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Expecting rules to tighten around shell companies after Panama Papers? Not likely

From left, Sen. Dean Heller, R-Nev., Nevada Governor Brian Sandoval and Rep. Joe Heck, R-Nev., attend an event to announce the FAA's first issuance of an unmanned aerial systems test site special airworthiness certificate Friday, Dec. 19, 2014, near Boulder City, Nev.
From left, Sen. Dean Heller, R-Nev., Nevada Governor Brian Sandoval and Rep. Joe Heck, R-Nev., attend an event to announce the FAA's first issuance of an unmanned aerial systems test site special airworthiness certificate Friday, Dec. 19, 2014, near Boulder City, Nev. AP

Who made the United States into a refuge for secretive shell companies?

Look toward Congress to find politicians who helped turn Nevada into a major home for shell companies, which can be used to evade taxes and hide illegal assets from around the world.

Sen. Dean Heller, R-Nev., now a member of the Senate Finance Committee, was a strong advocate while Nevada’s secretary of state for a 2001 state law that broadened legal protections for shell companies, allowing owners to remain secret.

The change made incorporating a company easier than getting a library card and helped spur the registration of thousands of shell companies in Nevada.

Rep. Dina Titus, who in 2001 was the Democratic leader in the Nevada state Senate and voted for the change, is now a member of Congress. So is Rep. Mark Amodei of Nevada, a key Republican proponent of the 2001 bill.

Heller and Titus now acknowledge that the Nevada legislation created unwelcome business practices; Titus even predicted in 2001 that it would attract “sleazeballs.” And indeed, foreigners have long employed Nevada shell companies, sometimes for corrupt purposes.

Will Capitol Hill tighten the laws around shell company practices? Don’t bet on it.

Neither state nor federal lawmakers seem eager to pursue proposed changes, shuttling back and forth the onus on who should act. Some Nevada politicians look to Washington to take action, while those on Capitol Hill often say it is up to the states to monitor and regulate corporations.

The revelations from the so-called Panama Papers, an archive of documents leaked from a Panamanian law firm that specializes in creating shell companies across the globe for its clients, laid bare how corrupt politicians and others seeking to hide their wealth used shell companies.

The Panama Papers were first obtained by the German newspaper Süddeutsche Zeitung and shared with the International Consortium of Investigative Journalists, which partnered with McClatchy and other media outlets from some 75 countries to search the 11 million documents.

McClatchy and its partners have revealed in previous reports how offshore companies were used in a $3-billion corruption scandal in Brazil that two months ago cost Brazilian President Dilma Rousseff her post, pending impeachment proceedings. Fifty-seven individuals set up 106 offshore companies, some of them in Nevada, through the Panama law firm, Mossack Fonseca.

The Panama Papers also revealed 123 shell companies in Nevada linked to Lázaro Báez, a close friend of former Argentina President Cristina Fernández de Kirchner. Báez, a businessman, reportedly received millions of dollars in kickbacks from government contracts, and is now imprisoned in that nation’s Ezeiza Penitentiary.

A database obtained from the Nevada Secretary of State’s Office shows 307,210 active corporate entities in the state, 22,060 with a shareholder or manager listing an address outside the United States, and 6,075 active entities with a foreign address. The rest had U.S. addresses.

As corporate filings in Nevada have increased, state coffers have prospered. For the most recent fiscal year, Nevada collected nearly $144 million from corporate registrations, annual filings and other associated charges. The Western state had $6.9 billion in total revenues.

“It’s become an important, addictive revenue source that’s not called a tax,” said James S. Henry, an economist and lawyer who works with the Tax Justice Network, a global think tank that studies tax evasion and the impact of offshore and onshore tax havens.

More broadly, Nevada has been largely unapologetic about how it opened its doors to shell companies and how it asks few questions of those who incorporate here. Among those seeking tax havens, Nevada is mentioned in the same breath as the Cayman Islands, Panama, Dubai, Seychelles and other far-off locales.

Nevada’s Sen. Heller, in a brief conversation outside the Senate Chamber in Washington, said “bad actors” behind some of the corporations have to be weeded out.

“The problem with it is, you know, it is the 5 percent that make the other 95 percent look bad, and that’s what’s going on. And so we’ve got to somehow put a stop to it,” said Heller.

A spokesman for Heller, Neal Patel, said in a follow-up email that the Nevada senator is working with his counterpart from Delaware “to focus on solutions and not merely talking points,” and that the two would submit a proposal as “a starting point, not a finish line.”

Nevada and Wyoming, and some other states on a smaller scale, have turned to corporate filing and registration fees as a revenue source. Some state legislators have resisted calls to regulate the companies, or even obtain the names of their true owners.

