CASEY MICHEL is a journalist in New York. This essay is adapted from The United States of Anonymity, a forthcoming report of which he is the author to be published by the Hudson Institute.
The clients of the former arms dealer Viktor Bout spanned the globe. By shuttling weapons to warlords in Liberia and a dictator in Zaïre, among others, Bout became the most notorious gunrunner of the past quarter century. As the former State Department official Witney Schneidman put it, he was also the “personification of evil.” But although the Tajik-born arms trafficker[1] dealt with clients from around the world, there was one place he chose to set up the shell companies he used to expand his business: the United States[2]. (Bout was convicted of terrorism-related charges in 2011 and is now serving a 25-year sentence in Illinois.)
Washington has provided the world with some of the foremost tools for combating crime and grand corruption. Its Kleptocracy Asset Recovery Initiative, for instance, has frozen some $3 billion in ill-gotten wealth since 2010. Yet over the past decade, a handful of states—primarily Delaware, Nevada, and Wyoming—have undermined the federal government’s efforts by making it easy for people such as Bout to use U.S.-based shell companies to protect their loot. The United States’ domestic stability has helped these states attract kleptocrats and criminal groups[3] from around the world.
Thanks to the efforts of these states’ governments to turn their locales into offshore havens, the United States has become one of the most important destinations[4] for offshore ownership vehicles, enabling tax evasion[5], corruption, and crime. In the first decade of this century, Delaware even hosted anonymous shell companies that had helped siphon off millions of dollars of international aid meant to help maintain[6] Soviet-era nuclear facilities in Russia and eastern Europe.
It is time for lawmakers to demand more transparency. The federal government should do more to push back against the states that are helping transform the United States into a global offshore haven[7]—and they should start to publicize the criminals, arms dealers, and kleptocrats that are taking advantage of American shell companies and trusts.
Viktor Bout arriving at court in Bangkok, Thailand, October 2010.
SHELL GAMES
It is not hard to see why kleptocrats and criminals prefer using companies listed in the United States to protect their wealth. In some states, they are easy and cheap to open. In 2015, the Boston Consulting Group estimated that some $800 billion in offshore wealth was held in the United States. (That number trails that of Switzerland, which is home to trillions of dollars in offshore wealth.)
Shell companies can occasionally be used for legitimate purposes—for example, to shield a celebrity’s assets from prying gossip magazines or to safeguard a corporation’s proprietary information. It remains unclear how many shell companies are used for more nefarious purposes in the United States, thanks to the lack of information[8] collected on them.
The proliferation of anonymous shell companies in the United States hinges on a simple fact: the country does not force registering companies to identify their so-called beneficial owners, or those who will ultimately benefit from the company’s business or holdings. Many other offshore havens require this basic level of transparency. Even the United Kingdom, which has become one of the world’s most notorious havens for financial secrecy, now requires companies to name their beneficial owners. But U.S. company service providers—the groups that form companies on behalf of anonymous clients—face relatively little pressure to do so, as federal officials seeking such information encounter push-back from state-level authorities. Even though Washington has signed on to international agreements committing the United States to disclose company ownership, some states have effectively ignored such obligations.
This helps explain why the United States has attracted the attention of pro-transparency campaigners. The country has been repeatedly slammed by the Financial Action Task Force[9], an intergovernmental anti-money-laundering organization, for insufficiently identifying and publicizing beneficial owners. A 2014 report by Global Witness, a nongovernmental organization, found that Delaware, Nevada, and Wyoming were among “the easiest places in the world to set up a company whose owners cannot be traced.” That is because officials at both the state and federal levels have rarely pressured those helping set up these companies to identify their beneficial owners. And according to the most comprehensive survey of international shell companies to date[10], by scholars Mike Findley, Daniel Nielson, and Jason Sharman, U.S. company service providers were less likely to comply with the transparency requirements of the Financial Action Task Force than their counterparts in other countries.
State lawmakers, for their part, have reason to race to the bottom. There is money to be made. And Delaware, Wyoming, and Nevada cannot depend on local industries to generate revenue in the same way that states such as California and Texas can.
Delaware, the smallest of those states, has managed to generate more than $1 billion[11] per year from its business-registry industry, accounting for around a quarter of the state budget. In 2012, the political economist Richard Murphy told The New York Times that the state was the “biggest single source of anonymous corporations in the world.” Nevada, for its part, tripled[12] the yearly revenue it drew from business registrations between 2004 and 2014, in part by making it easier and faster to list companies there.
Some lawmakers are aware that these practices draw unsavory groups to their states. In 2001, one Nevada official said[13] that a law that loosened the requirements for business incorporations would attract “sleaze balls and rip-off artists.” But because states make so much money from registering shell companies and because the negative consequences of their permissiveness mostly land elsewhere, they have little reason to introduce stricter rules or to more rigorously enforce those already in place. A 2016 investigation[14] by National Public Radio found that Wyoming had audited only 20 of its 450 company service providers since 2009.
State legislators know what types of figures are exploiting their shell-company industries. In 2011, Reuters[15] found that the former Ukrainian Prime Minister Pavlo Lazarenko[16] had set up a company in Wyoming to steward tens of millions of dollars of real estate in Ukraine. Teodoro Nguema Obiang Mangue—the vice president of Equatorial Guinea, who is being tried[17] in Paris on charges of embezzlement and money laundering—used a shell company incorporated in California to buy a mansion in Malibu.
Not only have U.S. shell companies served kleptocrats[18] plundering their own countries. They have also benefited the United States’ adversaries. Between 1989 and 2013, for instance, Iran[19] used an American shell company to manage its ownership of a Manhattan skyscraper, bringing in millions of dollars and skirting U.S. sanctions. And as the Department of Justice’s most recent National Money Laundering Risk Assessment[20] found, criminal groups from post-Soviet states have “systemic[ally] use[d]… sophisticated schemes to move and conceal their criminal proceeds using … U.S. incorporated shell companies.” All the while, federal authorities pursued some of those criminal groups in the United States[21] and overseas.
Outside the offices of Mossack Fonseca, Panama City, May 2016.
SECRETS, SECRETS ARE NO FUN
After the release of the Panama Papers[22] last year, the moment seemed ripe for a crackdown on financial secrecy in the United States. Mossack Fonseca, the Panamanian firm whose documents were leaked during the scandal, had recommended Nevada and Wyoming[23] as favorable destinations to clients seeking to hide their wealth from the authorities. But legislators in the states in question failed to introduce meaningful reforms.
Recent pro-transparency measures in the world’s traditional offshore havens, such as the Cayman Islands and United Kingdom, will soon send those seeking to hide their money in search of new homes. It will be far too easy for them to relocate to the United States. So U.S. officials should finally force state authorities to collect the types of beneficial ownership information they should have been gathering all along. They should offer that information to law enforcement officials and make a registry available to the broader public.
The longer the United States goes without requiring the identification of those who set up anonymous companies in its territory, the greater the likelihood is that those companies will be used for illicit purposes or to hinder U.S. interests. Until then, the public and the authorities will never know who profits from them—and whether states such as Delaware, Nevada, and Wyoming are inadvertently furthering the aims of the autocrats and criminal groups that undermine U.S. foreign policy.
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