Special Report: How Delaware kept America safe for corporate secrecy

August 24, 2016 9:46 AM EDT

Jeffrey Bullock, the appointed secretary of state of Delaware. Courtesy State of Delaware


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By Suzanne Barlyn

DOVER, Delaware, (Reuters) - In 2009, a global coalition was pressing governments to lift the veil on corporate secrecy. Its members – U.S. President Barack Obama’s administration, influential senators, international law enforcement agencies, anti-corruption activists and major American allies -- presented a formidable front in their campaign against money laundering and tax evasion.

The United States, championing the cause abroad, was also pursuing legislation for stronger disclosure rules at home.

Then along came Jeffrey Bullock, the newly appointed secretary of state for Delaware.

His tiny East Coast state was in crisis, heading toward an $800 million budget deficit. Delaware’s second-biggest biggest source of revenue was fees from few-questions-asked company registrations and other corporate services. That cash cow was in danger.

A proposed U.S. law would have required states to track the true owners of the companies they register. The global pushback against shell companies was threatening to dim Delaware’s longstanding appeal as a secretive corporate domicile.

Seven years later, the proposed law continues to languish, thanks in part to Bullock. He was neither the first nor the only official to take up the fight, but became a leader in defending the status quo as worldwide support for change gained traction. It’s as easy as ever to register a company in Delaware with scant disclosure of the real owner, making the state a magnet for anonymous shell companies that law enforcement says can be used to avoid taxes, launder money from drug-trafficking or conceal terrorist financing.

“We’re viewed as hypocrites,” said Carl Levin, the now-retired Michigan senator who sponsored the legislation and an advocate of corporate transparency in his 36 years on Capitol Hill. “We go after tax havens and people who launder money … but then we become a haven.” His bill received fresh support this month, in a letter from a coalition of the world’s largest banks to U.S. lawmakers. The legislation’s prospects remain unclear.

Delaware, meanwhile, is doing much better. Since Bullock started his job, the number of companies registered in Delaware has jumped 34 percent, to 1,181,000 as of last year. Revenue from the state’s corporations unit surpassed the $1 billion mark for the first time in 2015. In 2010, the state budget deficit was $800 million; as of this July, it was zero. Rising fee income from registrations, which surged during Bullock’s tenure, helped plug the gap.

Even before Bullock was appointed, officials from several states were working to address the growing sentiment against corporate secrecy. And Delaware took some steps to curb secrecy, such as tightening oversight of “registered agents,” third parties who act on behalf of companies. But Bullock helped outmaneuver foes of the status quo by tapping his political connections, drumming up support among other states and hiring a Washington lobbying firm.

In an interview, Bullock said corporate secrecy in the United States is a problem and that law enforcement needs tools to uncover the identities of company owners. He opposed past efforts to deal with the problem, he said, because they would have placed undue burdens on individual states. The federal government, not states, should be responsible for making the system more transparent, he said.

THE COST OF OPACITY

Leaving states to collect ownership information, Bullock said, could leave weak links in the system by creating a patchwork of different approaches and financial resources for collecting those details.

“And criminals can find the weakest link,” he said.

The vast majority of Delaware-registered companies are legitimate enterprises. More than 50 percent of all U.S. publicly traded companies and 66 percent of the Fortune 500 call Delaware home, according to the Delaware Division of Corporations.

Still, the opacity championed by Delaware and other states has allowed some notorious criminals to carry out their deeds and hide ill-gotten gains.

Lobbyist Jack Abramoff laundered money defrauded from clients through a Delaware shell company run by a lifeguard out of a beach house. Mexico cartel kingpin Joaquin “El Chapo” Guzman allegedly used a Delaware-based tequila business to launder drug money. Former Zambia strongman Frederick Chiluba siphoned off millions from state coffers into Delaware shell companies. The list goes on.

Bullock’s reach extends into the offices of his counterparts in other states who, at Delaware’s direction, lobby their U.S. representatives to fight transparency, said Heather Lowe, director of government affairs at Global Financial Integrity, an anti-corruption advocacy group in Washington, D.C. Bullock’s influence is “astoundingly frustrating,” Lowe said.

