Delaware is mentioned only four times in the Financial Action Task Force's latest 266-page 'mutual evaluation' report on the United States. Critics believe that the anonymity in which Delaware companies operate renders the entire US anti-money laundering regime akin to a "battleship without a bottom."

The US has not been the subject of a 'mutual evaluation' (actually an enquiry conducted by FATF draftees from all over the world - in this case largely from the 'five eye' allies of the United States) since 2006. The last report from such an evaluation, as now, portrayed the US as a 'largely compliant' country rather than a jurisdiction whose AML efforts were holed fatally beneath the waterline.

Delaware is one of the easiest places in the world to set up an untraceable shell company. Not only is it a tax haven in the heart of the very country that spends the most time persecuting other tax havens; it is far more opaque than jurisdictions such as Switzerland. It does not make details of trusts, company accounts and beneficial ownership a matter of public record. This is a major reason why it hosts one-half of America’s quoted firms and why nearly 65% of Fortune 500 companies are incorporated there.

On 1st May 2008, along with senators Coleman and Obama (who has since become the most vocal critic of the Cayman Islands), Senator Carl Levin of Michigan introduced a bill called the Incorporation Transparency and Law Enforcement Assistance Act (US legislators, rather optimistically, usually refer to their bills as ‘acts’ in anticipation of a happy outcome) into the federal Senate, proclaiming: “This bill tackles a longstanding homeland security problem involving inadequate state incorporation practices that leave this country unnecessarily vulnerable to terrorists, criminals, and other wrongdoers, hinder law enforcement, and damage the international stature of the United States. Each year, the States allow persons to form nearly two million and limited liability companies in this country without knowing – or even asking – who the beneficial owners are behind those corporations.

“Right now, a person forming a US corporation or limited liability company (LLC) provides less information to the State than is required to open a bank account or obtain a driver’s license. [A] report revealed that one person was able to set up more than 2,000 Delaware shell corporations [i.e. corporations with no physical presence] and, without disclosing the identity of the beneficial owners, open US bank accounts for those corporations, which then collectively moved about $1.4 billion through the accounts. It is one of the earliest government reports to give some sense of the law enforcement problems caused by US corporations with unknown owners. It sounded the alarm 8 years ago, but to little effect.”

The same bill has been introduced into the US legislature four times, but it has never been passed. The commitment of Obama to it waned after his election to the presidency. Nor have US bank regulators ordered US banks – or any other banks – to stop dealing with Delaware corporations. As long as this jurisdiction’s habits persist, American diatribes against other 'secrecy jurisdictions' (to borrow a US State Department phrase) will ring hollow.

To illustrate the scale of the problem, Delaware has more locally incorporated corporations than people. 285,000 companies are registered in one building alone.

Delaware is home to thousands of anonymous shell companies because of its strict corporate secrecy rules. It collects no data on beneficial owners, and company formation agents based in the state can act as nominee directors. Law enforcement agencies can obtain some (but very little) information and have to go through a cumbersome legal process to do it. Nevada and Wyoming have similarly lax corporate registration laws and have attracted large numbers of shell companies.

The report does, rather mildly, decry the existence of a "significant gap" in "beneficial ownership obligations" and say that the US should introduce "beneficial ownership preventive measures" as soon as possible, continuing previous efforts to bring these regulations into force. In a rather opaque footnote (34) it observes that on 5th May, the US Treasury announced a 'customer due diligence' final rule, proposed beneficial ownership legislation, and proposed regulations related to foreign-owned, single-member limited liability companies. The implementation period for the rule is two years. The rule contains three core requirements: (1) identifying and verifying the identity of the beneficial owners of companies opening accounts; (2) understanding the nature and purpose of customer relationships to develop customer risk profiles; and (3) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.

Transparency International, the anti-corruption watchdog charity, has said that the rule has significant gaps. At the time of the Treasury announcement in the summer it said the following in a communiqué.

"The [rule does] not sufficiently capture those who can control an anonymous company because in the definition of 'control' it conflates senior management and executive officers of corporate entities with the beneficial owners. Often, officials named in leadership positions in anonymous companies are figureheads and control of the entity is exercised through other means - a problem highlighted by the recently released Panama Papers. TI-USA proposes that financial institutions focus on capturing information about individuals who exercise control of the legal entity for their due diligence purposes.  

"The rules also do not extend the requirement to collect beneficial ownership information to accounts established before the rules’ implementation date, creating a major gap in information collected. It is essential that financial institutions are required to obtain customer due diligence information on existing accounts utilising a risk-based approach with the understanding that financial institutions would need additional time to complete such actions on existing accounts.

“In addition to identifying the beneficial owner of their corporate clients as required by the rules, financial institutions should carry out appropriate due diligence to determine the reasonableness of the information provided to them including to identify instances such as when kleptocrats use nominees, or if the information provided by the account openers does not stand up to scrutiny, or there are suspicions that the identity of the beneficial owner is not as it is being portrayed."

The charity has also called on Congress to pass the Incorporation Transparency and Law Enforcement Assistance Act to require either the US Treasury or the states to collect, maintain and update beneficial ownership information on legal entities for law enforcement purposes. Ideally, it would like this information to be public so that corrupt individuals cannot hide behind layers of anonymous companies. The election of Donald Trump to the White House, however, may kill this limping legislative initiative off forever.

TI-USA is also calling for 'gatekeepers' (real-estate dealers, jewellers, professionals such as lawyers and accountants and others who give people access to the financial sector) involved in purchases of luxury goods to be required to check buyers’ identities and the sources of their funds - another US failing that would have pushed a lesser power into deep trouble with the FATF.