Why U.S. Law Helps Shield Global Criminality

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The Piaget Building at 650 5th Avenue, New York City

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Don't expect Delaware to do anything to tamper with this profitable business line. The state's division of corporate services recently boasted it spent just $12 million to earn $700 million — a quarter of the state's annual revenue. That enviable cost-revenue ratio has triggered copycat competitors. It couldn't be easier. Apply online — providing less ID than it would take to get a library card — and have it all processed within 24 hours, for little more than $100; Nevada and Delaware will do it all in an hour for $1,000. Then, for modest fees, enjoy the illusion of legitimacy, complete with a telephone listing, receptionist, banking services, shareholders and directors. "The bottom line is we are giving criminals entree into our financial system," says Janice Ayala, deputy assistant secretary of Immigration and Customs Enforcement, which leads federal anti-money-laundering efforts.

Of course, the vast majority of the 2 million new corporations formed in the U.S. every year are legitimate businesses, taking advantage of these vehicles' ability to fence off liability so that entrepreneurs are not risking their entire financial viability in any one venture. In practice there can be multiple incorporations in a single deal. But critics say that the original intent of incorporation has been corrupted in the last 20 years as the conveniences offered by offshore tax havens — demand turbocharged by a boom in financial engineering — has degenerated into a race to the bottom to sell secrecy.

To halt these abuses Democratic Senator Carl Levin has reintroduced a bill he co-sponsored last year, with then Senator Barack Obama, that makes a seemingly simple new demand — that states add a single additional question to their incorporation application: Who are the beneficial owners? (Foreigners would also have to provide a copy of a passport-page photo.) The intent is to introduce the same standard — know thy customer — banks have had for years.

The bill has won the vigorous endorsement of law enforcement (at least six groups) who say it is a "no-brainer." As it is, federal officers are "10 steps" behind the bad guys, says John R. Ramsey, national vice president of the Federal Law Enforcement Officers Association, because they are busy spinning their wheels, serving subpoenas on third parties or conducting long-term surveillance, trying to pierce the corporate veil. Changing the rules is such a priority that these groups are willing to redeploy homeland-security funds, intended for first responders, to pay for the implementation, because they figure it will ultimately save them lots of money and time.

The push back has been vigorous, and not just from the usual business groups. States are reflectively resisting federal intrusion, besides being concerned about getting saddled with an unfunded mandate. Opponents also contend that shady business practices will just move offshore and put the tax dollars in another country's coffers.

But, says Raymond Baker, executive director of Global Financial Integrity, the capital-flight argument is similar to the businesses' objection to the 1977 Foreign Corrupt Practices Act, which outlawed overseas bribery. U.S. businesses would be at a competitive disadvantage, it was warned. Over time, though, America's example set a new global standard. Argues Baker: "There would be no net loss to the U.S. economy by eliminating secrecy. On the contrary, the more we can do to make the U.S. economy transparent, the more we can strengthen [it], and the more we will attract money from overseas."

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