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Kenyans read the morning newspapers reporting a statement issued by President Uhuru Kenyatta following reports that he is among more than 330 current and former politicians identified as beneficiaries of secret financial accounts, in the low-income Kibera neighborhood of Nairobi, Kenya Tuesday, Oct. 5, 2021. (AP Photo/Brian Inganga)
Delaware earns millions of dollars every year because of its popularity as a place where businesses can take advantage of corporate-friendly rules — and where there is some secrecy around who actually owns those businesses.
That’s why more than half the companies listed on the Fortune 500 have their legal homes in Delaware, even though most don’t have a real physical presence in the state beyond their post office boxes.
The number of corporations in Delaware easily outnumbers its residents. Despite growth in the latest census, the state’s population stands at fewer than 1 million people. Corporations in Delaware, on the other hand, topped 1.6 million at the end of 2020.
All those corporations, limited liability companies, and other entities add about $1.3 billion dollars to the state’s coffers. That helps the state balance the budget while maintaining Delaware’s status as the home of tax-free shopping.
Though popular with businesses, the state has also drawn criticism for the secrecy it allows.
The most recent hit comes via the “Pandora Papers,” a leak of nearly 12 million financial documents detailing where world leaders stash their assets. The documents were obtained by the International Consortium of Investigative Journalists and examined by the Washington Post.
The analysis found an increasing use of states like Delaware, and even more so South Dakota, by wealthy world leaders to store their assets because of favorable “protections and secrecy that rival or surpass those offered in overseas tax havens.” South Dakota was home to 81 trusts being used by world leaders, the report says. Another 37 were in Florida, and 33 were located in Delaware.
According to the International Consortium of Investigative Journalists’ report on the documents, a company incorporated in Delaware was used to hide the assets held by the Legion of Christ, “a wealthy Roman Catholic order disgraced by an international pedophilia scandal.”
While the Pandora Papers point more to South Dakota as a hub for international leaders to store money, the inclusion of Delaware in the report is just the latest instance of the First State’s corporate-friendliness getting the wrong kind of headlines.
“It looks like it’s a pandemic and it just never ends and there is no cure,” said Nick Wasileski. As president of the Delaware Coalition for Open Government, Wasileski has long fought for better ways to prevent wrongdoers from using Delaware’s corporate-friendliness as a cover for their misdeeds.
“This problem is not new, meaning within the last few years,” he said. “The first report that I could find … about the possibility of money laundering through Delaware business entities was a government accountability report that was written in 2000.”
For example, in 2018 the website Backpage.com was found to be a company in “good standing” with the State of Delaware, even after a federal indictment in Arizona charged seven of the company’s executives with facilitating prostitution, money laundering, and criminal conspiracy. The company’s CEO later pleaded guilty to money laundering and other charges, but because Backpage had paid its annual registration fee and maintained a registered agent in the state, it held on to its status as a Delaware LLC.
Wasileski is hopeful that new federal rules included with the National Defense Authorization Act late last year will reduce some of the secrecy surrounding the creation of these business entities.
“Maybe the Corporate Transparency Act that was passed a year ago, maybe when that takes effect and business entities have to disclose who their beneficial owners are, maybe that’ll have an effect. Maybe that would have a positive influence on stopping some of this,” Wasileski said.
Delaware Secretary of State Jeff Bullock’s office did not respond to requests for comment for this story, but Bullock’s comments accompanying his year-end report point to similar hopes for the Corporate Transparency Act.
“In Washington, after many years of advocating for a federal solution for a nationwide beneficial ownership policy, we now have what will provide law enforcement access to entity ownership information for the purpose of combating illicit financial activity,” Bullock said. “We continue to believe that a federal mechanism for the collection of this information is superior to a state-by-state structure that would inevitably prove inconsistent.”
The state enacted new guidelines in 2017 to force registered agents who manage some of these corporations in Delaware to provide more information about their ownership.
Those regulations required agents to perform quarterly screenings against a federal sanctions list of terrorists, international drug traffickers, and companies and regions banned from doing business in the United States.
That move came following an indictment against former Trump campaign chair Paul Manafort that accused him of using nine Delaware business entities in an international money laundering and tax fraud scheme. In 2020, the state Chancery Court ordered Manafort’s Delaware-based entities to be dissolved.
Perhaps it is those new regulations that made South Dakota more attractive for those stashing assets, as cited in the Pandora Papers.
“I don’t take solace in the fact that this activity is happening, that someone’s looking at another state other than Delaware, I would rather not be happening at all,” Wasileski said.
“I’m hoping that Delaware is doing its best to try to stop these types of bad activities that we’ve been blamed for.”