Offshore tax havens bring to mind tropical islands or Alpine towns. But the preferred location for organized crime figures and corrupt politicians worldwide is the US state of Delaware.
Last month, prosecutors for the Romanian Unit to Fight Organized Crime and Terrorism arrested an offshore registry agent named Laszlo Kiss for masterminding an embezzlement and laundering operation for executives of a Romanian oil services company. Kiss is the author of a book promoting his business – and outlining just how to take advantage of the tiny state of Delaware to avoid taxes and launder money.
Delaware has long been criticized for an incorporation process that leaves it vulnerable to criminal activity. Despite complaints from federal law enforcement officials, congressional testimony, and reports from the Government Accountability Office, procedures in Delaware – and similar processes in other states – still let criminal groups infiltrate the corporate system.
Delaware is becoming the choice of drug dealers, organized crime and corrupt politicians to evade taxes and launder money, an investigation of the Organized Crime and Corruption Reporting Project (OCCRP) found. The International Consortium of Investigative Journalists (ICIJ) assisted in the investigation.
“The biggest problem in the world is the US when it comes to shell companies, we are the biggest international problem,” said Denis Lormel, a FBI agent for 28 years and former chief of FBI’s financial crimes section. Lormel now runs his own consulting firm. “Because of the lack of transparency, shell companies become a vehicle of choice for the bad guys.”
The Tax Justice Network listed the tiny state as their No. 1offender in their 2009 Financial Secrecy Index, a ranking based on the scale of cross-border financial activity and on “Delaware's commitment to corporate secrecy, and resolute lack of cooperation and compliance with international norms.” (See the Full Delaware report here)
Professor Jason Sharman, an expert in offshore havens for the Center for Governance and Public Policy at Griffith University in Australia agrees: “The US has been pretty robust in making sure that other countries live up to these standards, but they have been lax about applying the same degree of rigor to themselves. It’s nowhere near what the US has signed on to do,” he said.
Delaware requires no information on actual ownership when companies fill out incorporating documents. Federal law enforcement agencies complain that this lack of identification makes it difficult at best for investigating suspected wrong-doing.
The US Department of Justice’s Office of Public Affairs provided comments in a 2009 congressional hearing on incorporation transparency. Jennifer Shasky Calvery, then senior counsel to the deputy attorney general, testified that law enforcement cannot determine who is perpetuating illegal activity through state records. “So, ironically, US law enforcement must try to get information about a US company from the foreign country, which is difficult for many reasons, and often simply not possible at all.”
Rick Geisenberger, Delaware’s deputy secretary of state and chief of the corporations division, said that asking for additional information from companies would interfere with a speedy and efficient incorporation system and could divert investment activity elsewhere. He said the overwhelming majority of companies that incorporate in Delaware are legitimate.
“I’m under no illusions that some of them are bad guys,” Geisenberger said. “But does that mean you put in place procedures that take longer to form entities in order to prevent those bad guys?”
Geisenberger’s comments parallel what is said in offshore havens around the world.
“Many high-taxing, high-spending governments would like everyone to believe that offshore companies are only used by fraudsters, terrorists and crooks. That`s completely unjustified. While there is always a rotten apple in any box (especially, if the box is large enough), 99 percent of all business transacted through offshore companies is completely legitimate,” said the website for Fidelity Corporate Services, a Seychelles offshore registry firm.
However, nobody knows for sure how much illegal business is taking place largely because offshore haven like Delaware don’t look. Anecdotal data suggest that a growing number of companies registering in Delaware from abroad that are involved in criminal activity.
“One of the other reasons people will incorporate in Delaware from a foreign jurisdiction is that you get this patina of respectability for registering in the US. But, in fact, you can’t really find anything out about the company. People are using our system and abusing our system,” said Heather Lowe, legal counsel and director of government affairs at Global Financial Integrity, a Washington, DC-based watchdog.
OCCRP easily gathered the names of dozens of instances of offshore companies used to evade taxes, launder money, hide monopolies, hide ownership or other criminal purposes.
Geisenberger said that indications of criminal activity should be taken seriously, and said the state would be willing to provide more transparency, as long as it did not interfere with corporate activity.
In 2000, the Government Accountability Office, the investigative arm of the US Congress, released a report on Russian groups setting up companies in Delaware, and concluded: “It is relatively easy for foreign individuals or entities to hide their identities while forming shell companies that can be used for the purpose of laundering money.” John Flattery, president of the Delaware Coalition for Open Government, said the report raised serious questions, but little was done in response.
