Shell Games

January 22, 2014 6:24 PM

The secretive business havens of Cyprus and the Cayman Islands face a potent rival: Cheyenne, Wyoming. At a single address in this sleepy city of 60,000 people, more than 2,000 companies are registered. The building, 2710 Thomes Avenue, isn't a shimmering skyscraper filled with A-list corporations. It's a 1,700-square-foot brick house with a manicured lawn, a few blocks from the State Capitol.

Why Incorporate In Wyoming?

Wyoming state fees are less than most other states. Wyoming has no business license fees or officer filing fees. This means we can deliver a quality company package for much less than you would pay in Nevada or Delaware. And, your Wyoming state renewal fee is, in most cases, $50, that is 84% less than what you will pay in Nevada. Wyoming is one of the most cost effective states to incorporate in and also to maintain in the following years. (Click here for pricing.)
And, the nice thing about Wyoming is that are many other reasons to incorporate here.

Shell Game: 2,000 Firms Based In One Simple House - ""You can get just as much secrecy in a place like Wyoming or Nevada as you can get in the Caymans or Switzerland," Grow says."

State Incorporation Comparison Chart
Officials Defend Wyoming Incorporation Regulations
Tax Havens: International Tax Avoidance And Evasion [PDF], Congressional Research Service
Onshore Secrecy, Offshore Transparency

Seventeen of the 45 attempts to solicit anonymous corporate vehicles met with success. Of these, 13 of 17 successful approaches were to service providers in OECD countries (seven in the UK, four in the United States, one in Spain, and one in Canada). This compared with only four service providers of 28 willing to provide anonymous shell companies in countries often identified as ‘tax havens’ (Hong Kong, Singapore, Belize and Uruguay). Corporate service providers in jurisdictions like Bermuda, the Bahamas, British Virgin Islands, Cayman Islands, Liechtenstein, Seychelles and Panama were punctilious in their customer due diligence. The same was true even of smaller centres like Dominica and Nauru.

Haven Hypocrisy: Big economies are leaning on offshore tax havens. But greater abuse may be taking place at home
Launderers Anonymous - A study highlights how easy it is to set up untraceable companies

bonus: Much of China's web traffic mysteriously sent to Wyoming shell company

posted by the man of twists and turns (31 comments total)

I know there's not a particularly direct connection, but I've had a grudge against Wyoming for a long time just for having 2 US Senators when Washington DC has zero representation, and also for having elected Dick Cheney to Congress. This doesn't help.
posted by Tomorrowful at 6:30 PM on January 22, 2014 [4 favorites]

That "bonus" is the real zinger of the bunch. Did some junior NSA contract programmer not think that anyone would notice when they rerouted China's entire web traffic?
posted by Dip Flash at 6:31 PM on January 22, 2014

The Economist had a piece about shell companies a few months back which concluded that -- despite occasional tough talk from its Congress about companies that avoid taxes by incorporating in the usual jurisdictions -- the United States was one of the worst offenders when it comes to a lack of corporate transparency.
posted by Slothrup at 6:35 PM on January 22, 2014 [6 favorites]

I've always understood that you couldn't get a federal tax ID number without putting someone's SSN on the form. That either breaks the anonymity or kind of limits the kinds of things the company can do (no bank accounts for one).

Am I confused?
posted by Skorgu at 6:35 PM on January 22, 2014 [1 favorite]

The articles in the OP focus on shell companies, but in addition regular companies are incorporated in Delaware, especially, because of lax regulation and low tax rates. (The New York Times covers it).

I worked for a UK-based multinational law firm. The only US law texts we had covered federal law, NY state law, and Delaware law, because so many of our clients were incorporated in Delaware. And yeah, Delaware is almost as big a haven as somewhere like the Caymans.
posted by Pink Frost at 6:39 PM on January 22, 2014 [1 favorite]

So, he who controls this house, controls the global economy?
posted by Apocryphon at 6:44 PM on January 22, 2014

I don't think the NSA is that powerful, Dip Flash.
posted by clockzero at 6:46 PM on January 22, 2014

The recent budget passed by Congress and signed into law by the President contains, as news reports today revealed, a paragraph that will severely restrict oversight by the IRS of monetary
distributions within political campaigns by anyone or any organization, corporate or otherwise.

