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Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, June 28, 2011

Cheyenne, Wyoming: The New Cayman Islands?

Wyoming Reuters, A Little House of Secrets on the Great Plains:

The secretive business havens of Cyprus and the Cayman Islands face a potent rival: Cheyenne, Wyoming.

At a single address in this sleepy city of 60,000 people, more than 2,000 companies are registered. The building, 2710 Thomes Avenue, isn't a shimmering skyscraper filled with A-list corporations. It's a 1,700-square-foot brick house with a manicured lawn, a few blocks from the State Capitol. ...

A Reuters investigation has found the house at 2710 Thomes Avenue serves as a little Cayman Island on the Great Plains. It 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. ...

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 pervasiveness of corporate secrecy on America's shores stands in stark contrast to Washington's message to the rest of the world. Since the September 11 attacks in 2001, the U.S. has been calling forcefully for greater transparency in global transactions, to lift the veil on shadowy money flows. ... Yet on U.S. soil, similar activity is perfectly legal. The incorporation industry, overseen by officials in the 50 states, has few rules. ...

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. ...

On its website, Wyoming Corporate Services currently lists more than 700 shelf companies for sale in 37 states. The older they are, the more expensive, like Scotch whisky. Brookside Management Inc., formed in December 2004, sells for $5,995, while Knotty Management LLC, formed in May, costs just $645. ...

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. ...

Some lawmakers want tighter rules. Senator Carl Levin (D-Mich.), chairman of the Senate Homeland Security Committee's Permanent Subcommittee for Investigations, has introduced the Incorporation Transparency and Law Enforcement Assistance Act each year since 2008. The bill would require states to obtain and update information about the real owners of companies, and impose civil and criminal sanctions for filing false information. The bill has been beaten back by a coalition of state officials and business groups, citing concerns about the cost of implementing the new law and federal government infringement on state incorporation rights.

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I don't get it. The implication of the article is that there is something illegal or even immoral about setting up a corporation. They article implies that companies set up corporations to avoid taxes, etc. $300,000 for nearly 3,000 corporation is nothing.... And there are very legitimate reasons to set up corporations. In fact, if one were going to do illegal activities, they probably would not set up a business at all....

Posted by: annon | Jun 28, 2011 6:39:09 PM

The key to understanding the "problem" is the use of anonymous corporate shells by foreigners seeking to hide income and/or wealth from their foreign tax authorities.

The "problem" is exacerbated by the fact that US tax law does not require banks to report to the IRS the non-taxable interest earned on accounts owned by NRA foreigners. This makes it - conveniently - impossible for the IRS to share that information with the relevant foreign government. The IRS is now making a second effort to unilaterally - i.e. without a change in the law - change this practice (the first was in 1999) and is again faced with massive resistance from US banks whose balance sheets depend upon deposits of foreign money (mostly from Latin America) for their economic health. How much of that money represents the proceeds of sales of illegal drugs to America drug-loving public is the subject of entertaining speculation.

The US is currently engaged in a campaign - called FATCA(T) - to enlist the entire financial world in its effort to track down US tax cheats around the world. A major "problem" for the US in this effort is the fact that the US continues to rank among the leading havens for tax cheats from everywhere else around the globe. It thus has to battle the charge of "hypocrisy" leveled against it by foreign governments whose financial services industries share the WY, NV or DE business models.

Posted by: John | Jun 29, 2011 12:45:33 AM

John. You should have written the article, because it didn't address any of that.

Posted by: anon | Jun 29, 2011 5:51:41 AM

John had a couple of good explanatory comments -- here and the post below this one. Where's he been hiding?

Posted by: Woody | Jun 29, 2011 7:46:55 AM