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“Somalia has slightly higher standards than Wyoming and Nevada” (Corporate Secrecy Edition)

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We’ve taken an interest in tax havens thanks to Nicholas Shaxson’s book Treasure Islands, which is a must read. Although the book gives a historical account of the rise of what he calls “offshore”, which includes forms of tax avoidance that extend beyond the use of secrecy jurisdictions, which gives the UK the leading role, Shaxson discusses is that the US is the now the biggest tax haven in the world. He discussed briefly the role of Wyoming, which has incorporation rules that are so lax that it is trivial to hide the owners of Wyoming domiciled companies.

An article in Reuters fleshes out this topic in more detail. I encourage you to read it in full. Key extracts:

The secretive business havens of Cyprus and the Cayman Islands face a potent rival: Cheyenne, Wyoming….

All the activity at 2710 Thomes is part of a little-noticed industry in the U.S.: the mass production of paper businesses…The hotbeds of the industry are three states with a light regulatory touch-Delaware, Wyoming and Nevada.

The pervasiveness of corporate secrecy on America’s shores stands in stark contrast to Washington’s message to the rest of the world. Since the September 11 attacks in 2001, the U.S. has been calling forcefully for greater transparency in global transactions, to lift the veil on shadowy money flows. During a debate in 2008, presidential candidate Barack Obama singled out Ugland House in the Cayman Islands, reportedly home to some 12,000 offshore corporations, as “either the biggest building or the biggest tax scam on record.”

Yet on U.S. soil, similar activity is perfectly legal…. Convicted felons can operate firms which create companies, and buy them with no background checks.

No states license mass incorporators, and only a few require them to formally register with state authorities. None collect the names and addresses of “beneficial owners,” the individuals with a controlling interest in corporations, according to a 2009 report by the National Association of Secretaries of State, a group for state officials overseeing incorporation. Wyoming and Nevada allow the real owners of corporations to hide behind “nominee” officers and directors with no direct role in the business, often executives of the mass incorporator.

“In the U.S., (business incorporation) is completely unregulated,” says Jason Sharman, a professor at Griffith University in Nathan, Australia, who is preparing a study for the World Bank on corporate formation worldwide. “Somalia has slightly higher standards than Wyoming and Nevada.”

An estimated 2 million corporations and limited liability companies are created each year in the U.S., according to Senate investigators. The Treasury Department has singled out LLCs as particularly vulnerable to being used as shell companies, as they can be owned by anyone and managed anonymously. Delaware, Nevada and Wyoming had 688,000 LLCs on file in 2009, up from 624,000 in 2007.

Treasury and state banking regulators say banks have flagged billions of dollars in suspicious transactions involving U.S. shell companies in recent years. On June 10, a federal judge in Oregon ordered a company registered there to pay $60 million for defrauding a Ukrainian government agency through sham transactions involving shell companies. The civil lawsuit described a network of U.S.-registered shells connected to fraud in Eastern Europe and Afghanistan.

A growing niche in the shell business is shelf corporations. Like paper-only shells, which enable the secrecy-minded to hide real ownership of assets, shelf companies are set up by firms like Wyoming Corporate Services, then left “on the shelf” to season for years. They’re then sold later to owners looking for a quick way to secure bank loans, bid on contracts, and project financial stability. To speed up business activity, shelf corporations can often be purchased with established bank accounts, credit histories and tax returns filed with the Internal Revenue Service.

“They just slot in your names, and you walk away with the company. Presto!” says Daniel E. Karson, executive managing director at investigative firm Kroll Inc. “The purpose is to conceal ownership.”…

Shell companies remain a headache for law-enforcement authorities. Officials say court-ordered subpoenas served on incorporators of shell and shelf corporations generally do deliver the names of the real owners hiding behind nominees. But if the owners are not U.S. citizens or companies, the investigation often hits a dead-end, they say.

There are additional hurdles. Wyoming Corporate Services charges $2,500 per year to supply an attorney who can provide an extra shield. Cheyenne attorney Graham Norris Jr. tells prospective clients sent to him by WCS that he will create a company on their behalf. That way, he says, he can invoke attorney-client privilege-adding a layer of privacy anytime there is an inquiry about their identities.

The in-depth report continues here.

Needless to say, on the one hand, we have the prospect of a budget deal that includes cuts to Medicare and on the other hand, tolerance of procedures that allow large scale tax evasion to occur (the IRS could stop this if it chose to by refusing to give IRS tax IDs to corporations that failed to provide the identities of owners). Not hard to see whose interests are served by this policy combo plate.

