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After a leak of millions of documents from the Panamanian law firm Mossack Fonseca revealed the widespread use of anonymous companies to hide money abroad, one fact remains clear — setting up secret shell firms to hide secret money is totally legal.
"We have never been found guilty of absolutely anything," said Ramon Fonseca, the Panamanian lawyer involved in the leak, “we are not responsible for the actions of the corporations that we form.” He is likely telling the truth. Most countries have established laws limiting the formation of anonymous companies that can be used as fronts for tax purposes or to hide illicit activity. Yet, in several countries this practice has almost no restrictions, including Panama and the United States.
These anonymous corporations are referred to as “shell” companies, and they have been used for a wide variety of things, ranging from issues that U.S. PIRG is directly concerned with — credit card fraud, government contracting fraud, and even anonymous financing of SuperPACs — to others that PIRG doesn't specifically address, but are nonetheless concerning, such as money laundering for drug cartels, or acquiring funds for North Korea’s nuclear program. The U.S. is a hub for these activities because we have such lax requirements for providing proof of ownership when setting up a company. In many cases, investigators have little to no ability to determine how these companies are earning money and who is responsible. So little information is required to set up a corporation in the U.S that it is actually more difficult to get a driver’s license than it is to set up a shell firm that could be facilitating all sorts of illegal activity.
For example, the Federal Trade commission sued Ira Rubin for using at least 18 different fraudulent shell firms to sell credit cards that people never received. One indictment showed that an Armenian organized crime ring was using 118 different shell firms in 25 states to rip off medicare for over $100 million. In Delaware it’s so easy to set up a shell company that there are currently more corporations in the state than people. One of these Delaware companies was found to have purchased tax liens in a number of states, forcing homeowners into foreclosure. Another shell was caught selling knock off parts to the Defense department in exchange for tens of thousands in federal contracts.
The fact that it is legal to set up a shell company without disclosing its real and beneficial owners is ridiculous. That’s why US PIRG and FACT coalition brought 70 small business owners and faith leaders from over 20 states to Washington, DC this week to advocate for the Incorporation Transparency and Law Enforcement Assistance Acts in the House (HR 4450) and Senate (S. 2489). The legislation requires the disclosure of the actual people who own a substantial portion of the company and that this information is kept up to date and made available to law enforcement upon request.
If we want to make sure corporation mills like Mossack Fonseca aren’t allowed to facilitate criminal activity and then claim plausible deniability after the damage is done, then we need laws that provide incorporation transparency.
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