The let-it-be mentality and a deeply ingrained anti-tax streak are among the strands that have shaped the history of Nevada, a state that has steadily found ways to make money off less-than-lofty human instincts.

Long before an ad agency in 2003 coined a phrase now indelibly associated with Las Vegas, “What happens here, stays here,” Nevada made money with quickie divorces after World War One, and then in 1931, it legalized gambling. It is also the only state to legalize prostitution.

In 1991, Nevada opened the doors to rapid incorporations with the goal of becoming the “Delaware of the West,” a reference to the Atlantic Coast state with a century-old history of serving as the legal home of thousands of U.S. corporations. Attempting to lure business, Nevada boasted of its lack of a personal or corporate income tax and guarantees of privacy.

The move spawned an industry of law firms and corporate registration agents with lobbying clout, and they have won friends in both the state Republican and Democratic parties.

Lawmakers in 1996 changed the Nevada constitution to require that any tax increase be approved by a two-thirds vote in the state Senate and Assembly. Nevada became only one of seven states with such a “super majority” requirement for any tax hike.

Then the state ran into financial trouble. In the spring of 2001, lawmakers faced a budget shortfall of $130 million. One solution to close the gap: Amend the incorporations laws to raise fees and relax some conditions.

Its sponsors framed it as an “educational enhancement package” designed to keep schools solvent. The proposal called for doubling the state’s initial corporate filing fee to $165 and limiting the liability of owners of Nevada corporations. Proponents said the plan would protect the state’s children.

Only a handful of lawmakers raised alarms.

“What a terrible message we are now sending to the business world. We might as well hang out a shingle, ‘Sleazeballs and rip-off artists welcome here,’ ” Rep. Titus, then a state senator, said at a hearing on May 26, 2001, according to an official transcript.

Speaking to lawmakers gathered in Carson City, the capital at the edge of the Sierra Nevada, Sen. Heller, then Nevada secretary of state, praised key industry players – the corporate registration agents – and forecast big changes to the incorporation industry.

“I think we will see a shift in the quality and the quantity of the kind of business we do,” Heller told senators, according to a transcript.

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.

His advocacy paid off. The final vote in the state Senate was 18-1. In the state Assembly, it passed 40-0.

A Democratic state senator, Bob Coffin, cast the sole opposing vote, warning that “scoundrels” would come to Nevada to set up corporations and limited liability companies. Titus said the threat to schools overrode her concerns and she voted for the changes.

Coffin recalled that industry figures pushed to relax the incorporation rules.

“The push came from people in the incorporation business who showed how much could be done,” Coffin said, referring to revenue from filing fees.

Heller said the pressure for the 2001 legal change came from the state legislature, not his office.

“The Legislature came to us and asked the secretary of state’s office to increase revenue coming out of that office,” Heller said. “I think at that time, the secretary of state’s office was the third- or fourth-largest revenue producer for the state of Nevada. ... The majority leader and the speaker both came to the office said, ‘Hey, can we increase revenues out of your office?’ ”

Rep. Amodei, a key proponent in the legislature in 2001, said the bill was intended to make Nevada more economically competitive with Delaware.

Registering a company or partnership in Nevada is remarkably easy. You can do it online without providing any identification.

“You can do it in 10 minutes,” said Eric H. Franklin, a professor at the School of Law at the University of Nevada, Las Vegas. “For a library card, you need to provide an ID card and an address so they can find you if you don’t return a book.”

Franklin said tax evasion concerns do not resonate in Nevada, partly because of antipathy toward the IRS.

“They are not evading state taxes. They are evading federal taxes, which is the IRS’s problem,” Franklin said, citing what he said was a common attitude but not his personal view.

A Nevada affiliate of the Panama law firm Mossack Fonseca & Co., whose internal documents are at the center of the Panama Papers scandal, helped set up 1,024 entities in the state, and a high percentage of them link to companies in the Seychelles, a small Indian Ocean island nation. An analysis of the Nevada registries reveals that three Seychelles companies — Plascot Ltd. (responsible for 182), Aldyne Ltd. (103), and Palma Corporation Ltd. (82) – manage more than a third of entities set up by MF Corporate Services (Nevada), which abruptly ceased operations in late May after the Panama Papers stories were published.

Some of the companies incorporated in Nevada are enmeshed in global daisy chain networks that make it impossible to discern who owns them.

McClatchy found one company, Balmont Holdings, Ltd., that was created on the small Pacific island atoll of Niue, population 1,190. When it re-incorporated in Nevada in 2006, it issued shares to a company registered in the Seychelles, an island archipelago off East Africa. Records show that a list of shareholders was kept in Cyprus by a Moscow law firm.

