Just how easy is it to establish a bogus business entity that can be used to funnel money offshore? I decided to see for myself.
One of the simplest ways to crack down on organized crime and money laundering, most cops or FBI agents will tell you, is to make it harder for crooks to create so-called shellcompanies. These firms—typically set up in an offshore haven by the crook's attorney or bagman—are designed to hide the identity of their real owners and allow people to move money around the world without it being traced back to them.
So when guns, drugs, or human beings are trafficked, or a politician takes a bribe, or a company pulls off a tax scam or Ponzi scheme or pump-and-dump stock swindle, you can be virtually certain that a shell firm was used to move the dirty money and cover the trail. According to Dennis Lormel, the first chief of the FBI's Terrorist Financing Operations Section and a retired 28-year Bureau veteran, "Terrorists, organized crime groups, and pariah states need access to the international banking system. Shell firms are how they get it."
My story in the December issue of VICE reports on the activities of one particularly prolific shell-company creator, Mossack Fonseca, a law firm with operations in dozens of countries around the globe that has set up companies used by an astonishing assortment of money launderers, business oligarchs, and cronies of some of the world's worst dictators.
When you hear the term "offshore haven," you tend to think about places like Panama, where Mossack Fonseca is headquartered, or the Bahamas, the British Virgin Islands, or Switzerland. But as I reported in the story, the United States is the second-easiest country, after Kenya, in which to establish an anonymous shell firm, according to a a DC group called Global Financial Integrity. That's probably why Mossack Fonseca sets up so many shell firms in the US, specifically in Florida, Wyoming, and Nevada, where it works with closely affiliated local offices.
A recent report by the group Global Witness documented dozens of scams and crimes pulled off with American shell companies, ranging from massive Medicare fraud by an Armenian-American crime syndicate to money laundering by Mexico's Los Zetas drug cartel (which used some of the laundered funds to buy race horses, including one named "Number One Cartel," that won millions of dollars at the track).
Senator Carl Levin of Michigan, who is retiring next year, has long tried to pass legislation that would make it harder to incorporate anonymous companies in the US. He had support from groups like the Fraternal Order of Police, the Society of Former Special Agents of the FBI, and various financial watchdogs, but his efforts haven't led anywhere. This was in large part due to opposition from lawmakers in those states that rake in especially big revenues through incorporating companies, especially Delaware and Nevada.
If I were a real crook or bagman, experts I spoke with advised, I'd "layer" my money laundering network by setting up a firm in one haven and subsidiaries of it elsewhere.
But just how easy is it to establish a bogus, anonymously owned shell entity in the United States that could be used to funnel money offshore to evade taxes or finance terrorism or crime? I decided to see for myself.
If I were a real crook or bagman, experts I spoke with advised, I'd "layer" my money laundering network by setting up a firm in one haven and subsidiaries of it elsewhere. I started out in Delaware, where secrecy rules are as tight as anywhere in the world. My initial choice as registered agent—the company that files the requisite paperwork, collects fees to be paid to the state, and sometimes appoints "nominee" directors—was CT at 1209 Orange Street in Wilmington. That's the listed address for more than 200,000 companies, from corporate giants like Google, Coca-Cola, and General Motors to countless anonymous shell vehicles like the one I planned to create.
CT was a bit pricey, so I went with Agents and Corporations, Inc., which is also headquartered on Orange Street. Company president John Williams talks about why Delaware is such a great place for companies to incorporate in a video on the firm's website. "When you're an officer or a director, many other states impose liability on you for making bad decisions, whereas in Delaware you're protected by the Delaware Business Judgment Rule," he says. "What that does is provide a shield for you... so you can take risks without the threat of lawsuits from stockholders from those business risks being a bad decision."
Of course, there was no need to actually go to Delaware to form my company. The whole process can be done in 15 minutes online or—as I did, on October 28—over the phone. It cost $292. I had to provide the name of a contact person—in a real-life scenario this would have been a lawyer, and hence I would have been protected by attorney-client privilege, or a trusted bagman—but for the purposes of this story I just wanted to keep my name hidden, so I had a friend in Washington serve as my front. (Her name doesn't appear anywhere in public records either, but is kept internally by Agents and Corporations, Inc.) The following day she received incorporation papers for my firm—MCSE, an acronym for Medellín Cartel Successor Entity—which was already up and running.
