Nevada aids and abets
The 'Delaware of the West' in the Panama Papers
A year or so ago, a collection of more than 11 million confidential documents were leaked to the German publication Süddeutsche Zeitung, which called on the International Consortium of Investigative Journalists for help in analyzing the massive collection. Over more than a year, 400 journalists in dozens of countries scrutinized the documents. On April 3, the first journalism based on the documents began appearing, and Nevada quickly found itself receiving unfavorable publicity.
The topic of the papers was more than 200,000 offshore companies associated with the Panamanian law firm Mossack Fonseca.
A taste of what Nevada was in for came in a table provided by the reporters’ consortium. It listed the top 10 tax havens mentioned in the Panama Papers. Nevada was number eight, below traditional havens like the Bahamas and Seychelles, but above Hong Kong and the United Kingdom.
In one highly publicized example, NML Capital—a creditor of the Argentine government—sought information from MF Corporate Services (Nevada) Limited, a firm incorporated in Nevada, only to learn that MF Nevada had set up 123 shell companies that kept NML chasing its tail in its quest to get paid amid allegations that the $50-60 million owed to NML had been embezzled and laundered.
Eventually a thousand or so Nevada shell companies were revealed to figure in the Panama Papers. In Brazil’s Petrobras scandal, more than 100 people have been arrested, including legislators and top executives at Petrobras, the national oil company, and a former president was questioned. It was alleged in court papers that stolen money laundered through Nevada companies was used to buy coastal homes in São Paulo, Brazil.
Soon the news was filled with the role of U.S. state governments in sleazy doings of all kinds.
“The proceeds of global financial intrigue turn up in the United States in the form, for instance, of all-cash condominium sales in Miami, or in special trusts in Nevada, South Dakota and Wyoming,” the Boston Globe said.
“Congress should demand that those U.S. states famous for allowing the onshore equivalent of offshore havens—Delaware, Nevada, Wyoming—play by the same rules as everyone else,” the Miami Herald editorialized.
Public News Service: “Panama Papers reveal that shell companies incorporated in Nevada are linked to hundreds of millions of dollars in losses from schemes to defraud a wide range of groups, including Medicare, elderly investors, church members and people in the armed forces.”
“It shouldn’t be surprising if nefarious characters or the family members of corrupt politicians are found to have been hiding behind shell corporations crafted in Nevada,” Las Vegas Review-Journal columnist John L. Smith wrote with admirable home-state candor. “It’s what we do.”SPREADING THE WORD
In 1987-88, it was part of my job as Nevada’s chief deputy secretary of state to increase the publicity Nevada got as the “Delaware of the West”—a haven from the supposed over-taxing and over-regulation in other states. Since the early 20th century, Delaware had been known as the best place for corporations to incorporate. More than half of publicly traded corporations are incorporated in Delaware. Truth to tell,
most states offer similar easy-on-business incorporation laws as Delaware and Nevada, but they don’t publicize them.
Nor did Nevada, usually. The state had a minor reputation as a haven because it shields corporations from taxes and liability, but it had not been something the state really cultivated. That was changing.
As I sold the story to various media entities, I learned more about what Nevada offered. I wasn’t all that comfortable with the secrecy the state gave corporations. It was pretty clear it came at the expense of shareholders and the public. Nevada requires that officers be disclosed, but not shareholders or even just major investors. I thought it was lunacy for Nevada to hide from shareholders the involvement of an Ivan Boesky in a corporation. It was the 1980s, a decade of graft and greed, and prosecutors were that very year closing in on Michael Milken.
On the other hand, I liked the idea of publicizing Nevada’s practices more than they had been in the past. After all, reporters were well known for their aversion to a lack of transparency, and when they learned how Nevada operated, it would result in reporting that would throw a spotlight on the state’s conduct. That might lead to change.
Over time, we had considerable success promoting the notion of Nevada as a haven, though our efforts were dwarfed by those of private firms. There are companies that help people form Nevada corporations and provide “resident agent” service. Every corporation must have an agent in Nevada on whom legal papers can be served. That, together with filing fees, are the principal benefits the state gets from being a haven.
Those firms put signs in airport concourses, advertised in airline magazines, advertised “Incorporate in Nevada” anywhere businesspeople might be likely to see it. There is less of that now—the internet has rendered it unnecessary.
Also at the time, Nevada was sort of the mecca of securities fraud, and Secretary of State Frankie Sue Del Papa was battling to stamp it out, not an easy task given that the authority was split between two agencies for two different types of securities. So at the same time that we were trying to publicize the need for curbing one kind of dubious business practice, we were trying to promote another kind that the legislature had authorized.
