The exposure of Panamanian law firm Mossack Fonseca’s work helping the global elite hide money from the tax man, and the more recent leak of the “Paradise Papers” from firms Appleby and Estera in Bermuda, have prompted outrage and interest in corporate secrecy. In the US, it also should provide occasion for introspection, because anything Panama does, Delaware, South Dakota, and Nevada can do just as well.
In fact, the US is one of the largest recipients of illicit financial flows from developing countries—money often smuggled out by corrupt politicians, drug dealers, or everyday criminals.
The key reason is corporate secrecy. When individuals or companies want to hide their assets, they transfer them to shell companies that hide the true owners behind nominee directors who act as the custodian of the firm. Often, and especially in tax havens, the directors of the company are not required to disclose, to the tax authorities or anyone else, who the true owners are.
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Just as small countries tend to breed the political culture that allows corporate secrecy, sparsely populated US states have competed in a race to the bottom to attract corporate investment through lax disclosure requirements. The tiny state of Delaware, called an “on-shore tax haven” by critics, garners more than a quarter of its public revenue—just over a $1 billion—from its business registry.
This probably factors into the World Bank’s assessment of the US as one of the worst offenders (pdf) when it comes to corporate secrecy. In fact, a 2012 academic study reports that it is easier to form a shell company(pdf) in the US than it is in Panama—or indeed, anywhere else but Kenya. At the top of their list? Delaware and Nevada.
