July 6, 2017 Richard Phillips

Senior Policy Analyst

July 6, 2017

Updated August 8, 2017 to reflect the introduction of a Senate companion bill to the Corporate Transparency Act and additional co-sponsors for the Corporate Transparency Act in the House of Representatives.

What do terrorists, opioid and human traffickers, corrupt government officials and tax evaders have in common? They all depend on the secrecy provided by anonymous shell corporations to allow them to finance and profit from their crimes. Momentum is building in the House and Senate to pass legislation that would strike against illicit finance in the United States and around the world by bringing an end to the anonymity provided by U.S. incorporation.

The key problem is that, in the U.S., state governments control incorporation and many of them do not collect or monitor the ownership of the entities formed under their laws. This means that individuals can engage in all kinds of criminal activities without law enforcement or really anyone being able to effectively trace those illicit transactions back to the ultimate owner of the corporation. In investigation after investigation, law enforcement personnel hit dead ends when they discover that money earned from criminal enterprises or terrorist operations was funneled into a series of untraceable shell corporations.

While the problem of secret financial transactions and anonymous shell corporations is often associated with Switzerland or some small Caribbean island nations, the reality is that the United States is the easiest country in the world to set up an anonymous shell corporation. Reporters with the news outlet Fusion created a video last year chronicling how quickly and cheaply they were able to create an anonymous shell company for their cat in Delaware, a state that has become an onshore tax haven. This a major reason why the U.S. was rated as one of the top secrecy jurisdictions in the world, above even infamous tax havens like the Cayman Islands or Luxembourg, by the Tax Justice Network.

Shell corporations formed in U.S. states have been used for all sorts of crimes. One of the most infamous examples involves the weapons trafficker Viktor Bout, played by Nicholas Cage in the movie Lord of War that depicted the case. Bout used more than a dozen U.S. shell corporations to help facilitate the crimes surrounding his eventual conviction for supporting terrorism. Shell corporations have been involved with Medicare fraud, laundering of illicit drug money to buy racing horses, a Moldovan sex trafficking ring in the U.S., and even allowed the government of Iran to evade sanctions and purchase a skyscraper in Manhattan without detection for many years.

Anonymous shell corporations also play a significant role in the facilitation of tax evasion by allowing U.S. individuals to move money into offshore tax havens without detection. In many cases, the bank accounts in tax havens like Switzerland and the Cayman Islands are owned by shell companies incorporated in states like Delaware.

Shell corporations have received more attention worldwide following the release of the Panama Papers, a massive leak of documents from a Panamanian firm involved in the creation of more than 200,000 of these entities. The documents led to some high profile revelations around the finances of associates of Russian President Vladimir Putin or the Prime Minister of Iceland who ultimately had to resign his position. The leak included information on how wealthy individuals in the United States may have used shell companies to evade paying their taxes in the United States. In one case, it appears that a successful finance book author used shell companies to illegally hide a million dollars in offshore bank accounts.

Two bipartisan bills in Senate have been introduced that would put an end to the creation of anonymous shell corporations in the United States by requiring that either the state or federal government collect basic ownership information on every corporation, which would then be made available when needed by law enforcement. The Corporate Transparency Act from Democratic Senator Ron Wyden and Republican Senator Marco Rubio would allow this information to be collected at the state or federal level, whereas the TITLE Act from Democratic Senator Sheldon Whitehouse and Republican Senator Chuck Grassley would require it to be collected at the state level. In the House, the Corporate Transparency Act was originally sponsored by Republican Representative Peter King and Democratic Representative Maxine Waters, and since its introduction has gained four additional Republican and four additional Democratic co-sponsors. Unlike many issues in Washington these days, this commonsense approach to ending corporate anonymity is backed by lawmakers in both parties and groups from across the political spectrum. In other words, this legislation represents a rare opportunity for Republicans and Democrats to come together and get something critical done this year.