Just what we need....even less transparency.
posted by chuckiebtoo at 6:48 PM on January 22, 2014 [1 favorite]

odinsdream: Yeah, I watched that. I think inventing people for your corporate officers isn't going to work long-term unless you're the CIA though.
posted by Skorgu at 6:49 PM on January 22, 2014

Global Shell Games: Testing Money Launderers' And Terrorist Financiers' Access To Shell Companies [PDF]

At the broadest level including the placebo email and all of the treatments, of the 7,466 inquiries sent, the non-compliance level for the international sample (with the 63 U.S. firms) is 8.4 percent, for an overall Dodgy Shopping Count of 12. The 8.4 percent includes non-responses in the denominator, since some CSPs may fail to reply in response to risk and thus may be complying with international law in a “soft” way. In the United States sample, the noncompliance level is 9.2 percent and the Dodgy Shopping Count was 10.9, which was almost
10 percent lower than the average in the international sample. Obtaining an anonymous shell company is therefore easier in the U.S. than in the rest of the world.

posted by the man of twists and turns at 7:07 PM on January 22, 2014

Great post; thanks.
posted by threeants at 7:16 PM on January 22, 2014

Reporting by Kelly Carr in Cheyenne and Brian Grow in Atlanta; additional reporting by Dan Levine in San Francisco, Jen Rogers and Jaime Hellman in Cheyenne; research by Mary Kivimaki of Westlaw; editing by Claudia Parsons and Michael Williams

These are eight names that just got put on a shitload of lists.
posted by Ray Walston, Luck Dragon at 7:25 PM on January 22, 2014 [4 favorites]

First: I read this article back when it first came out, and was trying to find it again, with my Google-fu failing me. So thank you for this, Man of Twists and Turns.

Second, and more to the point: I own a small business. As a first-time business owner, I made a number of mistakes and crapped all over our business credit before it even had a chance to really get established. Nobody will give us credit, even though I can easily bail the company out if all else fails, thanks to a family support network, made up of numerous people with phenomenal credit and a willingness to help me out. Of course, that doesn't show up in a credit report.

Which brings me to my question. Can someone more knowledgeable than me (which is probably about 90% of you reading this) tell me if this is something worth looking into? Would this give my company a new lease on life, by way of a new tax ID and a fresh start?
posted by CommonSense at 7:28 PM on January 22, 2014

"Is corruption widespread throughout the government in [the US] or not?" 73% say "Yes", according to this 2012 Gallup poll.
posted by sneebler at 7:48 PM on January 22, 2014

I saw this the other day. It's a pump house. Pretty neat how it's almost bigger on the inside.
posted by laconic skeuomorph at 7:58 PM on January 22, 2014 [4 favorites]

Related post.
posted by homunculus at 7:58 PM on January 22, 2014

This is one of the structural problems of the United States, namely state-level arbitrage: you can go to Delaware (or Wyoming) for corporate matters, New York for financial services, California for intellectual property in media, the eastern district of Texas for software patents, South Dakota for high interest rate lending, and so on. Just as states become near-monocultures for potatoes or soy or feedlot beef cattle, they become prime (if often nominal) locations for particular activities at the lowest end of oversight and regulation. And if you raise a fuss, there's always going to be another state willing to prostrate itself at a particular industry's feet, because businesses can move while governments can't.

It's relatively cheap to buy a small state legislature: they're largely not the brightest bulbs in the state lawmakin'-house, and a campaign donation and some pre-drafted laws make their lives much easier. And since the Senate grants equal representation to states regardless of population, it's also relatively cheap to buy a chunk of Congress.
posted by holgate at 7:59 PM on January 22, 2014 [14 favorites]

From Planet Money, last year: We Set Up An Offshore Company In A Tax Haven
posted by Going To Maine at 8:22 PM on January 22, 2014 [1 favorite]

The further point is that the US provides an intermediate-level course in how to negotiate the minute differences between state laws to prepare you for more famous international tax-avoidance strategies like the Double Irish or the Dutch Sandwich, with the added bonus that you have more room to change the rules.

A savvy corporate lobbying effort can nudge a state legislature into making relatively innocuous changes in its tax code because entrepreneurs and job-killing burdensome regulation, and since most state legislators have pretty parochial perspectives, they do it. Boom, all the wheels line up so that company X incorporated in state A is paying dividends to company Y in state B, which licenses services from its wholly-owned subsidiary Z incorporated in state C, and bye-bye tax bills.

In a state like Wyoming, I'm sure those filing fees and legal fees don't hurt, regardless of what the secretary of state says.
posted by holgate at 9:53 PM on January 22, 2014

Let's summarize what we've learned about US corporations so far.

• Corporations have the rights of people, but none of the responsibilities.

