Lobby groups ‘see right through’ US state’s financial transparency attempt

Delaware

One might think that if Delaware began to lift the veil of secrecy about the thousands of shell corporations in that state, there would be praise from groups that have long clamored for this very move. 

Think again.  Two measures that would do just that – provide a little more information about these secretive anonymous entities – just breezed through the Delaware House in early June and are headed to the state Senate, where success seems assured.  And Delaware’s governor is on board as well.  

There’s little cheering, however, from two prominent advocacy groups – Global Financial Integrity and Global Witness. They take a dimmer view and say the bills are  “mere window dressing” that will do little to reveal the hidden hands behind shell companies that are often used to facilitate crime and house ill-gotten gains.     

The companion measures passed the Delaware House by an overwhelming margin and would require businesses that incorporate in Delaware to keep better records of some, but not all, of the people associated with them. This information, however, would not be made public, which is one of the big concerns of the two groups.  Law enforcement agencies could obtain this information, but would have to go through a legal process first.  Critics have long claimed that the lack of information about the exact owners of these companies allows drug dealers, despots and other unsavory sorts to launder money through Delaware shell companies. 

Delaware has long defended its tradition of secrecy, and yet it also knows it must make some changes to shed its tax haven stigma. So, by design, the measures are a small step. Richard Geisenberger, director of the Delaware Division of Corporations, told the Wilmington News Journal that the bills were drafted by Delaware lawyers at the request of the state’s executive branch.  

“We’re taking a step within the context of what the state law can do to try to ensure that this information is held by the companies themselves and that through normal legal process can be made available to law enforcement upon request,” he told the newspaper. “It’s going to require cooperation across the business community, the legal community, federal law enforcement, financial authorities and all the states to really find a solution that works.”  

That small step is not gaining fans among advocacy groups, which instead favor putting names of the beneficial owners – the actual people who own these companies – in a public registry.   That way, the real power behind front companies could be identified and shell companies would no longer have hidden owners, say the advocates.  This approach is being taken by the United Kingdom, which is in the process of creating its first public registry. The European Union is thinking about doing the same.  

“Drug dealers, corrupt American politicians and illegal arms smugglers have all used anonymous Delaware companies in order to profit from their crimes,” said Heather Lowe, legal counsel for Global Financial Integrity, a nonprofit group based in Washington, in a statement. “Public registries of beneficial ownership information are the best approach to ending the use of anonymous companies.”

For Delaware, it is a question of whether this is real reform or whether the state is just trying to fend off criticism that it is a haven for those with something to hide. The state relies on fees from corporate registrations to pay for about a quarter of the state’s budget, creating a powerful incentive to maintain the status quo and allow secrecy to prevail.  Yet the state is facing mounting criticism over its freewheeling ways. Much comes from abroad but even a branch of the U.S. Treasury pointed a finger at the Delaware for being “particularly appealing” for the formation of shell companies because of its lack of transparency and high level of secrecy.

It is hard to tell whether the measures, if they get enacted into law, will burnish the state’s image. If the groups that want Delaware to clean up its act have much to say, the answer would be a resounding no. 

 

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