Granted, if Nevada had cracked down on its shady laws, businesses would just have gone to other states. All states offer confidentiality to corporations and, more recently, limited liability companies. At the same time we were publicizing ourselves, Oregon was engaged in the same thing—it had similar laws—and having some success. “Oregon—where timber and agriculture reign—is rolling out the red carpet for corporate American in the hope of becoming ’the Delaware of the West’,” United Press International reported in July 1987. Fortunately or unfortunately, though, Oregon wasn’t getting the message out as strongly as we were. (There was one story from the Knight Ridder Newspapers in 1988 that quoted British Virgin Islands Secretary of Finance Robert Maphavius saying, “We are now emerging as the Delaware of the West Indies.” That had success—the reporters’ consortium listed the BVI as the top haven in the Panama Papers.)
I also did some research that suggested Nevada’s role as a haven cost it more than it made from the filing fees. Federal cabinet departments, agencies and Congress sometimes turn to the number of companies in each state as one indice to determine the economic health of the states in determining where to distribute federal funding. By this indicator of number of companies per resident, Nevada is in no need of help. (After leaving the secretary of state’s office, I did some coverage of this aspect.)
Most journalists ate up everything we gave them—it was, after all, a legitimate story—but they showed a startling lack of curiosity about the secrecy Nevada fostered in the business world at a time of widespread corruption in commercial finance.
This was shown neatly by one incident. We got a story on Nevada as the Delaware of the West into the San Francisco Chronicle. After I read it, a thought struck me. I walked out into the corporate registration area and asked someone to look up the San Francisco Chronicle. Nothing. So I suggested searching for Chronicle Publishing.
Though the Chronicle story had not mentioned it, the San Francisco Chronicle was a Nevada corporation. In other words, the reporter in his research failed to turn up the fact that he was writing for a Nevada corporation while doing a story about companies that incorporate in Nevada. That tickled me, and I gave the information to Reno Gazette-Journal columnist Rollan Melton, who turned it into an item in his column. I would have preferred a better researched story by the Chronicle.
Far from the publicity of “Delaware of the West” leading to more scrutiny and changes in the way Nevada does business, the state in 1991 went deeper into questionable practices, extending its protections to limited liability companies (LLCs) that were at the heart of many Panama Papers cases. They could also be at the heart of darkness.Dangers
The world was changing as the 21st century neared, and drug prohibition and extremism were creating a more dangerous world. The addition of new laws in the 1990s increased the threats to Nevada from pampering business.
Just as serious is money laundering and funding for terrorism. Drug agencies and, after September 11, security agencies took more of an interest in Nevada. The risk was no longer merely of having the concealed presence of a Boesky in a Nevada corporation firm, but a bin Laden or Pablo Escobar—or their operatives.
U.S. Sen. Carl Levin of Michigan has tried to patch the leaks that state governments provide for money laundering. In a 2006 statement, he said:
“These [websites] portray our states as welcoming those who want to operate U.S. companies with anonymity. That type of anonymity is exactly what we’ve been criticizing offshore tax havens for offering to their clients. In fact, our last subcommittee hearing lambasted offshore jurisdictions for setting up offshore corporations with secret U.S. owners engaged in transactions designed to evade U.S. taxes, leaving honest taxpayers to pick up the slack.”
As the new century got underway, according to the Border Intelligence Center established in El Paso by the U.S. Justice Department and the Drug Enforcement Administration, Nevada was usually in the top 10 of states for the number of recorded seizures of cash and monetary instruments.
In 2005, the U.S. Treasury’s Money Laundering Threat Assessment found, “A handful of U.S. states offer company registrations with cloaking features—such as minimal information requirements and limited oversight—that rival those offered by offshore financial centers. Delaware, Nevada and Wyoming are often cited as the most accommodating jurisdictions in the United States for the organization of these legal entities.”
Shareholders of corporations and owners of LLCs based in Nevada are under no obligation to make themselves known. That frustrates some police and federal investigations entirely. The New York Times reported on one case that had to be closed without solution after investigators documented “a Nevada-based corporation that had received more than 3,700 suspicious wire transfers totaling $81 million over two years.” Have terrorists or drug lords been released from custody because states do not cooperate? The secrecy at both ends prevents us from knowing.
Amid all this, there was still a lack of inquisitiveness in journalism. The most penetrating piece of reporting on the topic appeared in the Las Vegas Sun in April 2007. Penned by J. Patrick Coolican with assistance from Mary Manning, Steve Kanigher and Rebecca Clifford, the 2,554-word report named names and cited chapter and verse on scams that victimized the public, including rape-and-run schemes that made Nevada corporations appear like the coming thing, inflated their stock prices, then left investors holding the bag after the officers fled. Coolican reported that on a single day—March 8, 2005—the Securities and Exchange Commission suspended trading in 34 firms involved in suspicious trades. Twenty-two of them were Nevada firms.
Many Nevada firms, he reported, trade on small stock exchanges where the regulation and scrutiny was lacking. And, Coolican wrote, Nevada stood at risk of becoming “a breeding ground for terrorist financing.”
Nevada legislators, inclined to a ho-ho, aren’t-we-devils attitude, were no longer playing games. It was evolving into, ho-ho, aren’t-we-getting-in-too-deep?Same but different
Nevada calls itself the “Delaware of the West,” but it’s not in the same league as Delaware. Nor do Nevada legislators have a clear view of the way Nevada compares.
