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Support in Delaware for end to shell company leniency

Monday, 28 July, 2014

Half the members of the Delaware State Legislature have publicly proclaimed their support for federal legislation requiring the real owners of corporations to be identified.

The bipartisan legislation is being introduced by Senator Carl Levin, a Democrat, and the Republican Chuck Grassley. It is strongly backed by the Obama administration which promised in its last budget to improve the transparency of corporate America – much as it has been encouraging other countries to do.

The White House has frequently been embarrassed in international negotiations by having its attention drawn to the company registration practices of its states, especially Delaware, which has achieved notoriety for the ease with which it allows anonymous persons to set up shell companies. (Nevada and Wyoming are the others.) The small state has more than a million active legal companies. John Kowalko, State Representative for one of Delaware's voting districts, admits that it has been called 'the US Shell Corporation Capital’, a 'corporate tax haven', and the 'new Cayman Islands'.

In a joint letter to the US congress signed by Kowalko and 30 other Delaware legislators, he admits that the state's image is 'besmirched' by these labels and it has 'a real problem that needs to be addressed.' the letter urges Congressional support for Levin and Grassley's Incorporation Transparency and Law Enforcement Assistance Act, or ITLEAA.

ITLEAA has been in draft for several years, but with White House support its time would now appear to have come. It would require companies from all 50 states of the Union to disclose their beneficial owners when they incorporate, and to keep this information up to date. Law enforcement officers would have access to this information via subpoena, without the natural persons behind the company being warned about the investigation. The bill defines beneficial owner as 'a real person who has a substantial economic interest in the business or ultimately controls the company’s activities or assets'.

At the moment the bill is awaiting hearing by the Senate Judiciary Committee, which includes a Delaware representative.

The White House is also canvassing a separate bill allowing the Internal Revenue Service to collect information on the beneficial owner of any legal entity organised in any state, and allowing law enforcement to access that information.

  • Not everyone accepts that Delaware's incorporation policy is in need of change. Sheldon Pollack, a law professor at Delaware University, says it is 'doubtful' that its corporate privacy laws facilitate money laundering, because 'state authorities and law enforcement can always gain access to that information'.

Sources