Luxembourg: “Delaware, Delaware.”

In the weeks past, not only in Luxembourg, but also in every other dying tax haven a new battle cry could be heard: “Delaware, Delaware.” It was most intriguing to hear tax havens yelling at the 800 pound gorilla in the room, who was presiding over the death penalty to be pronounced over the yelling crowd. How real are those loopholes called Delaware, Nevada, and Wyoming?

I asked Jeffrey Owens, Director at OECD the very question: “Why is that argument wrong?” The answer was very diplomatic, which means disappointing, because it was a pre-crafted escape answer: “Because they are part of a larger political entity called the United States.” As a former diplomat, I call such an answer a Houdini, after the escape artist.

This answer prompts at least two other questions:

1. Why are there separate discussions with Hong Kong and Macau, which are also part of a larger political entity called China?
2. In that case, shouldn’t the larger political entity be considered as not abiding by the OECD standards?

Senator Levin introduces S 569.

I went then to the horse’s mouth, Robert Roach, Chief Investigator at the US Senate’s Permanent Subcommittee on Investigations, presided by Senator Levin. It appears that the Senator has worked on that very issue since the year 2000. He has recognized the weaknesses in various US jurisdictions and has introduced as a remedy bill “S 569 Incorporation Transparency and Law Enforcement Assistance Act” on March 11, 2009.

Here are the findings as summarized by Senator Levin in his statement on the Senate floor:

“It is a fact that criminals are exploiting this weakness in our State incorporation practices. They are forming new U.S. corporations and LLCs, and use these entities to commit crimes ranging from drug trafficking, money laundering, tax evasion, financial fraud, and corruption.”

He also pointed out that one of the driving reasons behind the bill is the Financial Action Task Force’s notice that “gave the gave the United States two years, until July 2008, to make progress toward coming into compliance with the FATF standard on beneficial ownership information.”

The bill is co-sponsored by Senators Chuck Grassley (R-Iowa) and Claire McCaskill (D-Mo).

S 569, Requirements.

I would mention 3 main features in the interest of the fact that those are hints for future compliance requirements in jurisdictions that don’t have them yet:

1. Incorporations will require the use of a “formation agent”. A formation agent is any professional who for compensation, assists in the formation of a company.

2. The formation agent has specifically to identify correctly all beneficial owners and obtain a copy of those beneficial owners’ passport with picture. Beneficial owners are persons who can control or manage the corporation directly or indirectly. That information can be retrieved by law enforcement upon presentation of a subpoena. Beneficial ownerships have to be updated in the annual filings of the corporation.

3. The formation agent would be required to comply with an anti money laundering program to be set up by the Department of the Treasury within 90 days. The bill establishes civil and criminal penalties for persons who knowingly provide false, or fail to provide information.

So here is the thought: the battle cry “Delaware, Delaware” is a particularly bad choice. The 800 pound gorilla has been coerced by FATF into doing something right, complying with a FATF demand. He seems to be willing to comply and has a strong project to show that he will. What is the leverage then, yelling “Delaware”, if you show an unwillingness to comply with OECD demands.

Egide Thein
2009.06.02.