On the Oregon trail of shell companies: corporate anonymity in the USA
31 Jul 2017

There are a few ‘usual suspects’ when it comes to jurisdictions with less-than-transparent company law. The Financial Action Task Force currently lists countries like Iran and North Korea as high-risk and non-cooperative, and other jurisdictions like the British Virgin Islands and the Philippines are working to clean up their records. One less obvious contender, though, is the United States—and more specifically the state of Oregon, where a series of scandals triggered recent efforts to reform company law.

While the US has wider problems with access to beneficial ownership information, the US Treasury took, in 2006, the unusual step of deeming Oregon (alongside Delaware, Nevada and Wyoming) “attractive to those persons seeking to hide illicit activity within the framework of shell companies”. Shell companies are paper companies with no employees or operations, often bought and sold to people who wish to benefit from incorporation without having to go through certain due diligence practices of their own. Alone among the four states the Treasury named, Oregon did little to address those concerns. Its lack of a sales tax and streamlined, cheap methods of incorporation kept it a prime destination for shell company operators for years afterward.

However, the story burst open in 2015 when Matthew Kish, a reporter for the Portland Business Journal, uncovered a web of 1,300 shell companies operating out of a single suburban house in the unincorporated community of Aloha, near the border with the state of Washington. These were owned by US Corporation Services, a ‘corporation mill’: it sells its subsidiary shell companies to others, who gain anonymity and protection behind the barriers to investigation Oregon company law offers. These range from anonymous records to not having to provide a physical business address, along with a requirement for authorities to gain a court order to uncover a company’s actual place of business—thereby alerting unscrupulous operators. Kish notes dryly in his article that USCS says on its website that its shell companies can be used to hide assets from “threatening creditors, tax officials [and] angry spouses”. That proved very accurate: actual and planned financial crimes to the tune of billions of dollars were traced by the FBI to companies formed by USCS founder Bengt Stenbock before his death in 2012, though he was never prosecuted in connection with them. Those crimes sit alongside four of the biggest shell company scams in US history, all of which took place in Oregon in the 21st century.

Six months after the Business Journal ran its story, the Mossack Fonseca ‘Panama papers’ were leaked and the movement to reform Oregon’s company law took off. Tax Fairness Oregon, in submissions to a subcommittee of the state House of Representatives, baldly called the state a tax haven. The group then endorsed HB 2191, a legislative measure intended to wholly revise Oregon’s reputation by requiring companies to provide physical street addresses, making stand-in directors liable for damages and giving investigative authority to the Secretary of State (who, at present, merely processes paperwork). The Secretary of State would also be able to apply strong sanctions, including dissolving non-compliant companies altogether. Although an initial proposal to require the disclosure of beneficial ownership was taken out of the bill due to budgetary constraints, the amended bill won near-unanimous support among law enforcement and activists and sailed through the House and Senate without opposition. It now awaits Governor Kate Brown’s signature, though she has made no statement on the issue yet.

The real test will be whether Oregon’s example can be duplicated and built on around the US. Bipartisan bills were introduced at the end of June in both houses of the US Congress to require the disclosure of beneficial ownership to law enforcement, the very requirement left out of the Oregon bill for budgetary reasons. The UK’s PSC regime and EU equivalents offer a model for how this could work in practice, but it is uncertain whether the measure will pass Congress in the coming months. Previous efforts have failed—one of the bill’s co-sponsors has introduced four similar bills before, none of which made it out of committee stage. The bill might also face complications in the White House: the former Trump campaign chairman Paul Manafort is reputedly a frequent user of shell companies (as indeed is Mr Trump himself), some financially linked to President Trump or Russia. There may even be trouble in the courts. The bills in the House and Senate differ over whether the US Treasury or individual states would be required to gather the relevant data, a distinction which may be crucial to questions of constitutionality.

Opening up shell companies, then, goes to the very heart of the current fractious period in American politics. It remains to be seen whether meaningful federal action is likely in the near future. In the long term, though, reforms must have a consistent character across the US in order to be effective, as the European Union learned in relation to its own single market. The risk of regulatory competition undermining transparency is otherwise too great, as Delaware’s famously prime role in the 20th century demonstrates. Regardless, the movement to bring the US into line with other developed countries, one way or another, is growing stronger, from the borderline with Washington state all the way to Washington DC.

 

 

 

 

Richard Nicholl (@rtrnicholl) is Legal Editor for a leading provider of corporate legal intelligence. He also works as a freelance political commentator and investigative journalist.

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