Kowalko: Delaware’s image – What lies beneath the shadows

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The News Journal · September 19, 2016 · Delaware Voice · John Kowalko

Delaware is a pro-business state. It is relatively simple to form a company. We have no corporate income tax, and we even have special courts to handle corporate disputes. These courts have provided for an unmatched experience and understanding of the issues involved in commercial enterprises. These factors provide our state with a competitive advantage that has made us the choice for legal residence of nearly two-thirds of Fortune 500 companies.

However, recently our state’s reputation has suffered because of policies wrongly considered to be adding to our advantage. Some public officials have refused to challenge the practice of allowing anonymous shell companies to form in Delaware. The risk to Delaware’s reputation because of these practices threatens to erode Delaware’s standing in the global corporate community. The threat becomes more obvious when one considers that even the ethically-challenged nation of Brazil has blacklisted Delaware companies.

The use of anonymous shell companies to hide the identities of drug cartels, human trafficking operations and weapons dealers is well documented.These entities are used to launder money for terrorists, corrupt foreign officials and rogue countries like Iran to evade sanctions with impunity. Unfortunately, some of the most notorious examples are of rogue actors hiding behind incorporation in Delaware. Of the 1.2 million companies registered in Delaware, the vast majority are legitimate entities. We should not allow Delaware’s good name to be tarnished in order to protect bad actors that threaten the safety and security of communities both here and abroad.

Law enforcement organizations have called for the end of anonymous companies. The nation’s largest financial institutions, some headquartered in Delaware, have recently called for an end to the anonymity to help them prevent their institutions from being used to launder illicit funds.

There is legislation in Congress, that if passed, would require companies when they register to simply name the true owner. Current law permits anyone to be named. If you search the Internet, you can find a YouTube video of someone registering a company in our state naming their cat, Suki, as the owner. The video is humorous but the real world implications are deadly serious. Opposition to this legislation is misplaced. No state currently collects ownership information so a uniform, national rule requiring companies to identify owners would not harm Delaware. It would have no impact on our competitive advantage. Some argue that it would be a burden for state officials to collect the information but there are bills that would put that burden on the federal government.

As the dangers associated with secrecy come under increasing attack, our senators have sponsored a bill empowering the IRS to expand its collection of company contact information. While I appreciate their recognition that something needs to be done, the IRS collects information so they have a contact should there be a problem with the tax return. The person may be an accountant or a financial manager. These efforts fall short of identifying the true owner so that law enforcement and financial institutions can combat money laundering. For the bill to be effective in stopping anonymous companies from being used for criminal activity, it needs to ensure the right information is being collected and there is proper access to the information.

The current proposal falls short on both counts.

Our state has a proud open-for-business reputation. That reputation is being tarnished by a misguided defense of anonymous companies. There is no competitive advantage to continuing this practice but there is a great threat to our economy if we are increasingly seen as a bastion for money laundering and other illicit activity.

John Kowalko is the Democratic Representative of the 25th District.

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