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31 comments

  1. Johannes Yo Highness


    “offshore”, which includes forms of tax avoidance

    ~~Yves Smith~

    R U shore? The more I read into it, the more people should realize that taxation is the most fungible phenomenon in town. When rulers tax one fat cat, the cat quickly passes the tax on towards his customers, his creditors, his investors, his suppliers, his mistresses, their pimps, his mother-in-law, and her dog.

    Taxes don’t work for singin’the-blues-poor-folks the same way they work for the fat cat who puts his sandwich onto expense account covered by tax-exempt-charity that he consults for. Lets face it folks. We got to get rid of taxes. Drop taxes long enough to rev up our economy long enough to get folks off food stamps long enough to cut gov’mnt over-spending long enough to balance budget long enough to improve credit ratings on treasury-paper long enough to drop rates on debt-service long enough to make permanent our total tax holiday.

    Let the good times roll
    and thrill your soul!

    Got soul?

    Get it
    !

    1. liberal

      When rulers tax one fat cat, the cat quickly passes the tax on towards his customers, his creditors, his investors, his suppliers, his mistresses, their pimps, his mother-in-law, and her dog.

      This isn’t true of land value taxation.

      Land can’t be hidden. And the tax cannot be passed on because the elasticity of the supply of land is zero.

    2. Binky the perspicacious bear

      tomfoolery and shenanigans.
      the real problem is that failure of enforcement goes hand in hand with “deregulation” such that kidnapping will soon come back as a method of revenue generation, to be legalized after the fact by well paid Republicans and Democrats who see the interests of their constituents well represented by kidnappers.
      I prefer the lonely soul who said “put a few of these bankers in real, pound them in the butt prison, and the rest will come into line very quickly.”
      If only we had someone who would do that. We need a Teddy Roosevelt, more than an FDR.

    3. K Ackermann

      “…When rulers tax one fat cat, the cat quickly passes the tax on…”

      That’s one-step-and-rest thinking. What drives prices is supply and demand.

      You don’t bake tax evasion into your prices.

      Also, taxes are on PROFITS. They are not an expense.

  2. Paul Tioxon

    http://www.politico.com/news/stories/0611/57796.html

    “Some observers are calling for a “repatriation holiday” on profits held by foreign subsidiaries. Some members of Congress, eager to stimulate our fragile economy, are listening.”

    The lack of transparency is monumental, but with a global economic system in support of a global military superpower, what did you expect? Lesser nation states that are little more than meat puppet controlled client states of the US Government and its business allies, are offered protection for their loyalty. They in turn finance us when called upon and they are granted a certain amount of privileges, most favored nation status for one, and this needs to be masked from the public as well as the tax man.

  3. duffolonious

    Yves,

    This really brings a question to the fore:

    What’s the point in giving a shit (now) if there is nothing that can be done about it?

    Besides removing myself from the economy (don’t add debt, don’t consume, etc.) all one can do is wait for a Greece situation (you know, collapsing economy – lot’s of people taking to the streets) to enact real change (otherwise it’ll just be delayed).

    And since I’m impatient, maybe I should welcome our superior business elite overlords to get this party started!

    1. Yves Smith Post author

      You give a shit now because:

      1. There are some interesting point of leverage (like county recorders starting to do the financial equivalent of bombthrowing at Fannie and Freddie over unpaid recording fees. If this snowballs, it has all sorts of ramifications. And county recorders listen to locals, so they are amenable to pressure from individuals).

      2. You’ll be alert enough to know which side to be on when the revolution comes and who the real bad guys are ;-)

  4. Doug Terpstra

    From the Reuters article: over 2,000 corporations are registered at one little house in Cheyenne, “the company’s website boasts, ‘A corporation is a legal person created by state statute that can be used as a fall guy, a servant, a good friend or a decoy … A person you control … yet cannot be held accountable for its actions. Imagine the possibilities!’”

    Well, yes we can imagine what no accountability looks like. It’s what we voted to change, but it’s too far gone now, beyond redemption.

    “Those who make peaceful revolution impossible will make violent revolution inevitable.” – John F. Kennedy,

  5. readerOfTeaLeaves

    As I recall, Wyoming has about 1/5th of 1% of the US population.
    In other words, about .02 of the US population.

