By their very nature, anonymous shell corporations are a problem that remains under the radar. Anyone can easily set up an anonymous corporation, but Massachusetts, as well as Connecticut and Maine, are uniquely positioned to play a key role in shutting them down.
Tax dodgers and criminals use anonymous shell corporations to hide financial transactions. They are the weapon of choice for major corporations seeking to hide profits from tax collectors, as well as for scammers attempting to defraud consumers or government programs, and for drug traffickers and terrorist groups trying to evade law enforcement. Shell companies also conceal the source of contributions to politicians and political campaigns.
In Massachusetts and most other states, it is easier to set up an anonymous shell corporation than to obtain a driver’s license or open a bank account. Only Maine, Alaska ,and Arizona require meaningful information about the true owners of a new corporation.
Shell companies registered in states with the most lax disclosure laws like Delaware, Wyoming, and Nevada make it the easiest for unscrupulous businesses to hide their profits and payments. These states are dependent on the incorporation fees they charge on a growing number of companies; and each state has spawned an industry of shady companies that specialize in selling instant boards of directors and other services for shell corporations that can be created in as little as five minutes. “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,” boasted the website of Wyoming Corporate Services. “A person you control ... yet cannot be held accountable for its actions. Imagine the possibilities!”
Congress will soon consider a bill to shine a light on anonymous corporations, requiring that states ask anyone forming a corporation to identify the actual owners. While most of Congress remains stymied by partisan rancor and election-year politicking, this bill — the Incorporation Transparency and Law Enforcement Assistance Act — was introduced jointly by Senators Carl Levin, a Democrat, and Charles Grassley, a Republican.
The legislation has the strong backing of law enforcement groups like the Society of Former Special Agents of the FBI, the United States Marshalls Association and the Fraternal Order of Police. Whether they are pursuing tax evaders, consumer scammers or terrorists, law enforcement officials too often hit a dead end when their money trail leads to anonymous shell companies. This legislation would give them the tools they need to protect the public and do their job.
The law will save taxpayer money by eliminating tactics used to defraud the government. A Reuters investigation found two defense contractors used anonymous shell companies to pose as minority-owned businesses so they would get special treatment from the Pentagon, winning contracts worth hundreds of thousands of dollars. The investigation also found a single house in Cheyenne, Wyoming is home to 2,000 registered corporations from which tax authorities are attempting to collect $300,000 in unpaid taxes. An investigation by Nevada’s Secretary of State estimated the state gets scammed out of millions of dollars in lost licensing fees from companies that falsely report they operate from Nevada homes with little income. When Nevada investigated one of its 700 companies specializing in selling quick corporate registration, it found all its 427 clients claimed the special home exemption from those fees, but most appeared to be shadowy firms from Taiwan seeking a legitimate-sounding base for their unknown business ventures.
As elected officials in Washington compete this season to be the biggest defenders of Medicare, they should use this opportunity to protect against anonymous shell companies that have been used to defraud the program. Examples of such fraud include a fake AIDS clinic set up in Florida with the help of 29 anonymous shell companies to cheat Medicare out of $4.5 million. A more extreme case involved an organized crime ring setting up 118 shell corporations in 25 states to swindle $100 million out of Medicare.
Congress should waste no time in passing the Incorporation Transparency and Law Enforcement Assistance Act. No less than three New England senators — Scott Brown of Massachusetts, Joseph Lieberman of Connecticut, and Susan Collins of Maine — sit on the committee with jurisdiction over this bill. All three portray themselves as thrifty Yankees who rise above partisan politics to solve problems with practical solutions. They should prove it by taking the lead in advancing this bill. Forming corporations should be a way to enable job-creation and prosperity, not to facilitate illicit tax evasion and dangerous criminal activity.
Deirdre Cummings is the tax and budget program director for MASSPIRG. Phineas Baxandall is senior analyst for tax and budget policy for US PIRG.