It’s impossible for authorities to determine exactly how much dirty money is tucked away in havens. Based on an analysis of International Monetary Fund data, Global Financial Integrity says that roughly $1.1 trillion in illicit funds were transferred out of developing countries in 2013.

WHERE COMPANIES WANT TO BE

Corporate America has long favored Delaware as a domicile because of statutes that give directors broad discretion in how they run companies, a dedicated court for corporate disputes that dates to 1792, and a business-friendly legislature. Delaware was the first state to let stockholders limit the liability of corporate directors.

Delaware is also one of the world’s easiest places to set up a company. The state charges as little as $90 to register a limited liability corporation, or LLC. All that’s needed is the name of a registered agent, which can be bought from an outside company for $50. Approximately 200 agents represent Delaware’s 1.2 million companies. “Form Your Delaware Company in Just Minutes,” touts the website for one of them, Harvard Business Services Inc.

When law enforcement officials, or anyone else, search Delaware’s corporate registry online to see who owns a company, all they get is the name and address of the agent. The true owner, also known as the beneficial owner, doesn’t have to be disclosed.

The Corporations Division of Delaware’s Department of State comprises a warren of cubicles in the basement of a government building in Dover, the state capital. The division’s 111 employees man two shifts, working until midnight to accommodate urgent corporate filings. For $1,000, the office will vet a corporate registration application in an hour, taking requests as late as 9 p.m.

Bullock was raised in Claymont, a steel town whose fortunes fell with the collapse of the U.S. steel industry. He came up in local politics, landing a gig as chief of staff to then-Governor Tom Carper in the 1990s. Delaware’s current governor, Jack Markell, appointed Bullock secretary of state in 2009.

It was a bleak time for Delaware, in the wake of the global financial crisis. By 2010, the state’s budget was deep in the red. State leaders were wrestling with the equally unappealing prospects of deep spending cuts and steep tax hikes.

Worse, Delaware’s corporate registry franchise, its biggest revenue driver after personal income tax, was in jeopardy.

AMERICA THE OUTLIER

In 2006, the Financial Action Task Force, or FATF, a group of some three dozen nations formed to combat money laundering and terrorist financing, noted “significant shortcomings” in the United States. The group declared Washington “non-compliant” in four of 40 categories for anti-money-laundering compliance. Among the failures: Authorities could not obtain timely information about a company’s real owners, FATF said.

The task force demanded that the United States fix the problem. For Washington, which was pressing allies to crack down on terror financing, it was an embarrassing critique.

The same year, the U.S. Government Accountability Office, Congress’s auditing arm, concluded that federal law made it too easy for individuals to anonymously form companies. Delaware was a favored destination for such companies, the report said.

As anti-secrecy momentum built, Senator Levin and then-Senator Barack Obama joined forces with Senator Norm Coleman of Minnesota to make it tougher to register new companies without identifying the owners.

They issued a bill in 2008 that would pare back secrecy laws in Delaware and other states by forcing them to collect information about the true owners of companies, thereby making the facts more accessible to law enforcement.

In 2009, the Department of Justice, U.S. Immigration and Customs Enforcement and the Manhattan District Attorney’s office each testified to a Senate committee that corporate secrecy was a growing problem and impeding law enforcement.

CHAMPIONING THE CAUSE

By then, Bullock had been appointed secretary of state. Trim and friendly, he became a popular figure, tasked with praising the state’s founders in speeches on “Delaware Day” and flanking the governor at bill-signing ceremonies.

He pursued a weightier agenda behind the scenes. By May 2009, he had hired Washington lobbying firm Peck Madigan Jones to sway lawmakers and administration officials against Levin’s bill. One of the partners, Jonathon Jones, had served as Governor Carper’s chief of staff after Bullock. Bullock is the only secretary of state in the country with a taxpayer-funded lobbying firm, according to lobbying disclosures.

Bullock said the firm’s main role was to lobby on the Dodd-Frank financial regulatory reforms. Peck Madigan didn’t return calls seeking comment.

Bullock then hit back against FATF, the multinational group that had slammed Delaware as a secrecy haven.