According to Entrepreneur magazine, Nevada is now “one of the most expensive states in the nation in which to incorporate.”
In Nevada, officers, directors, employees and agents are indemnified by statute; bearer stock can be employed; nominee shareholders are allowable; the state does not have a corporate tax and so does not collect corporate tax information to share with U.S. Internal Revenue. None of those things are true in Delaware.
There’s a distinguished Delaware Chancery Court that offers a level of predictability and stability Nevada does not. Delaware has been at this kind of thing for considerably longer, and its body of law is comforting to some corporations. Even for corporate law, cases in this field can be mind-numbing, and that kind of esoterica can enhance the obscurity in which corporations want to live.
And while resident agent firms are the big boost to Nevada’s economy, in Delaware, it’s lawyers. A 2002 Stanford Law Review article reported that “the average income of Delaware lawyers is higher than that of lawyers in any other state, or even any city, in the country.”
Officers, directors and members of LLCs are secret in Delaware, but not in Nevada, for what it’s worth. Owners are secret in Nevada unless they are managers, but as Pulitzer reporter David Cay Johnston notes, Delaware, Nevada and Wyoming “let the owners of shell companies hide their identities by hiring fronts, known as nominees, to lawfully pose as owners.” It’s not as though everyone doesn’t know what’s going on, but Nevada is careful not to know too much.
The same applies to officers and directors. The U.S. Treasury this year is beginning to require financial institutions to know who they deal with, but state governments are another matter. Financial institutions often file suspicious activity reports with the feds. State corporate registration offices rarely do.
Nevada does little if any investigation of officers. They are just a group of names. As far as the state knows, they may not even exist, and if they do, they could be beards. Wyoming did an audit of a couple of dozen Mossack Fonseca companies and found a lot of missing information. The state had not spotted the problem before. That’s how much state governments want not to intrude on the secrecy of corporations.
Entrepreneur magazine warns its readers of what it calls the Nevada stigma: “Nevada corporations are often used by unscrupulous business persons to accomplish illegitimate goals, such as hiding assets. Many corporation service companies openly tout Nevada as the best state to incorporate in order to achieve certain illicit goals, such as hiding assets.”
To be sure, Delaware is no paragon of virtue. Forbes Magazine: “Why doesn’t Delaware crack down on anonymous incorporation? It would be a futile gesture; the crooks would just take their business to Nevada.”
It’s not as though large corporations have any particular loyalty to states in which they operate. They take what is available and leave when the burdens become onerous. They expect benefits from the state but normally do not offer any return benefits except some charitable giving. States are played off against each other. Johnston reported in his book The Fine Print:
“For example, chains like Target, Walmart and Hilton charge their Wisconsin operations a royalty to use their logos on signs marking their buildings. These royalty payments funnel money out of Wisconsin to states such as Delaware, Nevada, Texas and Wyoming, where corporations pay little or no tax on their profits.”
Note that neither Wisconsin nor Nevada gains anything from the transactions. Nevada serves merely as a laundry.
Sen. Norm Coleman, a Minnesota Republican, was sympathetic to states who resist unfunded mandates from Congress, and he recognized that if one state changed, corporations would just move elsewhere. He said in 2006, “It appears to me that what is needed is a level playing field, a system that avoids a race to the bottom. … We have enhanced our security and identification requirements at ports, airports and along the borders, but we have ignored the obvious vulnerabilities created by anonymously-owned U.S. companies.”
He seemed to say that if the states did not change, a federal remedy would be imposed. But so far political polarization in D.C. has prevented that.
Nevada is not just shielding swindling corporations from soldiers, senior citizens, and their own shareholders anymore. It may well be facilitating the work of terrorists who fund the combat those soldiers face on the battlefield.
Coleman: “The United States should never be the situs of choice for international crime, but that is exactly what the lax regulatory regimes in some of our states are inviting. U.S. shell companies have been used to obscure the ownership and purpose of billions of dollars in international wire transfers and to facilitate criminal activity throughout the world. The FBI believes that U.S. shell companies have been used to launder as much as $36 billion from the former Soviet Union. … It is embarrassing that foreign law enforcement agencies report being frustrated by the lack of ownership information available on U.S. companies and that the Department of Justice is often unable to respond to requests for company ownership information from our treaty partners. In our fight to win the war on terrorism, opportunities to assist law enforcement efforts of our allies are too precious to sacrifice.”
State governments have made the United States one of the world’s biggest tax havens, in the same league with the Cayman Islands and Switzerland, at a time when the U.S. government has gotten Switzerland to change its ways and browbeats the Caymans to do the same. None of these jurisdictions are saving working people taxes. Their havens are for the big boys.
From legal boxing to quickie divorces, gambling, prostitution, quack cancer cures and youth drugs, Nevada’s major industry has always been taking advantage of human weakness. Has the state, now finding itself in bed with drug lords, terrorists and corrupt national leaders, finally found the level of shame that will force change?
Late breaking: Nevada may not have as