Geisenberger said Delaware has been at the forefront of improving state incorporation politics, particularly as the first state in the country to pass a statute that ensures all corporations in the state have a registered office. It also doesn’t allows them marketing anonymity as a benefit to potential clients.
All Delaware companies are required to have a registered agent, which must maintain an address in the state, be open during normal business hours, and act as the liaison between a company and the Delaware corporations’ division. Incorporating documents will list that agent’s name and address as the company’s only contact, without providing details about the real ownership. The purpose of the company may also be listed although the following standard language is often used: “To engage in any lawful act of activity for which corporations may be organized under the General Corporation Law of Delaware.”
But in practice, these actions are self serving. The requirement has actually made it easier for criminals to start offshore shell companies. Using Delaware’s all-too-accommodating registry companies means organized crime can register Delaware companies in minutes. OCCRP also found that while Delaware companies might not advertise the state’s anonymity laws, just about every registration company abroad does and this is where much of the criminal activity originates.
The state turns a blind eye to the fact that its agents do not verify information they are given nor does this solve the problem of offshore companies using proxies to register companies in Delaware. Delaware’s law does do one thing – its swells state coffers by requiring everyone to pay Delaware agents to register a company increasing their income and collection of Delaware taxes.
“In 2007, in Delaware, their operating budget for incorporating companies was a little over $12 million and they were pulling in over $700 million each year. So clearly that’s one of the ways they’re financing services for the state,” Lowe said.
According to congressional testimony, business incorporation and related fees account for as much as 25 percent of the state’s general fund revenues.
Kiss and other registration agents abroad register dozens of companies at a time through Delaware agents and then resell those companies to clients. Because agents like Kiss use the same proxies on all their companies, no ownership change is needed when they “sell” a company. In a proposal to undercover OCCRP reporters, Kiss offered to sell them pre-registered companies with matching names in Delaware, Seychelles and Cyprus. This amounts to a turnkey money laundering or tax evasion system.
Kiss told reporters from OCCRP before his arrest that he had a virtual “factory” in Delaware minting companies for him. Kiss registered hundreds of companies through the same Delaware firm without raising any alarm bells in the state or with the agent.
Delaware’s Division of Corporations processes incorporating documents for the state and Geisenberger said he is proud of their quick turn around which makes it easy to move capital and generates investment activity.
Flattery said the state touts its advantages for businesses.
“Delaware looks at is as a revenue-raising measure,” Flattery said. “But as a national issue, it’s a disgrace. Fictitious companies that are allegedly violating the law are using Delaware as a shield.”
OCCRP found numerous companies registered in Delaware by offshore businesses controlled by persons accused of organized criminal activities. For example:
- Serbian fugitive Stanko Subotic registered the planes in Delaware that Italian prosecutors said were used to ferry stacks of illegally earned cash to banks in Cyprus and Liechtenstein. The money was earned, prosecutors say, from tobacco smuggling between the Montenegrin government and the Italian Sacra Corona Unita mafia group.
- Fugitive Serbian drug lord Darko Saric, who allegedly tried to move 2.1 tons of cocaine from South America to Montenegro last year, registered many of his companies in Delaware where they are still active.
- Marian Iancu, a Romanian businessmen charged with organizing a criminal group by Romania prosecutors, used Delaware based companies in his takeover of a state oil refinery through an alleged corrupt privatization and in its eventual resale to controversial Russian businessman Mikhail Chernoy.
- And Laszlo Kiss used Delaware companies to bill Petrom Service more than €8 million in consulting contracts for work that was never done.
Last year, Sen. Carl Levin, a Democrat from Michigan, proposed the “Incorporation Transparency and Law Enforcement Assistant” bill that would require names and addresses of actual individual owners on incorporating documents. That information, he said, could be vital for investigations.
Levin said that only federal legislation can “level the playing field among states” and that states are not willing to reach a solution because they compete with each other to bring in corporations. The bill was never acted on.
“This bill died because we had two Delaware senators and a Nevada senator on the committee,” said Lowe of Global Financial Integrity. “That’s just frustrating. They’re protecting their positions, and they’re protecting their revenue.
“And to put state revenue ahead of global security to my mind is not OK.”
The following journalists contributed to this project.
 Congressional hearing, Tom Carper testimony, 2009