    Delaware has less than 1% of the US population.

    Talk about your asymmetries.. wow!

    On a sort-of-related point, Dylan Ratigan has a segment on US debt in which he has information that Eric Cantor has taken a short position on US sovereign debt. Isn’t that insider training…?!
    http://www.msnbc.msn.com/id/3096434/#43568406

    So if we are now in a situation where the budget negotiators are taking short positions on US bonds, the problems of corporate structures and shell corporations become even more resonant in terms of economic structures posing problems for the larger economy.

  6. Tim

    I guess an interesting question would be whether the IRS can under existing law make changes to the requirements to obtain an EIN. I do know the Senators from Wyoming, Delaware, and Nevada have been pretty adamant about opposing any federal law that would hurt there state’s revenues from incorporation activities(Remember too who the senior senator from Nevada is and who the former senior senator from Delaware is). I know under Nevada state law the Nevada secretary of state is specifically prohibited from cooperating with the IRS short of a federal court order.

  7. Francois T

    “the IRS could stop this if it chose to by refusing to give IRS tax IDs to corporations that failed to provide the identities of owners.”

    What would happen if the IRS promulgated a rule to this effect?

    1. Yves Smith Post author

      If the Dems weren’t corpocrats, they could beat back the predictable outcry easy. Who is in favor of tax cheating (!) and money laundering (!) when budgets are being cut?

  8. Hugh

    Something good to remember in a kleptocracy the size of ours is that scams don’t involve hundreds or thousands but millions of cases. So the factoid in the article that Wyoming alone has 688,000 LLCs, a corporate form that lends itself to use as a shell.

    I like Yves’ suggestion about the IRS and tax IDs. It shows that there is at least one simple solution to the problem and that it is not used is a clear indication of government running interference for the looters, which is, of course, what we would expect in a kleptocracy.

    1. Mary

      It would be a pleasant summer idea to take a beautiful camping trip to that little house in Cheyenne, with as many fellow campers as we could find.
      *************
      Senator John Barasso
      Cheyenne Office:
      2120 Capitol Avenue
      Suite 2013
      Cheyenne, WY 82001
      *************
      Congresswoman Cynthia Lummis
      Cheyenne Office
      2120 Capitol Ave., Suite 8005
      Cheyenne, WY 82001
      Phone: (307) 772-2595
      Fax: (307) 772-2597
      Main: 307-772-2451
      **************
      Doesn’t Dick Cheney, Ted Turner and others have nice little ranches in Wyoming, or am I thinking of another state?

      1. Mary

        No, Ted Turner has a ranch in South Dakota..

        http://www.cfo.com/printable/article.cfm/3009947?f=options

        The High Cost of Tax Shelters (2003 article)

        Study claims states lost nearly $13 billion because of corporate tax shelters in 2001. One caveat: states conducted the study. Plus: Is Donaldson backing dissident shareholders? And: Borrowing binge continues.

        Five states had no estimated corporate-income tax losses due to tax-sheltering activity: Alaska, Delaware, Nevada, South Dakota, and Wyoming.
        What kinds of tax shelters are we talking about?

        According to the MTC, most of the revenue losses are linked to such tax-sheltering techniques as reincorporating strictly for tax-income purposes in Bermuda; creating separate corporations to house “intangibles” (for example, trademarks) and then siphoning profits away from taxation in the states in which the companies actually do business; shifting taxable income away from the United States to other nations through the pricing of goods and services involved in transactions between jointly owned companies; and using complex interpretations of tax laws to create so-called nowhere income that is earned by a corporation but then not reported to states that impose corporate income taxes.

        “The vast majority of U.S. businesses are not part of the state corporate income tax sheltering problem,” the MTC asserted in its press release. “Very few small businesses can take advantage of the tax sheltering schemes studied by the MTC. Additionally, some major corporations choose not to engage in aggressive corporate income tax sheltering.”

        The MTC says its study estimates the impact of tax sheltering in two ways.

        One part of the study gauges the impact of tax sheltering aimed exclusively at state corporate taxes. Factors that do not qualify as tax sheltering—such as state legislative changes to lower rates and the switch of regular corporations to S-corporations—were excluded from the estimate.