I planned to set up a subsidiary of MCSE in Nevada, which also has incredibly lax rules on business incorporations and which has billed itself as the "Delaware of the West." Under state law, you need to identify your local registered agent and a company "manager" when you establish a shell, but they don't have to disclose anything about ownership unless compelled to by a court or law enforcement, and even then it can take a long time. Furthermore, the "manager" does not have to be a human being but can be another anonymous company located in a different secrecy haven.
I could have created the subsidiary over the phone, but I was flying to Las Vegas anyway (Mossack Fonseca creates shell firms through an affiliated company there), so I decided to do it in person. On the morning of November 3, I headed out from New York–New York Hotel & Casino on the Las Vegas Strip to meet Fe McGuffey of the Corporate Services Group (CSG), which I'd randomly selected from a list of registered agents on the Nevada Secretary of State's website. She'd assured me via email that even though I would control the firm, my name wouldn't appear in any publicly searchable records.
CSG is located at 723 S. Casino Center Blvd, in an area otherwise occupied by bail bonds offices and liquor stores. But the name on the front of its modest two-story stucco building, which has a yard with a few small palm trees that is circled by a chain-link fence, was Hilbrecht & Associates.
After she'd escorted me into her small office, McGuffey, a short, sturdy, middle-aged Asian woman who previously worked for the Navy in biological warfare programs, explained to me that CSG is one of five corporate incorporators operating from the address. They are all owned by her boss—who, I subsequently discovered, is a former state senator, Norman Ty Hilbrecht. Each of five incorporators had different purposes, McGuffey told me. For example, one sets up LLCs in neighboring Wyoming, while another registers firms for foreign clients. McGuffey never told me what Nevada Incorporating Company—which she picked to register my firm—specialized in, but she said it was her personal favorite of the five.
With Seabasstian Consulting and MCSE I was positioned to go into business as a drug trafficker or arms trader or dictator's bagman.
It took us about an hour to fill out the paperwork. Then we emailed two pages to my friend in Washington for her to sign and return. "You're not hiding from the law, are you?" McGuffey said with a chuckle after I'd asked, for roughly the tenth time, for confirmation that my name wouldn't appear anywhere in the shell firm's records.
"No, it's just a matter of privacy,"I replied. "It's a long story." She didn't ask for details and I was soon out the door.
Two days later, I checked the Nevada Secretary of State's website and was pleased to see that Seabasstian Consulting, LLC, named in honor of my daughter's pet Siamese fighting fish, was now a legitimate shell firm, operating from CSG's address and managed by MCSE, the Delaware shell. All this had been accomplished in less than a week and for under $1,000.
With Seabasstian Consulting and MCSE I was positioned to go into business as a drug trafficker or arms trader or dictator's bagman. But Heather Lowe, head of Global Financial Integrity, told me that I'd probably want to create several more subsidiaries offshore to put a few extra layers between me and my American shell companies. After that, I could open a foreign bank account that would be very hard for the IRS or international law enforcement to trace. "You might have to look around a little, but you would be able to find a foreign banker who'd open an account for you," she said.
The possibilities were virtually endless, and I could do it all without straying far from home. I could, for example, set up a Seabasstian Consulting subsidiary on Nevis, the Caribbean island that provides "complete secrecy" for company owners, according to a US-based firm called Offshore Corporation (which helps clients set up shells online or at its offices in Santa Clarita, California or Coral Springs, Florida). The Nevis shell could then be used to set up yet another dummy company in, say, Liberia, which may be a failed state currently being ravaged by Ebola but has a highly efficient, loosely regulated corporate registry that operates out of Vienna, Virginia, in the DC suburbs.
But if I really wanted to secretly funnel my money offshore, I'd make an appointment with Mossack Fonseca and fly down to Panama City. It would cost a little bit more, but why deal with second-rate competitors when I could go straight to the top of the international shell-company incorporation racket?
Ken Silverstein is an investigative reporter for the Intercept.