MSNBC Business reported the fascinating story from Reuters about a house in Cheyenne, Wyoming that is used to protect corporations from paying their fair share of taxes. More than 2,000 companies are registered at a 1,700-square-foot brick house at 2710 Thomes Ave. The story exemplifies the problem with American tax policy and how corporations including national nursing home chains evade liability. Excerpts below:
A Reuters investigation found the house is the headquarters for Wyoming Corporate Services, a business-incorporation specialist that establishes firms which can be used as "shell" companies, paper entities able to hide assets.
Wyoming Corporate Services will help clients create a company, and more: set up a bank account for it; add a lawyer as a corporate director to invoke attorney-client privilege; even appoint stand-in directors and officers as high as CEO. Among its offerings is a variety of shell known as a "shelf" company, which comes with years of regulatory filings behind it, lending a greater feeling of solidity.
"A corporation is a legal person created by state statute that can be used as a fall guy, a servant, a good friend or a decoy," the company’s website boasts. "A person you control… yet cannot be held accountable for its actions. Imagine the possibilities!"
All the activity at 2710 Thomes is part of a little-noticed industry in the U.S.: the mass production of paper businesses. Scores of mass incorporators like Wyoming Corporate Services have set up shop. The hotbeds of the industry are three states with a light regulatory touch-Delaware, Wyoming and Nevada. The incorporation industry, overseen by officials in the 50 states, has few rules. Convicted felons can operate firms which create companies, and buy them with no background checks.
No states license mass incorporators, and only a few require them to formally register with state authorities. None collect the names and addresses of "beneficial owners," the individuals with a controlling interest in corporations, according to a 2009 report by the National Association of Secretaries of State, a group for state officials overseeing incorporation. Wyoming and Nevada allow the real owners of corporations to hide behind "nominee" officers and directors with no direct role in the business, often executives of the mass incorporator.
"In the U.S., (business incorporation) is completely unregulated," says Jason Sharman, a professor at Griffith University in Nathan, Australia, who is preparing a study for the World Bank on corporate formation worldwide. "Somalia has slightly higher standards than Wyoming and Nevada."
An estimated 2 million corporations and limited liability companies are created each year in the U.S., according to Senate investigators. The Treasury Department has singled out LLCs as particularly vulnerable to being used as shell companies, as they can be owned by anyone and managed anonymously. Delaware, Nevada and Wyoming had 688,000 LLCs on file in 2009, up from 624,000 in 2007.
Treasury and state banking regulators say banks have flagged billions of dollars in suspicious transactions involving U.S. shell companies in recent years. On June 10, a federal judge in Oregon ordered a company registered there to pay $60 million for defrauding a Ukrainian government agency through sham transactions involving shell companies. The civil lawsuit described a network of U.S.-registered shells connected to fraud in Eastern Europe and Afghanistan.
A growing niche in the shell business is shelf corporations. Like paper-only shells, which enable the secrecy-minded to hide real ownership of assets, shelf companies are set up by firms like Wyoming Corporate Services, then left "on the shelf" to season for years. They’re then sold later to owners looking for a quick way to secure bank loans, bid on contracts, and project financial stability. To speed up business activity, shelf corporations can often be purchased with established bank accounts, credit histories and tax returns filed with the Internal Revenue Service.
"They just slot in your names, and you walk away with the company. Presto!" says Daniel E. Karson executive managing director at investigative firm Kroll Inc. "The purpose is to conceal ownership."
On its website, Wyoming Corporate Services currently lists more than 700 shelf companies for sale in 37 states. "If they’re signing a large contract, they may not want it to look like they’ve just formed a company," said Brett Melson, director of U.S. sales at Harvard Business Services. But he added: "Unsavory characters can do a lot of bad things with the companies."
Wyoming Corporate Services is run by Gerald Pitts, its 54-year-old founder and president. On paper, he is a prolific businessman. Incorporation data provided by Westlaw, a unit of Thomson Reuters, show that Pitts is listed as a director, president or principal for at least 41 companies registered at 2710 Thomes Avenue. Another 248 firms name Edge Financial Inc., another incorporation service, as their "manager." Gerald Pitts is the president of Edge Financial, according to records on file with the Wyoming secretary of state’s office.
Companies registered at 2710 Thomes Avenue have been named in a dozen civil lawsuits alleging unpaid taxes, securities fraud and trademark infringement since 2007, a review of Westlaw data shows. State and federal tax authorities have filed liens against companies registered at the address seeking to collect more than $300,000 in unpaid taxes, according to Westlaw.
Among those registered at the little house in Cheyenne are two small companies formed through Wyoming Corporate Services that sold knock-off truck parts to the U.S. Department of Defense, according to a Reuters review of two federal contracting databases and findings from an investigation by the Pentagon’s Defense Logistics Agency. The owner of those firms, Atilla Kan, awaits sentencing on a 2007 conviction for wire fraud in a related matter.
Also linked to 2710 Thomes is former Ukrainian Prime Minister Pavlo Lazarenko who was once ranked the eighth-most corrupt official in the world by watchdog group Transparency International. He is now serving an eight-year jail term in California for a 2004 conviction on money-laundering and extortion charges. According to court records, that scheme used shell companies and offshore bank accounts to hide stolen Ukrainian government funds.
Court records submitted in Lazarenko’s criminal case and documents from a separate civil lawsuit, as well as interviews with lawyers familiar with the matter, indicate Lazarenko controls a shelf company incorporated in Cheyenne that owns an estimated $72 million in real estate in Ukraine through other companies including Capital Investments Group, registered at 2710 Thomes Avenue. The dossier on Capital Investments Group claims that other directors of the alleged front companies include Lazarenko’s wife, son and mother-in-law.
Why use a shelf company? "To hide who they are and what they are doing.
The loopholes in U.S. disclosure of bank-account and shell-company ownership have drawn fire.
The U.S. was declared "non-compliant" in four out of 40 categories monitored by the Financial Action Task Force, an international group fighting money laundering and terrorism finance, in a 2006 evaluation report, its most recent. Two of those ratings relate to scant information collected on the owners of corporations. The task force named Wyoming, Nevada and Delaware as secrecy havens. Only three states – Alaska, Arizona and Montana – require regular disclosure of corporate shareholders in some form, according to the 2009 report by the National Association of Secretaries of State.
Shell companies remain a headache for law-enforcement authorities. An attorney can provide an extra shield. Cheyenne attorney Graham Norris Jr. tells prospective clients sent to him by WCS that he will create a company on their behalf. That way, he says, he can invoke attorney-client privilege-adding a layer of privacy anytime there is an inquiry about their identities.
The 2006 U.S. Money Laundering Threat Assessment, prepared by 16 federal agencies, devotes a chapter to the ways U.S. shell companies can be attractive vehicles to hide ill-gotten funds. It includes a chart to show why money launderers might like to create shells in Wyoming, Nevada or Delaware, which offer the highest levels of corporate anonymity.