He co-wrote a Sept. 16, 2011, letter to FATF on behalf of the National Association of Secretaries of State in which he called the group’s recommendations “impractical,” warning it not to meddle with “the core principle of Constitutional state sovereignty.” Such letters from association leaders are not unusual, a NASS spokesperson said.

Meanwhile, Levin made a tactical misstep. He introduced his bill in the Homeland Security and Government Affairs Committee, where an influential member was Delaware Senator Tom Carper - Bullock’s old chum and former boss.

The bill was the subject of two hearings in 2009, tying it up for six months. Carper testified against it, saying states shouldn’t be burdened with more work.

“I have long believed it should be easier for law enforcement to access identity information about criminals who manipulate our corporate laws,” Carper said in a statement to Reuters. But new rules to ease access should preserve “a nurturing” business environment, he said.

STUCK IN THE SENATE

Levin reintroduced a more detailed bill in late 2011 with ramped-up identification checks. The Treasury endorsed it.

This time, according to a former congressional staffer, Carper pressed Senator Joe Lieberman, the committee chairman, to let the bill languish. When the bill was scheduled for a markup, the final step before going to the full Senate for debate and a possible vote, it never came to pass, the staffer said.

Lieberman, in an email, said Carper and other committee senators voiced concerns about the bill. “It was my impression that they were hearing from their states’ secretaries,” Lieberman said. Lieberman said he asked the senators to compromise. “They tried but were never able to find the sweet spot of an agreement. And that’s where it ended,” said Lieberman, now a lawyer in private practice.

In June 2013, pressure rose on Washington to act. The Group of Eight industrialized nations issued a declaration demanding that members curtail anonymous shell companies. The plan called for creating ownership registries to aid authorities. That month, President Obama issued a national plan to address the G8 concerns, including a call for the Treasury Department and other agencies to back measures against anonymous shells.

Levin retooled his bill yet again in August 2013. It had yet to make it to the Senate floor for debate, five years after it was introduced. This time, he crafted it for consideration by the Senate Judiciary Committee, hoping for a better reception.

By then, NASS, where Bullock had become a dominant voice, was pushing a counterproposal. It advocated addressing the issue by relying on information the Internal Revenue Service collects from companies.

That wouldn’t work, critics said. The IRS has long restricted the information it gives law enforcement, they said. Further, the IRS requires only that companies register “responsible parties,” a term that could include anyone -- even a lawyer duty-bound to hide the real owner’s identity.

It “was a cover to oppose a bill that’s presumably aimed at the true owners of corporations,” Levin told Reuters. “It’s a dodge.”

AGENTS FOR CHANGE

NASS spokeswoman Kay Stimson said the IRS collects the same kind of information described in the Levin bill. Law enforcement officials, she said, have told NASS that the IRS data is sufficient.

In 2013, two retired FBI special agents took up the cause against secrecy, serving as unofficial spokespeople for active agents. Dennis Lormel and Theodore Greenberg, with decades of experience working anti-money laundering cases between them, visited Bullock in his offices in mid-2013.

Too often, they told Bullock, the FBI’s trail went cold at the addresses of Delaware incorporation agents. Sometimes that happened when foreign law enforcement agencies sought FBI assistance chasing the money trail of a suspected criminal. Such cases, they said, frayed relations with foreign agencies, which were expected to cough up the goods whenever the FBI was hunting terrorist cash flow.

The two agents walked Bullock through a form and protocols used by banks in Switzerland, long one of the world’s most secretive financial hubs. If Delaware could simply meet the same minimal transparency standards as the Swiss, everyone would be happy.

Bullock told them Delaware would not tighten requirements because companies would flee to other states with lax laws, according to the agents. Bullock told them the resulting blow to the state treasury could harm his chances of winning higher office, the agents said.

“I was pleasantly surprised that he was at least being honest,” Lormel said.

Bullock said he didn’t recall all the details of his meeting with the former FBI agents. He said he does not have future political aspirations.

“The anonymity that is possible when using shell companies can lead to difficulties in federal investigations,” an FBI spokeswoman said. She declined to comment on the legislation.

