Image by Nattanan Kanchanaprat from Pixabay
In the United States, it is easier to set up an anonymous shell company than it is to obtain a library card. No state jurisdiction requires any person starting a company to disclose beneficial ownership data. The freedom and secrecy that this prerogative provides is a recipe for corruption that has specifically been evident with Shell companies in the US. Since Shell companies are LLCs, they are managed and owned anonymously, and are therefore easily subject to abuse. They exist simply as a transfer point for moving funds from one bank account or business to another, which money launderers, tax evaders, arms dealers and other illegal actors have taken advantage of. As mentioned in the United VS. Stegman case in 1997, “U.S. LLC shells are used more often in laundering proceeds of grand corruption, which often escapes taxation, than the LLC shells of any other country.” Some of the most dire crises that our globe suffers from is exacerbated by the U.S.’s legal system. Although perfectly legitimate activities are conducted through shell corporations, there are also illicit transactions and profiteering made possible through the anonymous ownership status these companies provide, which necessitates the implementation of effective legislation on shell company regulation in the U.S.
Wyoming, Nevada, Delaware and New Mexico are some examples of states that allow for the establishment of anonymous LLCs. Their incorporation laws are comparatively lax enough to overcome the power of law enforcement, fortifying the corporate secrecy needed to protect shareholders’ rights. In Delaware, 198,000 entities were formed in 2017 alone. Similarly, lenient disclosure and liability laws have earned Nevada a reputation of being “the Delaware of the West.” According to Financial consulting firm PrivateRaise, 588 of the 1,215 publicly traded U.S. shell companies it monitors (which is nearly half of the total) are registered in Nevada. The prevalence of these enterprises, and more importantly the ease with which their anonymous owners could transfer illicit funds and luxury assets, poses a challenge that law enforcement, like the DEA and U.S. Treasury Department, has not been able to handle successfully.
Advocating since the Obama Administration, Congress has finally managed to pass the “Proposed Corporate Transparency Act” in 2019. Although it could potentially mitigate financial corruption by “creating a federal database of persons controlling business entities”, this database would not be publicly released until FinCEN receives an official request from a local, state, tribal, or federal law enforcement agency. U.S. law enforcement would realistically have to undergo a time-consuming and resource-intensive process to unravel the systematic ownership of shell companies, especially if it involves ownership overseas or simply numerous layers of corporate entities and trusts. The law also prohibits companies from issuing shares in “bearer form”, which means that the true owner would remain unrevealed since stock certificates do not disclose ownership information. Additionally, this legislation may enforce the centralization of ownership information, however, only applies to newly formed companies.
Unfortunately, any legal progress made seems to be inhibited by a haunted past of defective legal frameworks that extremists and aristocrats capitalized off of and continue to benefit from. According to the 2018 risk assessment conducted by the U.S. Treasury, “domestic financial crime, excluding tax evasion, generates approximately $300 billion of proceeds for potential laundering.” Rather than using such abundant revenue to revitalize our structurally changing industries, shell owners are profiteering off of crimes like human trafficking, bank fraud, consumer fraud, healthcare fraud and tax fraud. Through legislation, the United States is gradually compensating for its shortcomings in anti-money laundering compliance. However, it will take more than just the backing from state representatives to ensure that such support will be mirrored in the practices of financial institutions and that law enforcement agencies will take the appropriate measures to efficiently combat illicit exchanges.