I came across an interesting article on money laundering and tax evasion today. Let me just quote a few passages:
The pervasiveness of corporate secrecy on America’s shores stands in stark contrast to Washington’s message to the rest of the world. Since the September 11 attacks in 2001, the U.S. has been calling forcefully for greater transparency in global transactions, to lift the veil on shadowy money flows. During a debate in 2008, presidential candidate Barack Obama singled out Ugland House in the Cayman Islands, reportedly home to some 12,000 offshore corporations, as “either the biggest building or the biggest tax scam on record.”
Yet on U.S. soil, similar activity is perfectly legal.
Compare that to a country not exactly known for legal gainful employment:
“In the U.S., (business incorporation) is completely unregulated,” says Jason Sharman, a professor at Griffith University in Nathan, Australia, who is preparing a study for the World Bank on corporate formation worldwide. “Somalia has slightly higher standards than Wyoming and Nevada.”
Some numbers might be interesting for comparison:
The Treasury Department has singled out LLCs as particularly vulnerable to being used as shell companies, as they can be owned by anyone and managed anonymously. Delaware, Nevada and Wyoming had 688,000 LLCs on file in 2009, up from 624,000 in 2007.
That’s roughly one LLC for every four people of working age in those states!
So, we slam the offshore banking industry, offer the same services in our own country, tax people all over the world, and are still running a deficit? How does that work?
The obvious quick answer is that we spend more than we earn. 🙂 It doesn’t matter how rich you are if what goes out exceeds what comes in. Mr. Micawber knew.
LLCs may be vulnerable to being used as shell companies, but they’re also important for small businesses and entrepreneurs. I hope we don’t get another case of destroying the little guy in an effort to get the big crooks.
Good point. For the sake of completeness, another quote:
I think the difference between having a company in another country versus another state different from where you live is that it is still in the US, so still under federal oversight.
Though, now that I’ve read the article, I see that they are talking about just US companies incorporating in other states, but rather shady types from other countries. I think to be fair, you would need to separate those two categories.
I know about the tax reasons for Nevada (where Microsoft is incorporated) and Delaware, where nearly every other business is. Microsoft ships its monthly box of cds to their vendors from Ireland. I assume it has something to do with getting around the US’s export restrictions on encryption algorithms, but it still seems pretty weird to me (and can it really be worth the expense of overnight shipping?).
I think the point of the article was that federal oversight over LLCs is practically nil. Therefore, whether you are a shady American or a shady foreigner makes no difference: the US is a convenient place to set up your shady business. Not only are tax laws favorable, but it is very easy to hide true ownership of your shady business.
Yes, as SursumCorda points out, there are good reasons to make LLCs easy to incorporate, particularly in order to encourage small businesses. The problem is that shady characters of any stripe or flag can take advantage of these LLCs – just like a few guys took advantage of American hospitality to go to flight school and then take down a building with a jetliner. I think Sursumcorda’s concern that action on this point will mostly hurt the little guys is justified.
The article, as far as I understood it, has nothing to do with legitimate US businesses incorporating in another state for tax reasons. It doesn’t need to separate out that category because it pretty much neglects it. Of course, it’s the combination of low taxation and loose laws that make the three states mentioned so attractive for launderers, and make US imprecations against countries that have low taxes because they know how to balance their budget all the more irritating.
To change the subject from that of the article, yes, many companies have their overseas offices in Ireland. The reason is the “Double Irish” and the “Dutch Sandwich,” which makes overnight shipping look like pocket change. Google uses it too. Dilbert sums it up quite nicely.
More detail on the Double Irish on Bloomberg.