Hundreds of other Nevada-registered companies have similarly convoluted ownership patterns and histories.

Such layering is common among those trying to put distance between themselves and their assets, and hinder any single country from successfully following the money trail, experts said. The true owners, with the help of lawyers and accountants, move legal control from tax haven to tax haven.

Anyone who presses to find the owners of such companies can quickly run aground.

When the head of the Seychelles Financial Services Authority, the island nation’s regulating body, wrote to the local Mossack Fonseca manager asking who owns three companies incorporated by the Panama law firm, she heard back: No one.

“They are not actually owned by anybody, neither Mossack Fonseca nor any client, directly,” wrote manager Mayka Villarreal to authority chief executive Jennifer Morel in a letter dated Jan. 20, 2015.

Morel declined to say whether any action was taken against the companies, noting in an email to McClatchy that such matters are not “deemed to be publicly available information.”

It appears that few foresaw how the ease of incorporating in Nevada would attract foreign interest, said Steven Miller, senior vice president of the Nevada Policy Research Institute, a conservative think tank in Las Vegas.

“The primary market for these incorporations was just the U.S.,” Miller said. “Suddenly, because of crises around the world, the LLCs have taken on a different flavor.”

Limited liability companies, or LLCs, are entities that minimize the responsibility for misconduct, negligence or debt of their partners.

Two months ago, Sen. Ron Wyden, D-Ore., a top member of the Senate Finance Committee, wrote to the secretaries of state of Nevada and Wyoming demanding to know what actions they were taking to monitor registered corporations.

Nevada Secretary of State Barbara K. Cegavske said in a June 2 response that her office does not have the authority to investigate illegal activities, such as money laundering or tax evasion, linked to Nevada-registered companies. Moreover, she said that in the past three years her office had not demanded ownership information from any company because no law enforcement agency had asked for it.

Industry representatives caution against implicating foreign-controlled companies simply because they have an address on a tropical isle.

“You can’t just look at them and say, ‘Well, they’ve got a foreign address, they must be unsavory,’” said Trevor Rowley, president of the Nevada Registered Agent Association.

Amid the global reaction to the Panama Papers, which toppled the Icelandic prime minister and roiled governments in Pakistan, Argentina, Ukraine and elsewhere, Treasury Secretary Jacob Lew called on Congress in May to establish a federal registry of true ownership information about companies.

Some in Nevada say they don’t think such steps, either at the state or federal level, will hinder those intent on using companies or partnerships for fraud or other criminal acts.

“If you pass a law in the state that says you have to put the owner down, I don’t think the criminal is going to say, ‘Oh, I guess I’ll just put my name down,’” said Robert C. Kim, a Las Vegas-based lawyer with Ballard Spahr LLP, a Philadelphia-based firm, who also heads the business section of the state bar association.

Nevada’s representatives on Capitol Hill differ on what should be done.

Rep. Titus, who once warned of “rip-off artists” flocking to Nevada, called on Congress to ensure those who incorporate “are playing by the rules.”

“Nobody should have the ability to use a shell company for laundering money, evading taxes, or participating in any other criminal activities,” Titus said.

Rep. Amodei insisted that federal lawmakers have no role.

“Having 535 Members of Congress, who are a long way away from most states, make these decisions doesn’t sound as efficient as letting local officials figure out what’s best for their state,” Amodei said. “And, if attorney generals and secretary of states can’t police this – that’s a shortcoming on their part.”

But back in Nevada, several lawmakers said that is asking for the impossible. No state will risk tightening the rules unless others follow suit.

“Because we are all competing with each other, if one state steps out and does something, they lose their competitive edge,” said state Sen. Richard “Tick” Segerblom.

“The only way you can address this issue is at the federal level, not at the state level,” said Coffin, the former state senator who is now a Las Vegas city councilman.

That means near-term prospects are not good.

“Nothing’s going to happen this year,” said one staffer of a legislative committee looking into shell companies.

Treasury Secretary Lew sent a proposal to Congress in May that would establish a federal registry and require all corporate entities to list their true owners. But no lawmaker has signed on to sponsor the proposed legislation. Other proposals have also not prospered this year.

Some experts said, however, that the issue could move forward in 2017.

“Ongoing threats from terrorist financing, money laundering, drug and human trafficking, corruption … mean that, one way or another, the United States and the world have to tackle the issue of companies with hidden owners,” said Elise Bean, former staff director and chief counsel for a Senate investigations subcommittee until 2014.

McClatchy data journalist Christopher Huffaker contributed to this report

Tim Johnson: 202-383-6028; @timjohnson4

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