AN ALTERNATIVE PLAN

That July, NASS held its annual convention in Anchorage, Alaska. A report about shell companies, prepared in part by Bullock’s office, was circulated among the group’s shell company task force. It discussed, among other things, IRS changes that could simplify collecting ownership details.

Afterward, other secretaries of state, including Vermont’s James Condos, entered the fray. Condos was a critical link to Senator Patrick Leahy, Democrat of Vermont, then chairman of the Senate Judiciary Committee, where Levin’s bill would soon be pending.

Levin’s bill “would leave companies, especially small businesses, with additional costly and confusing layers of bureaucratic red tape,” Condos wrote in an Aug. 8, 2013, letter to Leahy, days after returning from Anchorage. The bill never left the Judiciary Committee.

Condos said that Bullock did not encourage him to write to Leahy.

Bullock and NASS say he didn’t play the lead in rallying opposition to Levin’s bill. The cause had been taken up much earlier by officials in other states, he said, and by the U.S. Chamber of Commerce and the American Bar Association. NASS says secretaries of state have unanimously opposed Levin’s legislation from the start.

“This issue was already hot and heavy when I entered the scene,” he said.

By 2014, some Delawareans were growing concerned about the state’s reputation as a secrecy haven. A group of state legislators began circulating a draft public letter opposing Bullock and supporting Levin’s bill.

REBELLION AT HOME

Bullock tried to quash the letter before it went public. “I am writing to urge you to not sign on,” he wrote in an email to state Representative Paul Baumbach on July 10, 2014. To “support this kind of legislation sends the wrong message to the 1,050,000 legal entities incorporated in Delaware,” he said.

Baumbach signed anyway. He said he has stopped following the issue.

Bullock told Reuters that he emailed the lawmakers out of concern that the registration business would simply move to other states if Delaware changed policies unilaterally.

Thirty-one of Delaware’s 62 elected state legislators signed the letter opposing Bullock and supporting Levin’s bill. “Taking action will help … ensure that individuals cannot use our state’s incorporation laws for illicit purposes,” the legislators wrote.

The resistance failed. In March 2014, a senior U.S. Treasury official told Lormel, the former FBI agent, that the Obama administration was conceding defeat. There was too much opposition to the bill.

A month later, an item on the White House blog reported Obama’s support for the alternative proposal centering on IRS data.

Asked about the change of tack, a senior administration official said: “The Obama administration wants to work with Congress to pass meaningful legislation that would require companies to know and report accurate ‘beneficial ownership’ information at the time of a company’s creation, so that the information can be made available to law enforcement.”

Lormel, the former FBI agent, said the IRS approach may yield some useful information for law enforcement, but noted that identities of real owners might still be missing.

LEVIN AND LIMBO

Levin retired in 2014. Other legislators took up his cause. Similar bills have struggled to gain traction.

In May, the U.S. Treasury unveiled a new rule that, starting in 2018, will require banks to more thoroughly vet the real owners of potential corporate customers. Levin says the Treasury’s definition of beneficial owner is loose and allows the reporting of managers instead of actual owners.

On July 14, Delaware’s Senator Carper introduced yet another alternative - a bill that would codify the IRS approach supported by Bullock.

This legislation, crafted by Bullock’s office and Delaware’s senators, would require every U.S. company to get an IRS identification number. Companies would provide “responsible party” information to the IRS that law enforcement officers could use in money-laundering and terrorism cases, according to the bill.

The bill also outlines a new process for federal law enforcement to obtain that information from the IRS, a step that has required a court order and often led to dead ends.

Proponents of transparency think it falls short. “These are half-measures that largely serve to deflect political opposition rather than tackle the problem,” said Mark Hays, a senior adviser at Global Witness, an anti-corruption group.

Two days after Carper introduced the bill, Bullock unveiled it at a NASS conference in Nashville, Tennessee. He suggested the bill would help cast secretaries of state in a more positive light after years of fighting the Levin bill.

“I know how people portray us,” Bullock told the conclave. “I don’t want to be against things, I want to be for things.”

(Additional reporting by Francisco Vara-Orta in Columbia, Missouri. Edited by Charles Levinson and John Blanton.)



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