Russian woman and South Dakotan connected by mysterious business

South Dakota News Watch | by Bart Pfankuch

For reasons known only to him, embattled political operative Paul Erickson started a new business in South Dakota in June.

By spending just $150 and filling out some online paperwork, Erickson formed Medora Consulting LLC, a company with no stated purpose or partners.

The LLC, or limited liability company, was not Erickson’s first foray into starting companies through the LLC process, and certainly not the most explosive.

Erickson, 56, started Medora LLC just one month before his romantic and political relationship with indicted Russian woman Maria Butina became international news. Last week Butina, 29, was arrested and charged with being a foreign agent who conspired against the United States. The arrest has shone a light on Erickson, his connections to Butina and his role as a highly influential political operative.

Erickson contractually bound himself to Butina on February 9, 2016, when he filed paperwork to create a South Dakota company called Bridges LLC with only he and Butina as principals in the business. State records do not say what the business was to be used for, other than a vague reference to consulting, and note it would be operated from Erickson’s apartment on Oxbow Avenue in Sioux Falls.

Bridges LLC is registered in South Dakota as a limited liability company, a form of corporate organization that allows a business person or group to legally create a company with little paperwork, scant information disclosure and at low cost in order to limit their financial liability in the case of a lawsuit. LLCs are legal in all states and are an increasingly popular way to establish a business cheaply and at breakneck pace, sometimes in less than a day with just a computer and a credit card.

But LLCs have become a common component of criminal conspiracies, providing a way to hold or move money while keeping the names and motives of those involved away from public scrutiny. Experts say LLCs have been used to hide finances, intentions and identities in cases involving money laundering, sex trafficking, illegal campaign finance operations, improper foreign investment and securities fraud.

Erickson, a South Dakota resident who is a longtime conservative political operative, is embroiled in an international scandal due to his relationship with Butina. Press accounts show that Erickson led Butina on several speaking engagements in South Dakota over the past few years to push her pro-gun agenda, which authorities now say was likely a cover for her covert activities.

Erickson is widely believed to be “U.S. Person 1,” who is referenced numerous times in federal charging papers as having an intimate relationship with Butina.

The Washington Post reported that just prior to her indictment, Butina and “U.S. Person 1” had ended their lease in Washington, D.C., packed up boxes and rented a truck to head back to South Dakota.

Erickson has not been charged with a crime and did not return a message left on his voicemail seeking comment for this article.

The LLC that Erickson created with Butina became delinquent with the state in March. However, on June 15 of this year, Erickson created Medora Consulting LLC. He is also the registered agent of Investing with Dignity LLC, created in 2010.

Because LLC statutes in South Dakota do not require the registered agent to state a purpose for the business, no one knows why Medora Consulting or Investing with Dignity were formed, what purpose they served or who outside of Erickson may be involved.

Erickson told the McClatchy news service in 2017 that Bridges LLC was formed to receive money to help put Butina through college at American University in Washington. Butina is not listed on the filings for the other two LLCs registered by Erickson.

To date, authorities have not said if they believe Bridges LLC was involved in any illegal activity. Erickson and Butina are signatories on the initial filings for Bridges LLC and both submitted electronic signatures in the 2017 annual report for the LLC.

By state statute, LLC records are not required to contain information beyond the name of the LLC, the name of the registered agent, its form of management and the address from which it will operate. The public and government officials in South Dakota have no easy way of knowing who else is a partner in the company, what it does, how it operates, if money was received or disbursed, or if a company is being used for illegal purposes.

When Erickson signed and submitted documents to form Bridges LLC and included Butina as the “organizer,” the person who conceived of the LLC, he bound himself legally to a woman now charged in federal court with attempting to infiltrate and manipulate some of the nation’s highest officials and organizations.

Butina is now held without bail in a Washington, D.C. jail; she is considered a flight risk due to her strong connections to powerful people in her home country.

LLCs popular in South Dakota

Secretary of State Shantel Krebs said that in fiscal year 2017 — the period from July 1, 2016 to June 30, 2017 – there were 34,683 LLCs registered in the state. Of those, 29,020 were domestic LLCs, meaning they are operated by people within South Dakota. That year, the state had 5,663 foreign LLCs, meaning they are operated by an out-of-state person or group (foreign does not indicate international ownership, Krebs pointed out.)

In fiscal year 2018 – the time frame of June 30, 2017 to July 1, 2018 – South Dakota had 44,023 LLCs registered, an increase of 27 percent over the previous fiscal year. Of the LLCs on file in fiscal 2018, 37,122 were domestic and 6,901 were foreign, Krebs said.

The filing numbers can be skewed a bit because some LLC operators allow their companies to go delinquent for a time and some will reestablish an LLC that has gone delinquent, Krebs noted. In fiscal 2017, there were 5,106 new domestic filings and 752 new foreign filings. In fiscal 2018, she said, there were 6,015 new domestic filings and 874 new foreign filings.

According to the state, LLCs combine the favorable tax treatment of a partnership with the limited liability protections of a corporation. LLCs also allow for highly flexible internal management structures and do not require creation of a formal board of directors. The operator of an LLC must keep the company’s finances completely separate from their personal finances. Lawsuits can be filed against the LLC itself without affecting the finances of the members of the LLC.

