ICC Commercial Crime Service

The Hypocrisy of Transparency in the U.S.

Timing is everything! With last month’s release of the existence of and exploitation of the so-called “Panama Papers” captivating the world and revealing how easy it is to form and own a corporation anonymously, we had the timeliest topic to discuss at the Offshore Alert Conference on Miami Beach.

So my fellow panelists and I decided to tackle, in our conference presentation, how the United States criticizes other governments for allowing opaqueness in corporate ownership, but allows its states to hide ultimate beneficial owners as well. Essentially, the U.S. has become a finger-pointing ideologue that must put an end to calling the kettle black and get its own house in order.

States’ Authority in a Federal Government

The U.S. form of government – a federal republic – means that its 50 state sovereign governments are solely responsible for the vast majority of law making and governmental regulation relating to corporate formation and transparency (or the lack thereof). The federal government generally only steps in when an issue affects several states and, of course,on U.S. taxation issues. Essentially, that means the U.S. has 50 sovereign governments that make their own decisions and laws. And with respect to corporation registries, that means that each state makes its own rules.

States’ Financial Boost

It’s no surprise, then, that states with shrinking coffers and limited resources see a source of income from individuals or corporations wanting to establish shell companies or subsidiaries within their boundaries. These states benefit directly and financially from fees paid to establish and maintain these corporations, but they also benefit indirectly, since their banks and lawyers are also getting a share of the income for managing these corporations and assets.

It should also be no surprise that those additional revenue streams make it politically challenging to promote sweeping changes. So states like Delaware, Wyoming, Nevada and Montana (and many others, too) allow corporations to be set up with little or no ownership information required. In Delaware, you can even set up a corporation for your cat in about five minutes! While these states often are the ones cited, the truth is few states require the identity of the ultimate beneficial owner to set up a corporation.

Even when a corporation is transferred to another “owner,” little-to-no information is required of the new owner. That’s mainly because states lack the resources to follow up on these corporations once they’ve been established. It is why we, as asset-tracing specialists, and law enforcement investigators face numerous challenges tracking down assets and their owners owned by U.S. corporations.

Real Estate Laundering

While states that set up the corporations benefit financially, there’s a trickle-down effect to other states, too. States with booming real estate markets, like Florida, New York and California, for example, reap the benefits when these same shell corporations are used to purchase real estate and launder the money they’ve received through illegal activities.

It’s why many luxurious condos in Manhattan and Miami are not owned by John Smith, but rather by the XYZ Corporation. The New York Times, last year, exposed how this works in its five-part series Towers of Secrecy.

While you can’t own a bank account in the United States without the bank knowing (or at least being required to know) the identity of the ultimate beneficial owner, you can own a luxury condo essentially anonymously if it’s owned by a corporate name in a layered structure.

Steps to Transparency

To be fair, changes have been introduced to set the U.S. on the right course.

In February, Sen. Sheldon Whitehouse (D-R.I.) sponsored a bill, the Incorporation Transparency and Law Enforcement Assistance Act, in the U.S. Senate that calls for the disclosure of beneficial owners to prevent opacity and to assist law enforcement in detecting civil and criminal misconduct, including terrorism. The bill, co-sponsored by Sen. Dianne Feinstein (D-Calif.), aims to enforce states’ compliance by withdrawing some federal funding if they are found to be noncompliant. The bill is now being considered by the Senate Judiciary Committee.

And to curb money laundering through real estate investments, the Financial Crimes Enforcement Network (FinCen) of the U.S. Department of the Treasury, in January, issued temporary Geographic Targeting Orders requiring certain U.S. title insurance companies to report all-cash purchases of real estate in Manhattan and Miami through August 27, 2016.

Of course, real reform will take years to come to fruition. But with the exposure of these practices by the “Panama Papers,” and public ire turning toward shell corporations and opacity in corporate transactions, we may be standing at the threshold of change. And the more we, as asset-recovery lawyers, talk about it with our colleagues in the media and in law enforcement – as I did with my fellow panelists at OAC 2016 – and with lawmakers, the more likely we’ll begin to shrink this growing hypocrisy.

Edward H. Davis, Jr. has practiced law for 28 years, and is a founding shareholder of the Miami international law firm, Astigarraga Davis. As a Certified Fraud Examiner, he heads the firm's Asset Recovery and Financial Fraud group, representing victims of fraud and grand corruption including governments, governmental entities, corporations, hedge funds, insolvency practitioners and individuals by investigating and prosecuting civil fraud and asset recovery actions. He serves as inaugural chair of the International Bar Association’s Anti-Corruption Committee’s Subcommittee on Asset Recovery, and is a leading original member of the London-based International Chamber of Commerce Commercial Crimes Services FraudNet Network. In 2013 Ed has been recognized as the Asset Recovery Lawyer of the Year by Who’s Who Legal since 2014.





ICC FraudNet is an international network of independent lawyers, who are leading civil asset recovery specialists in each country. Recognized by Chambers Global as the world’s leading asset recovery legal network, our membership extends to every continent and the world’s major economies, as well as leading offshore wealth havens that have complex bank secrecy laws and institutions where the proceeds of fraud often are hidden. Founded in 2004 by the Paris-based International Chamber of Commerce (ICC), the world’s business organization, FraudNet operates under the auspices of the ICC’s London-based Commercial Crime Services unit.