• Anyone can set up a corporation, but if you care to spend a little time and money, it's very difficult to figure out who is actually behind it.

• These corporations can make unlimited political and campaign donations.

• And if they're large enough, they can commit almost any crime in almost any quantity (like thousands of counts of money laundering or thousands of counts of negligent homicide) but no one in charge will even see the inside of a court room, let alone spend a day in jail.

This is a system that I'd call "broken by design" - and this is not something that voting for either of the two mainstream political parties is going to fix, because both parties are in on this up to their eyebrows.
posted by lupus_yonderboy at 10:06 PM on January 22, 2014 [9 favorites]

Dip Flash: if you RTFM, you'll see that the Chinese censors accidentally routed the traffic for 500 million people to a "bypass the Great Firewall of China" service hosted in WY rather than away from that service.
posted by sideshow at 10:19 PM on January 22, 2014

That "bonus" is the real zinger of the bunch. Did some junior NSA contract programmer not think that anyone would notice when they rerouted China's entire web traffic?

Pakistan took down youtube briefly by making a similar kind of mistake.
posted by empath at 10:22 PM on January 22, 2014

In no way do I want to defend corporations avoiding legitimate (or even just fair) taxes or using SPVs to take advantage of workers, hide unsavory connections etc.

That said, the US is by far not the only or even worst offender, and different countries favor different jurisdictions for a variety of reasons, e.g. the Russians in Cyprus, the Chinese in the Caymans, the Greeks in Liberia, Panama and increasingly Marshall Islands. And there are plenty of countries you wouldn't think of as tax havens or places to obscure ownership, but many large corporations - I'm looking at you Ikea and U2 - are based in...the Netherlands.

Also there are legitimate reasons to use SPVs, one important one in particular: to isolate assets or counter parties so that, if that asset or counter party gets into trouble, it doesn't bring the rest of your organization down with it. Before anyone says that's inherently evil too, consider that in shipping, for example, you might have a ship arrested for extremely spurious reasons or even legitimate ones that are actually no fault of your own (e.g., the charterer is the one someone's going after, not you, but there is an in rem lien on the vessel). In that case, the SPV protects the rest of your assets and counter parties from being dragged into the proceedings.

And there are almost no off shore jurisdictions that can't be cracked, usually the old fashioned way by grooming a connection on the inside and showing up at a predetermined time with a bag of cash. There are several companies I know of that make a living out of what's called "piercing the corporate veil."

All the above notwithstanding, it's still a basically evil practice in general that wouldn't be necessary or attractive if we had better and better enforced laws all around.
posted by digitalprimate at 11:42 PM on January 22, 2014 [1 favorite]

I'm a little surprised this has got any traction. Most small business accountancy firms would act as the registered office of a large number of corporations. Sure, 2000 is a largish number, but my local accountant handles hundreds and he is just a guy in a small suburb.
Even without fiendish tax avoidance measures, there are plenty of reasons your local graphic designer, chimney sweep or high school tutor might form a company that most people here would agree are legitimate and above board, and many of these people would like their official correspondence from the IRS/tax office to go to their accountant rather than their house, because they don't have a skyscraper they have a van or a laptop perched on the kitchen table instead of an office.
I am sure some of the registered companies are set up for tax purposes because Wy has sweet corporate tax laws, but I bet a bunch are just average small businesses.
posted by bystander at 2:51 AM on January 23, 2014 [1 favorite]

And since we are talking about aligned stuff. Has anyone got a legitimate argument against a global Tobin tax?
posted by bystander at 2:54 AM on January 23, 2014

For those interested in some broader context about tax havens, I highly recommend TREASURE ISLANDS, by Nicholas Shaxson. It explains in some detail how tax havens and the offshore world damage both developing and advanced nations, by giving the wealthy a way to channel enormous amounts of money out of their home countries.

He argues that the City of London, New York and several states (such as Delaware) are every bit as much a part of this system for providing the wealthy with an escape as places like the Bahamas, Jersey or the Cook Islands.

In the last chapter of TREASURE ISLANDS, Shaxson recommends a number of different measures that would tackle this kind of abuse. These include

- Create a meaningful international blacklist of places that seek "to attract business by offering politically stable facilities to help people or entities get around the rules, laws and regulations of jurisdictions elsewhere" - rather than the current politicised lists that let richer countries off the hook

- Reform the accounting rules for reporting trade and transactions within companies, so that they are genuinely transparent - rather than hiding where companies actually make their profits and letting them claim that those profits are made in tax free jurisdictions (when that is just a convenient legal fiction)

- This might involve introducing "combined reporting with formula apportionment and unitary taxation" - a messy name for a procedure whereby tax authorities would treat a multinational as a single group, and then allocate portions of the multinational's income out to the different jurisdictions where it operates, under an agreed formula based on real things like sales, payrolls and assets in each place.

