Transparency International, a Berlin-based nonprofit with chapters in 100 countries, recently called for social sanctions against Delaware. At issue: the state's very successful corporation registry, which over the years has enticed 60 percent of the Fortune 500 and over half of America's publicly traded companies to make the state their official home.
According to the nonprofit, best known for its annual global ranking of countries based on perceptions about their levels of corruption, Delaware is "a place where extreme corporate secrecy enables corrupt people, shady companies, drug traffickers, and fraudsters to cover their tracks" because the state doesn't collect data on the identity of who actually owns the companies registered there. The legal definition of this kind of arrangement is called beneficial ownership.
In a statement, Transparency International included Delaware's easy-access incorporation, which includes user-friendly LLC (limited liability corporation) processing, as one of the world's top nine examples of a "grand corruption" that benefits "the few at the expense of the many" and "often goes unpunished."
The other inductees are Petrobras, the Brazilian state oil company that's caught up in a high-profile corruption scandal; FIFA, soccer's beleaguered world governing body; a handful of former leaders from Panama, Ukraine and Tunisia; and the entire political system of Lebanon. The list was selected by online voting by 170,000 participants and internal deliberations at Transparency International.
"While no U.S. state collects beneficial owner information, the federal government already does," according to a statement issued by Delaware's Department of State, which like its counterparts throughout the nation, oversees corporate registrations. "Delaware and other states have already taken important steps to deter fraudulent activity -- prohibiting anonymous bearer shares, giving law enforcement access to the name of a natural person for every company, and requiring limited liability companies to retain ownership information available to law enforcement with a subpoena.
"Along with Nevada and Wyoming, we have enacted laws to regulate the activities of commercial registered agents and deter the promotion of shell companies, with penalties for agents and businesses that violate these laws," the Delaware Department of State said. "And we fully cooperate with investigations of U.S. law enforcement agencies including the FBI, Financial Crimes Enforcement Network and Office of Foreign Asset Control."
A spokesman for Delaware Governor Jack Markell confirmed that, all totaled, Delaware gets $1.1 billion of its close to $4 billion state budget from revenue generated by the business registry, which includes well over 1 million entities.
But Delaware is hardly alone. Back in 2006 a General Accountability Office national survey flagged as a problem the scant information all states collect on basics like the record of beneficial ownership, the identity of the people who actually own the businesses registered by the states.
GAO found that both "government and international reports indicate that shell companies have become popular tools for facilitating criminal activity in the United States and internationally and can be involved in fraud and corruption or used for illicit purposes such as laundering money, financing terrorism, hiding and shielding assets from creditors, and engaging in questionable tax practices. Such schemes can conceal money movements that range from a few thousand to many millions of dollars."
Yet, despite the risks, all 50 states appear equally eager to attract and retain business, and try to outdo each other in their efforts to cut any red tape that could impede new investments. Online, well over 1,000 corporation formation and corporate service firms vie for prospective customers touting the competitive advantages for their respective states.
Wyoming promoters pitch the ability of the state's laws to protect investors' assets. In New Hampshire, state boosters pitch a "one stop" experience. Looking for a fictitious corporate name to use, instead of your official business name? Florida's Department of State's Division of Corporations offers the convenience of online registration to get a business alias for just $50. And sites promoting dozens of foreign tax havens have proliferated.
For several years, proposed federal legislation to require the collection of basic information about corporate ownership has garnered bipartisan support, but the political forces in support of the patchwork status quo continue to prevail. Advocates for a measure that would have the federal government collect the data are hoping an additional round of congressional hearings will carry the day.
Clark Gascoigne is interim director at the Financial Accountability and Corporate Transparency (FACT) Coalition, one of the advocacy groups pushing for greater public disclosure on the details of corporate ownership. Gascoigne says when it comes to Delaware entities, federal law enforcement has to resort to obtaining a court order to get access to the supporting documents for state incorporations.
"But that usually hits a dead end because the names on these documents are people who make their living executing corporate registrations" and have no actual ownership interest in the business, Gascoigne told CBS MoneyWatch.
In 2008, former Senator Carl Levin warned that without a robust uniform corporate ownership disclosure requirement, the states would be caught in " a classic case of competition causing a race to the bottom, making it difficult for any one state to do the right thing and request names of beneficial owners."
Said William Black, professor of economics and law at the University of Missouri-Kansas City: "This race to the bottom is occurring eight years after a very similar race to the bottom in the financial services sector that was encouraged by economists who promoted deregulation and decriminalization of behavior that produced the financial crisis and Great Recession."