The crux over shell companies: Who are the true owners?

Offshore corporations: The secret shell game

Offshore corporations have one main purpose - to create anonymity. Recently leaked documents reveal that some of these shell companies, cloaked in secrecy, provide cover for dictators, politicians and tax evaders.
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Offshore corporations have one main purpose - to create anonymity. Recently leaked documents reveal that some of these shell companies, cloaked in secrecy, provide cover for dictators, politicians and tax evaders.

A decade ago, then-Senator Carl Levin offered a simple solution to the secrecy of shell companies: List the true owners.

But the Michigan senator retired last year without his proposed legislation reaching fruition, despite backing from authorities who crack down on dirty money.

“I think it’s very disappointing that we can’t get the Congress to respond to the request, the urgent request of the law enforcement community,” Levin, a Democrat, said in a recent interview.

As the massive leak of the Panama Papers shows, bad actors continue to operate freely under the cover of anonymity – not only abroad, but also within U.S. borders, using shell companies in places like Wyoming, Nevada and Delaware.

An important measure of whether reform follows is whether the United States would require that companies that register shell companies keep information about true owners, known as “beneficial owners.”

“There’s no excuse for this. It’s very, very simple to add one line to the articles of incorporation to put down, ‘Who are the real owners – the so-called beneficial owners – of this corporation?’ ” Levin said in Detroit ahead of the publication of the Panama Papers.

The Obama administration has been mostly silent in reaction to the so-called Panama Papers, the subject of a yearlong investigative reporting project into leaked secret files of the Panamanian law firm Mossack Fonseca & Co.. Journalists from more than 100 news organizations across the globe, including McClatchy as the only U.S. newspaper group, analyzed an archive containing 11.5 million files loaded with explosive secrets.

But the administration is now taking heat from a few fellow Democrats on Capitol Hill. Sen. Elizabeth Warren, D-Mass., wrote to Treasury Secretary Jacob Lew on Thursday seeking “an assurance” that he’s looking into Mossack Fonseca’s ties to the U.S. financial system.

“The Justice Department is reportedly reviewing this matter to determine whether there may be ‘high-level, foreign corruption that might have a link to the United States or the U.S. financial system.’ But, as the primary agency charged with protecting the integrity of the U.S. financial system and enforcing our laws against money laundering and terrorist financing, we strongly urge the Treasury Department to conduct its own inquiry into Mossack Fonseca’s activities and its clients,” Warren wrote in a letter co-authored by Sen. Sherrod Brown, D-Ohio.

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An agency of the U.S. Treasury Department known as the Financial Crimes Enforcement Network, or FinCen in government parlance, says it may soon tighten disclosure for foreign shell companies setting up bank accounts in the United States, requiring that they name their true owners. The agency first proposed the rule change in 2014.

FinCen is not moving to require that registered agents identify their customers as former Sen. Levin proposed. Its jurisdiction is limited to banks, so it can’t set limits as comprehensive as Levin proposes.

"Different financial institutions face different risks, and have different relationships with their customers," said FinCen spokesman Stephen Hudak. "Some financial professionals are better positioned than others to detect and report suspicious activity."

Patrick Fallon Jr., head of the FBI’s financial crimes section, said he believes all shell companies should be required to list their true owners.

“I can’t think of a reason not to do that,” Fallon said in an interview conducted before McClatchy and its reporting partners published the Panama Papers stories. He added that the “most simplistic way” of resolving the problem would be to have whoever is incorporating the company, whether in faraway Samoa or in Nevada, list all the beneficial owners in a public registry.

The Panama Papers’ revelations have shaken the pillars of power in many corners of the globe. Russian President Vladimir Putin attempted to discredit the reports, which describe how a network of his close associates and friends moved up to $2 billion through offshore companies. China has blocked any mention of it on the Internet space it controls, the prime minister of Iceland stepped aside and the prime minister of Malta is staring at a possible parliamentary vote of no confidence next week. British Prime Minister David Cameron finally admitted Thursday that he did have a stake in his now-deceased father’s offshore trust.

