Bill would rein in foreign LLCs in Delaware

The News Journal | by Margie Fishman

Foreign limited liability corporations investing in industries that pose national security risks would undergo more rigorous review when incorporating in Delaware, under draft legislation proposed by a group of local open government advocates.

Released Tuesday by the Delaware Coalition for Open Government, the proposal aims to curtail money laundering schemes and potential security threats. Foreign entities could no longer escape federal scrutiny by manipulating Delaware law to morph into a series of different domestic companies, according to DelCOG members.

Foreign business interests investing in industries vulnerable to internal sabotage, such as transportation systems, chemical manufacturing and the energy sector, would be required to provide more information in writing about their intended purpose, ownership interests and financing. Delaware’s Secretary of State would be empowered to deny applications based on credible information that the company is connected to a criminal organization or constitutes a security threat.

DelCOG members insist they aren’t trying to slow down the process for legitimate businesses to incorporate in Delaware.

“This is not an idealistic bill. It’s a practical bill,” explained DelCOG board member Christine Whitehead, a retired government attorney who drafted the measure. “We’re closing the loopholes.”

Chief Deputy Secretary of State Richard Geisenberger said Tuesday he had not had a chance to review the proposal in its entirety. But he reiterated that it is the responsibility of federal law enforcement, not individual states, to investigate foreign business entities.

Previously, state officials have balked at expanding the company information they collect, explaining it would be cost-prohibitive and lead to approval delays for other businesses.

“If the federal government believes that more regulation is required, they have the power to adopt it,” said Geisenberger. Delaware supports the Obama administration’s current proposal to increase transparency into the “beneficial ownership” of companies formed in the U.S. by requiring companies report their true owners, he said.

The DelCOG draft has received early support from Democratic state Rep. John Kowalko of Newark, who said reforms are needed to Delaware’s loose process of certifying Limited Liability Corporations. Kowalko hopes to introduce the bill next month.

There are three pending House bills related to LLC rules, but all constitute minor technical updates, according to a Secretary of State spokesman.

Delaware has pioneered stricter standards for LLCs, according to Geisenberger, including barring the use of anonymous bearer shares, prohibiting company registered agents from marketing shell companies and requiring such agents to retain contact information for every entity they represent.

“You can go online and file a corporation in Colorado and no human being will ever look at the document,” he said at a DelCOG meeting earlier this year.

Still, the state has been linked to disgraced lobbyist Jack Abramoff, who used a Delaware-based company to pilfer millions from clients; and notorious Russian arms dealer Viktor Bout, who used at least two Delaware shell companies to transfer money into legal channels. It is also believed that Mexican drug lord Jaquin “el Chapo” Guzman incorporated his tequila business in Delaware.

“We cannot close our eyes to it and we cannot afford to allow Delaware to be known as some kind of haven for corporate anonymity,” said Kowalko, citing a string of national media reports criticizing the First State.

The recent release of the Panama Papers exposed how the wealthy elite hide assets in secret offshore shell companies. Delaware has come under fire for offering an equally enticing alternative closer to home. Transparency International, a Berlin-based nonprofit recently singled out Delaware for enabling “corrupt people, shady companies, drug offenders and fraudsters to cover their tracks.”

State officials have responded that Delaware is the incorporation leader nationwide, not for underhanded dealings but because it provides professional efficiency and legal consistency. The state attracts 60 percent of the Fortune 500 and more than half of America’s publicly traded companies to base their operations — at least on paper — here.

Of Delaware’s 784,000 active LLCs, less than one percent are foreign or other state LLCs qualified to do business in Delaware, according to research provided by DelCOG.

Delaware’s process for incorporation takes seven easy, affordable steps. And it produces a big return, accounting for a quarter of the state budget. Only businesses physically located in Delaware are required to apply for a business license, which involves approvals from the Department of Labor, Division of Revenue and Division of Motor Vehicles. For the 95% of Delaware-incorporated businesses located outside the state, the founder must hire a registered agent to handle state correspondence.

Among the recommendations to tighten Delaware’s regulations:

Require foreign-owned LLCs to be governed by Delaware law, not the laws of their home countries, and mandate that a series LLC notify the public, such as with a sign in the office reception area, when there is a change in ownership.

An LLC with a majority of members who are citizens of countries at war with the U.S. or harboring groups threatening the U.S. must supply additional information to the Secretary of State related to their ownership interests, physical address and funding sources. “No government sheltering forces hostile to, or at war with, the United States may form a Delaware limited liability corporation,” the draft bill reads.

End the practice of allowing foreign businesses to convert to Delaware LLCs and establish other LLCs under different names in other states, potentially escaping a security review by the Committee on Foreign Investments in the United States.

On first glance, DelCOG’s proposed legislation may narrowly address longstanding issues associated with foreign-owned LLCs and money laundering, according to Mark Hays, senior advisor for Global Witness. The international advocacy organization has called for national legislation requiring full disclosure of the actual owners of companies formed in the U.S.

“It appears the (Delaware) bill leaves unanswered the bigger question about the company’s beneficial owners–that is, who they’re really doing business with,” he said.

“The question is whether Delaware’s leadership will support even these modest measures,” he said.

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