In our January 12, 2009 update, we reported on a Nevada law that requires a company to maintain a record of beneficial ownership and to make the record available to the Nevada Secretary of State on request. Last week, world leaders met at the G20 summit to tackle global economic problems, including reform of secretive "tax havens."
What do these two items have in common? The answer can be found in an article in the March 26th issue of the Economist entitled "Haven Hypocrisy" in which the U.S. practice of permitting formation of companies, without disclosing names of shareholders, is called an "insidious form of secrecy."
French President Nicolas Sarkozy is one of the most outspoken advocates of financial regulation, including blacklisting of uncooperative "tax havens," where banking clients can deposit large amounts of money, move assets, and engage in financial mischief, all the while keeping their identity secret. As this update was being written, the U.S. and U.K. were reportedly prepared to back the publication of such a list, but China was opposed. It seems clear that reform of tax havens will move forward in some form. Even the alleged tax havens themselves, including Switzerland, Luxembourg, Hong Kong, and Singapore, have shown more willingness to relax secrecy laws and move toward greater transparency.
So it is interesting to see the Economist, a U.K. publication which often reflects European views, comparing U.S. corporations to insidious tax havens. Ironically, the Economist article highlights Nevada as one of the worst examples of corporate secrecy. Nevada's website "touts its 'limited reporting and disclosure requirements' and a speedy one-hour incorporation service. Nevada does not ask for the names of company shareholders, nor does it routinely share the little information it has with the federal government." The article also notes that the Internal Revenue Service found that 50% - 90% of the registering companies were already in breach of federal tax laws elsewhere.
The federal government may step in. Senator Carl Levin, (Democrat from Michigan), along with Senator Chuck Grassley, (Republican from Iowa) and Senator Claire McCaskill (Democrat from Missouri) have proposed a law (called the Incorporation Transparency and Law Enforcement Assistance Act) forcing states to identify the beneficial owners of corporations. A similar bill introduced last year died quietly in a congressional committee. But the atmosphere this year is clearly different.
The downfall of Enron and other companies earlier in this decade, blamed on financial shenanigans and manipulation, led to reforms (which some called unnecessary and burdensome regulatory overkill). It could be that the current economic downturn will lead to other reforms which will change the way we do business. One of these reforms could be the loss of shareholder anonymity, which is now becoming an international issue.