The leak has stirred a debate in the United States about what actions the federal government could or should take to regulate shell corporations domestically, and to what extent it is a laggard in permitting foreigners to use secret shell companies established here just as they use offshore havens.

Asked about the leak on Wednesday, President Barack Obama deflected the questions and pivoted to his latest attempt to thwart an unpopular tax loophole that allows U.S. companies to merge with smaller foreign partners in more tax-friendly countries to lower their tax bills.

In some ways, both Obama and Secretary Lew have missed an opportunity to use the Panama Papers to discuss a solution that they offered deep in their proposed budget, both for fiscal 2016 and fiscal 2017.

The proposal would have imposed on corporate formation companies like Mossack Fonseca the same know-your-customer rules that banks now face, and would have made it easier for law enforcement to access federal tax records that accompany the creation of U.S. shell companies.

The limits date back four decades to the era of Watergate and President Richard Nixon’s resignation in disgrace in 1974. Congress wrote laws that limited the tax information that law enforcement could see without a subpoena because Nixon had notoriously used the IRS against political opponents.

The Obama administration’s proposal would chip away at that, enabling law enforcement to be more proactive in sniffing out bad actors, especially foreigners who might be using U.S. shell companies to disguise corruption, criminal activities or even acts of terror.

It would do so by requiring that all legal entities formed in the United States, regardless of whether they do business here or not, file what’s known as an SS4 form to the IRS. The form generates a unique Employer Identification Number from the IRS. Law enforcement and homeland security personnel could come to the IRS and ask about an entity without a court-issued subpoena.

“The problem – and we’ve heard this from law enforcement over and over again –is that they can’t access it without a subpoena,” said Richard Geisenberger, Delaware’s deputy secretary of state and head of its corporations division.

It is a proposal that gets support from secretaries of state in Delaware and in other states who oversee the incorporation process in their respective jurisdictions.

Obama’s proposal would address what Geisenberger says is the “core problem,” which, he said, “is not that this information is not being collected, it’s that it is so darned difficult to share” with law enforcement.

But states such as Delaware, Nevada and Wyoming – the onshore equivalent of offshore havens – oppose any requirement that states collect and keep information on the true owners of these dummy corporations.

Shell companies “often serve as an important use for potential start-ups and are a well-established means of doing business in Wyoming and in any other state,” Ed Murray, Wyoming’s secretary of state, said in a statement Wednesday, vowing to fight any federal rule that dissolves privacy protections.

In an interview before the Panama Papers were released, his deputy secretary, Karen Wheeler, said that the Cowboy State made numerous changes to address concerns raised during Levin’s hearings a decade ago. Chief among them was requiring that a live person be listed as a contact and be reachable if there are problems.

“Now, our laws require that for investigative purposes that if the secretary of state’s office or law enforcement requests that information, they must provide it to us,” she said.

Her office confirmed Thursday that after the release of the Panama Papers, the 24 companies registered by Mossack Fonseca in Wyoming were audited, and that the company failed to meet its statutory requirements. Citing the ongoing investigation, her office provided few other details. A McClatchy reporter visited Wyoming in March to interview secretary of state officials about foreigners using Wyoming and other U.S. states as a secretive tax haven.

The next few months may prove critical in determining whether there will be substantive changes. By summer, political conventions will dominate the news cycle and an inauguration beckons early next year.

“If there was ever a moral imperative to change it, this week has done it,” Charles A. Intriago, a former federal prosecutor in Miami, said Thursday.

Nicholas Nehamas of the Miami Herald contributed to this article.

Kevin Hall: 202-383-6038; @kevinghall

Marisa Taylor: 202-383-6164; @marisaataylor;

This story is part of a larger series, involving McClatchy and other news organizations, working under the umbrella of the nonprofit International Consortium for Investigative Journalists.