        The second way the study estimates the impact of sheltering that affects both federal and state tax is through corporations shifting income earned inside the United States to other nations. Using conservative national estimates of international income shifting through transfer pricing, the study estimated state revenue losses of $5.3 billion.
        **********
        So no wonder we need to CUT everything for the working, tax-paying citizens. There is just NO CHOICE! We can’t INSTEAD, raise taxes on those legal avoiders, now can we? They might go to another country…

        **********

        “the IRS could stop this if it chose to by refusing to give IRS tax IDs to corporations that failed to provide the identities of owners.”

        What would happen if the IRS promulgated a rule to this effect?

        **********
        So, again, I wonder what would happen if some peaceful public visibility occurred as an example, at one of these little obscure houses that shells 2000 corporations? Hmm?

        1. Mary

          Corporate tax shelters are dangerous to the health of state budgets.

          At least that’s the conclusion of a new national study from the Multistate Tax Commission (MTC), created in 1967 to encourage states to adopt uniform tax laws and regulations that apply to multistate and multinational enterprises. Today 45 state governments participate in the MTC.

          READ:

          The tax commission found widespread use of tax shelters cost states as much as $12.38 billion in revenue in 2001. Had these devices not been in place, state corporate income-tax revenue, which totaled $35.4 billion in 2001, would have been as much as 35 percent higher.

          ***********

          That’s nothing to sneeze at, particularly at a time when most governments are facing budget shortfalls due to the bad economy and higher spending on security and antiterrorism measures.

          “The lost revenue attributable to domestic and international income-tax sheltering is adding to the size of state budget deficits while undermining the equity and integrity of state tax systems,” the MTC asserted in a statement. “It is apparent that various corporations are increasingly taking advantage of structural weaknesses and loopholes in the state corporate tax systems.”

    2. Mary

      2710 Thomes Avenue, isn’t a shimmering skyscraper filled with A-list corporations. It’s a 1,700-square-foot brick house with a manicured lawn, a few blocks from the State Capitol.

      1. Mary

        You know what’s interesting?

        Cheyenne Regional Airport is about 25 blocks from that little Tax Haven house and the Cheyenne Senator and Congresswoman’s office is about 6-8 blocks from the Tax Haven House (just as one example). How convenient is THAT?

        http://www.cheyenneairport.com/index.php
        Great Lakes Airlines (Denver) and American Eagle (DFW)

  9. KFritz

    Please note than in the last day of its 2010-11 session the RobertsSupremeCourtCorp affirmed & strengthened the money=speech concept, which is proving to be the death of our Republic as we knew it.

    “A Republic, madam, if you can keep it.”

  10. Sundog

    Just to say cheers Yves for making this a post rather than an item in daily links.

    Last night finished David Kay Johnston’s “Perfectly Legal” and this Reuters piece was the first thing I read this morning. Seems I’ll have to add Somalia to my standard comps of Mexico and Russia.

  11. Kakko

    The real tragedy is in calling these transactions and setups examples of “capitalism”.

    Don’t blame capitalism for cronyism that begins with bad laws created by lobbyists and passed by politicians.

    1. attempter

      Capitalism has been in the full deployment stage long enough and universally enough that we know that whatever it’s always been in practice (initial competitors striving for monopoly or oligopoly racketeering; by now the rackets are terminally calcified in all sectors) is what it really is in essence, and will always be.

      It’s funny how alternatives to capitalism are always called “utopian”, yet nothing could be a more pointy-headed inmate of the ivory tower than the notion of some “pure” capitalism, a true “free” market. These things have been proven beyond any doubt whatsoever not to exist. It’s impossible for them to exist.

    2. Cahal

      What amuses me about ‘public choice’ types is that they seem to think the government is to blame for the corruption, and don’t bother to look at who is doing the corrupting.

  12. Woodrow

    I always wondered why I was filing so many entities with stupid names that made no sense. My first thought when I would file an entity like “Flamingo’s Pan North” (fictitious name), “Who the heck though of this name?” One client, had five entities, Roman numeral I-V with their last name spelled backwards, in Delaware of course (a name EVERYONE would recognize spelled correctly). Maybe nothing, but I always wondered, maybe this is my answer.

  13. Cugel

    Ah! Tax Fraud! I was wondering about NV or WY corporate filings from the point of view of creditor protection — for which it is largely worthless except in Nevada or WY.

    That’s because while the corporation may be a Nevada corporation and Nevada may not allow outside parties to find out who the beneficial owners are, the debtor would be subject to the personal jurisdiction of other states courts and could be forced to disclose under penalty of perjury.

    But, for tax cheats it’s a wonderful boondogle!

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