- A land tax, which would fall on a kind of asset that is difficult to move to another country or disguise (and a huge chunk of the profits of the financial sector comes from inflated real estate prices)

- Make the accountants, banks and law firms who assist kleptocrats who loot countries criminally liable - when a client gets caught and thrown in jail, "so should his relationship manager, accountant, trustee, lawyer and corporate nominee".

I don't agree with all his suggestions, but I think they are interesting.

One of the things I thought was interesting about TREASURE ISLANDS is that Shaxson argues against tax havens from both a left-wing and a right-wing point of view.

The left-wing argument is fairly obvious: tax havens allow the wealthiest members of society to avoid paying any taxes. They therefore benefit from a society that makes their businesses possible and protects them without actually having to pay anything back.

But there is also the right-wing argument that tax havens completely undermine competition. Although defenders of tax havens argue that they promote "tax competition" between states, this is misleading because states are nothing like businesses competing in a free market; instead, the tax haven system just produces a race to the bottom that actually prevents fair competition between businesses. Two businesses are supposed to compete on the quality of their products and win over consumers - but a big business that can take advantage of tax havens to avoid paying tax will have a massive, unfair, unearned advantage over a smaller business that cannot do that. The consumer loses out, which is precisely the situation that libertarians and "free market" types supposedly want to avoid.

Shaxson has a website, here. He is also co-author of a research paper called "The Finance Curse", which argues that, once it grows beyond a certain size, a financial sector can actually hurt the wider economy and political liberty of its home country. The website of the Tax Justice Network is probably also worth consulting for ongoing updates.
posted by lucien_reeve at 3:26 AM on January 23, 2014 [6 favorites]

Reform the accounting rules for reporting trade and transactions within companies, so that they are genuinely transparent

Many companies preclear their transfer pricing with the IRS in advance to avoid audits. That doesn't stop them from being able to shift assets to lower tax jurisdictions.

Combined reporting and allocative tax sourcing (based on payroll, plants/property/equipment, whatever) is a pretty good idea. It's how most states allocate income, so we have experience with the system. I'd love to see some literature on the method's efficacy and effects before suporting it, though.

re Tobin tax: see Sweden.
posted by jpe at 3:41 AM on January 23, 2014

Re: the Chinese incident, DIT (the targeted company) has a post about it with more detail. China started blocking their domain names (banned religious and human rights content) in 2002.
posted by RobotVoodooPower at 5:55 AM on January 23, 2014

...the US is by far not the only or even worst offender, and different countries favor different jurisdictions for a variety of reason...

Sure. But the point is, I think, that most people are under the impression that "shady corporate tax haven" is something that you need international borders to arrange, when the truth of the matter is that there are pretty bad offenders right here in our very own country, under our laws, where "Hey, they can do whatever they want on their own tiny island" doesn't apply.

It's the difference between "Sure, some guy down the street is selling shady stuff, but I can't do anything about that" and "My spouse is a fence."
posted by Tomorrowful at 5:58 AM on January 23, 2014 [1 favorite]

Going To Maine: From Planet Money, last year: We Set Up An Offshore Company In A Tax Haven

Yes, I was going to recommend exactly that story. I bet some of the current reporting is provoked by that story - when I listened to it, it was a bit of an eye opener.

(Pedantic point: Can something be an "eye opener" if you're listening to it?)
posted by RedOrGreen at 10:49 AM on January 23, 2014

Many companies preclear their transfer pricing with the IRS in advance to avoid audits. That doesn't stop them from being able to shift assets to lower tax jurisdictions.

Combined reporting and allocative tax sourcing (based on payroll, plants/property/equipment, whatever) is a pretty good idea. It's how most states allocate income, so we have experience with the system. I'd love to see some literature on the method's efficacy and effects before suporting it, though.

I am not an accountant, so sadly there is a limit to how well I understand this or can comment.

That said, Shaxson goes into a bit more detail about how multinational companies can shunt assets around inside themselves to avoid tax. And one of his main points is that the practices that are currently orthodox among accountants actually - as you say - treat that kind of asset shifting as perfectly acceptable.
posted by lucien_reeve at 2:37 AM on January 24, 2014