Kowalko: Delaware LLC law – facilitator or conspirator?

Delaware State News | Letter to the Editor | by Rep. John Kowalko

I filed HB 442 on June 23. It’s a bill to reform Delaware’s LLC licensing process to protect the integrity of the system and prevent illegal and illicit activities from being perpetrated. Recent worldwide media accounts have tarnished Delaware’s reputation as a leader in corporate investment, with oftentimes valid questions raised as to the willingness of Delaware and its citizens to provide an unquestioning attitude towards companies that incorporate here or form LLCs.

The questionable behavior of a very small percentage of these corporations and businesses demands that I, on behalf of all Delawareans, make an effort to close loopholes and enhance security in our corporate laws. HB 442 is the first small step in that direction.

One of the basic requirements in order for a democratic nation to survive is honesty. That is one reason that our Constitution does not give a legislative body the authority to write laws that may be harmful to the general welfare — such as laws that might enable criminal conduct.

Creating and upholding good laws that benefit the public — not just the wealthy and powerful, and certainly not criminal elements — is extremely important. Therefore, this bill is a reminder to those that benefit from our LLC laws that Delaware has an obligation, as one of the “United States,” to obey federal laws and to see that its citizens do the same.

If the president of the United States can be embarrassed by references to Delaware’s laws at a (G7) Conference, his ability to ask for and expect other nations to conduct their affairs with honesty is weakened. When it is pointed out by leaders of other nations that Delaware is responsible for many companies taking billions of dollars out of the normal avenues of commerce and that money laundering is costing those countries revenues, which their countries need, it is time for our common sense to take over. When the head of the National Security Agency announces to the country, on television, that our secrecy is impeding his agency’s ability to investigate threats by terrorists, it is time for patriotism to kick in.

A group of Delaware citizens, members of DELCOG (Delaware Coalition for Open Government), have sought a way for Delaware to respond to this threat without turning away a large number of people who want to legitimately form a limited liability company in Delaware. DELCOG and I agree that only a few LLCs, with huge financial resources, are taking advantage of the system’s weaknesses. It is possible to curb those without disturbing the great majority of our companies who are legitimate businesses.

The bill I am sponsoring is simple. It is not inherently disruptive since businesses which would ignore the requirements of this bill are likely already violating federal law. This bill is a reminder that the laws exist, and is a guide to address what can be a complicated subject — sanctions against nations, persons, and criminal elements that the United States does not want involved in our economy because they are inherently dangerous to the U.S. and its people.

This bill will require the registered agents to assume responsibility for their actions. The agents already know their clients and their purposes when they form an LLC. Therefore, they must help the Secretary of State to see that we comply with all sanctions and cease potentially putting the entire country at risk.

The Office of Foreign Assets Control exists in the [U.S.] Department of Treasury to oversee sanctions that have been enacted against persons and nations. Their website is a guide to this field. Not all sanctions are permanent, and changes are made as our relationships with countries change.

Diplomatic relations with Cuba are one such example. Changes cannot be made overnight, so, the bill suggests clients which may be on these lists as relations are in flux go through the Committee on Foreign Investments in the United States (CFIUS) for clearance to invest in this country or otherwise do business as a Delaware LLC. The initial check takes 30 days, and CFIUS does not always feel it is necessary to investigate. The owners or potential owners under the proposed requirements are identified as “Sanctioned Nations” or “Specially Designated Nationals” and are most often not the usual customers of registered agents.

It is time to shine the spotlight on these activities, both nationally and internationally. I hope that this step toward reinvigorating Delaware’s status as an honest and fair place to do business will motivate other states with similar laws to do the same.

State Rep. John A. Kowalko Jr.
Democrat, District 25 (Newark South)

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