States like Delaware and Nevada have long been criticized by transparency advocates for allowing Americans to use them as tax havens. But a recent document leak revealed that such corporation-friendly states may be helping foreign nationals hide potentially illicit assets as well.
Earlier this month, 11.5 million confidential documents were leaked from a Panamanian law firm, exposing how some of the world's richest people hide assets in shell companies to avoid paying taxes. It’s the largest leak in history, and among the so-called Panama Papers' many revelations was that the seventh most popular place to set up shell corporations was in Nevada.
More than 1,000 companies have used Nevada to hide their money. Delaware, South Dakota and Wyoming also emerged as popular places to stash cash.
Some of these states actively market themselves as quick and easy places to set up corporations. Take Nevada. Its website points visitors to its WhyNevada.Com to find out “why NV ranks as a top state for commercial filings," highlighting its favorable tax structure. Meanwhile, Delaware’s most recent financial report touted another record year for the number of new entities registered in the state. Delaware’s 1.1 million registered corporations outnumber the people who actually live there.
The Panama Papers have raised concerns among many here who say it's hypocritical of the U.S. to complain about its citizens hiding assets from taxation in offshore accounts when some states provide the same service for foreigners. The secrecy these states offer to account holders also brings up questions about whether money is intended for or came from illegal activity. "Drug money, funding terrorism -- we know all of these uses exist in shell corporations," said Matthew Gardner, the executive director of the Institute on Taxation and Economic Policy (ITEP), a nonpartisan think tank that works on state and federal tax policy issues.
Gardner says that the national security concerns surrounding these revelations could and should spur Congress to create a national law that would essentially ban offering the level of anonymity that some states do in registering corporations. "Certainly if you've made [fighting terrorism] a major prong in public policy, as they have at the federal level, then they have a good claim for doing this," he said.
The states themselves have had varied reactions so far to the leak. Wyoming’s Secretary of State Ed Murray has been the most responsive, announcing last week that his office immediately audited the 24 companies registered in Wyoming for which Mossack Fonseca, the Panamian law firm, was a registered agent. The firm had failed to perform its record-keeping duties under Wyoming law, and, per Murray's request, has since provided the missing information. Still, "in order to report any possible illicit activity,” Murray briefed law enforcement on developments and the investigation is ongoing.
Barbara Cegavske, Nevada's secretary of state, said the state has previously strengthened laws but is working with lawmakers to see if more is needed.
In Delaware, where an investigative journalist recently set up a shell corporation for her cat, Secretary of State Jeff Bullock defended its incorporation system as America's gold standard. "You can go on the Internet and copy our law. What you can't copy is our reputation,” Bullock told The News Journal. “Think of it like a brand. Our long-term interest is in making sure that the kind of activities that have been revealed in the Panama Papers stop."
The News Journal also reported that Mexican drug lord Jaquin "el Chapo" Guzman is believed to have incorporated his tequila business in Delaware.
South Dakota's secretary of state has not yet publicly addressed the Panama Papers.
What’s next for these four states remains unclear. Some believe they're unlikely to enact any significant changes on their own, given that one state acting by itself could put it at a competitive disadvantage with the others. And at the federal level, Tax Foundation expert Alan Cole says any action may take a back seat to the many tax reform policies politicians have been debating in recent years. “I don’t see anything immediate on the horizon,” he said.