Common examples of LLCs are those formed by real estate managers, farmers, and a wide range of small businesses ranging from furniture repair and self-storage to restaurants and home service providers.

It costs $150 in state fees to start a domestic LLC and $750 to create a foreign LLC, according to state statute. The registered agent is required to file an annual report on each LLC and pay a $50 renewal fee. The annual report contains no financial information and simply affirms the name and address of the registered agent.

LLC paperwork can be filed by mail or via an online system designed to make filing faster and easier, Krebs said. In addition to the registered agent, an LLC can include an infinite number of members who are part of the company though there is no requirement that any members be listed in the paperwork, Krebs said.

That ability to hide the motive and membership of an LLC from public view are elements that make LLCs ripe for abuse by people with illegal intent, according to Ross Delston, a Washington, D.C. attorney with 40 years of experience in the financial services sector.

“You don’t know who really owns it,” Delston said. “There could be third parties that are not named in order to shield the real owners, the ultimate beneficial owner.”

Delston is frequently called upon as an expert witness in civil cases involving financial impropriety including money laundering and fraud. In such cases, Delston said it is not uncommon for an LLC to be set up by foreign interests or by lawyers who serve as registered agents for people who want to hide their identity. LLCs are a common part of many criminal conspiracies, Delston said.

“They’re ubiquitous,” he said. “LLCs are often used in cases involving allegations or convictions of money laundering. They’re used to buy real estate, they’re used to hold assets, they’re used to avoid paying taxes inside and outside the country.”

Delston said an LLC owner who was trying to hide financial transactions or the identity of partners would be wise to set up an LLC in their home state in order to gain the trust of banks that might receive deposits on behalf of the LLC. Banks are leery of unknown or untrusted depositors or recipients of money, Delston said.

“Banks want to know the purpose of an account, how it would be used and what is the expected transaction activity,” he said. “Banks are required to conduct customer due diligence and have a baseline of what to expect so if in the future they see suspicious activity they know to report it.”

An LLC owner with something to hide could also benefit from having an LLC with paperwork that includes a generic intention of how it is being used.

“The goal of someone trying to hide something is to be boring,” he said. “If you’re a local businessperson, what better way to be boring than to have a locally based corporation? And consulting can mean anything.”

All of the LLCs registered by Erickson have used his apartment in a complex in the 4900 block of Oxbow Avenue in Sioux Falls as the operating address.

The initial filing for Bridges LLC indicate that a $200 filing fee – which included a $50 additional fee for expedited processing — was paid in February 2016 by Sioux Falls attorney Eric Kerkvliet of the firm Lynn, Jackson, Shultz & Lebrun. Reached by phone last week, Kerkvliet refused to comment on his role in setting up the LLC and then hung up. Krebs said it is not uncommon for a lawyer or other entity to remit payment for LLC fees.

Delaware cases lead to scrutiny

Scrutiny of LLCs rose in 2017 and again this year after two major criminal cases exposed the use of LLCs in potential wrongdoing.

The first high-profile case centered on the indictments of President Donald Trump’s former campaign officials Paul Manafort and Rick Gates, who authorities say used LLCs and other corporate constructions to avoid U.S. tax liabilities on tens of millions of dollars in payments for lobbying and consulting from the government of the Ukraine. Both men have pleaded not guilty.

Several of the accounts that received payments were LLCs registered in Delaware, according to court filings.

South Dakota may have seen a recent rise in LLC filings, but the state is far behind Delaware when it comes to their use.

Delaware, population about 960,000, is home to roughly 870,000 registered LLCs, some of which have been proven to hide financial impropriety and illegal acts, said Nick Wasileski, a financial watchdog who heads the Delaware Coalition for Open Government.

Wasileski said investigative work by himself, newspapers and authorities has uncovered money laundering, securities fraud, drug smuggling and child sex trafficking operations tied to Delaware LLCs. According to reports in The News Journal in Dover, past cases featuring Delaware LLCs have involved high-profile crimes and suspects such as a Chilean airline that bribed union bosses, Russian arms dealer Viktor Bout, Mexican drug lord Joaquin “El Chapo” Guzman and former lobbyist Jack Abramoff.

The other bellwether case in Delaware involved an LLC used by operators of the website Backpage, a classified advertising service featuring sexual content and offerings that was seized and shut down by federal authorities in April. Company officials face charges and some have pleaded guilty to federal charges.

“There seems to be a pattern that attracts bad actors to use LLCs,” Wasileski said. “It’s the secrecy and non-disclosure of information that makes it rampant for wrongdoing.”

The Backpage case has led to increased calls for reform and more reporting requirements for LLCs in the state, Delaware House member John Kowalko said.

Kowalko, a Democrat who is a former official for a machinist union, has tried for years to initiate reforms in Delaware, but his bills have never made it out of committee. The opposition arises due to the high level of funding that Delaware receives from LLC filings, Kowalko said. The News Journal reported in 2017 that a quarter of Delaware’s annual state revenues come from filing fees paid by corporations.

Last year, Kowalko tried to block formation of LLCs by people who were on federal government terrorism watch lists, and that measure was also quickly defeated.

Now, Kowalko is hopeful the new cases involved LLCs will give him fodder to pass reforms. “Without the proper safeguards, we are really threatening the security of the United States and the security of the corporate structure of the United States if we don’t ferret out the money-launderers and wrongdoers,” he said.

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