soccer body FIFA. He owns the Uruguayan soccer club Peñarol. Damiani resigned from FIFA days after publication of the Panama Papers.

In the United States, reaction to the Panama Papers was muted. A Republican-led Senate held no hearings, and the GOP-led House of Representatives ignored requests from the Obama administration to create a registry of true owners of companies. The Congress passed no legislation to address weaknesses that allow foreigners to hide assets in the United States.

“I think the rest of the world has traditionally said that we have led in terms of transparency and openness and accountability,” said Sen. Ron Wyden, D-Ore., who has called for hearings and has sent letters of inquiry to Wyoming, Nevada and Delaware and to the Internal Revenue Service.

The top Democrat on the Senate Finance Committee, Wyden is preparing legislation to introduce early in 2017 that would require business entities established in the United States to provide more information when they are created.

“My take … is that our country basically doesn’t collect all of the right information at the right time of the true owners of companies,” Wyden said in an interview. “The whole point of disclosure laws is to determine who owned the entities when they were established, instead of having to play catch-up ball.”

Wyden will have to convince fellow lawmakers that bipartisan bills being discussed in the House and Senate fall short by requiring only contact information for people associated with these companies.

Sen. Tom Carper, R-Del., and Sen. Dean Heller, R-Nev., representing leading states in the formation of limited liability companies with secretive structures, are both pushing Congress for legislation that is similar to Wyoming’s pending bill.

“While the Carper-Heller bill is the weakest of the bills introduced to combat corporate secrecy, it still represents a dramatic admission by Delaware and Nevada that there’s a problem that needs fixing,” said Elise Bean, a former staff director of the Senate Permanent Committee on Investigations, which conducted numerous anti-money laundering investigations. “Maybe 2017 will be the year Congress finally cracks down on the lawyers and hidden owners misusing U.S. corporations for sex trafficking, drug money, financial crime, and corruption.”

Kevin G. Hall: 202-383-6038, @KevinGHall