Critics see too many secrets
Las Vegas is famous for being discreet about its guests’ activities when they’re in town.
But government critics say the city’s “What happens here, stays here” slogan applies to Nevada’s corporate secrecy laws, too, making it easier for corporations to evade income taxes, launder money and possibly even finance terrorism.
Although Nevada doesn’t sanction illegal activities, critics contend the laws on registering corporations and limited liability companies make the state a magnet for illicit operations. The laws allow corporations to hide the identity of owners as well as officers and directors. Criminals know this secrecy makes it hard for law enforcement officers to investigate corporations when a crime is suspected.
The Senate Permanent Subcommittee on Investigations in November singled out Nevada, Delaware and Wyoming as states with particularly lax standards for corporate disclosure.
Sen. Carl Levin, D-Mich., now the subcommittee’s chairman, wants to introduce legislation that would set minimum standards for corporate disclosure in states. However, he agreed to postpone federal legislation to give states time to resolve corporate secrecy issues, said Leslie Reynolds, executive director of the National Association of Secretaries of State.
She said Levin is waiting to see what the association recommends for state corporate disclosure requirements when it meets this month in Portland, Ore.
The Nevada Legislature, which adjourned last month, already closed some, but not all, of the loopholes the subcommittee said could be used to hide criminal activity.
“We hope that (new Nevada laws) could become the model for other states and the national model across the country,” Nevada Secretary of State Ross Miller said. “I think it’s really a positive piece of legislation.”
Other observers aren’t sure Nevada’s Legislature went far enough, though. They say it’s still too easy for both crooked and honest businesses to cloak their ownership and ties to corporations and limited liability companies registered in Nevada.
The new laws passed by the Legislature and signed into law by the governor will:
•Outlaw bearer stock certificates, which are not registered on the books of the issuing corporation and afford their holders all legal rights associated with a stock. Law enforcement officials have complained that the ability to hold stock in bearer certificate form made it hard to investigate illegal operations.
Bearer stock certificates differ from registered stock certificates, which are registered on a corporation’s stockholder register. Registered stock certificates are transferable only by endorsement; the issuing corporation will mail payments. Bearer stock certificates are negotiable without endorsement.
•Require business entities, other than those with publicly traded shares, to maintain ledgers identifying the owners of the businesses. The measure is designed to let companies keep their ownership records hidden from the public while allowing law enforcement agencies to obtain the list of owners for investigations.
•Make it easier for secretary of state to investigate securities fraud cases.
The law still permits:
•Corporations to use nominee officers and directors for business entities — although these straw men may have little or no connection with a company. Registered agents, who help businesspeople establish corporations, often list themselves or employees the officers and directors of companies and may even open bank accounts for the companies. In one instance, a registered agent firm hired homeless people for $10 to be listed as corporate officers and directors.
•Convicted felons to serve as registered agents. At least two Las Vegas registered agent operations have been operated by men who served federal prison sentences for wire fraud.
Miller said he is satisfied with the changes that the Legislature enacted and doesn’t want additional measures on corporate registrations. He singled out the requirement for ownership records as a key improvement. The law gives his office the authority to demand the identity of corporate owners from any company registered with the secretary of state’s office. If the ownership list is not provided within three days, Miller can revoke or suspend the corporation’s charter.
“They can’t hold it offshore or outside of the country where it can’t be subpoenaed,” Miller said.
A source close to law enforcement said the measure will often be unworkable.
By the time a criminal investigation begins, the source said, the individuals who formed the corporation may have disappeared. The registered agent may no longer know how to reach the business owners and officers. Once a bank account is open, the criminal enterprise probably no interest in keeping corporate filings current, the source said.
Another source close to law enforcement quipped: “Veiling the identity of ownership of Nevada corporations is akin to wearing a mask in a bank robbery.”
Law enforcement officers ultimately may be able to find criminals by tracing funds, but corporate secrecy makes the investigation more difficult, he said.
Martin Lobel, a Washington, D.C., attorney and former legislative aide to the late Sen. William Proxmire, D-Wis., opposes keeping ownership records secret from the public.
“The public should know who owns something. That’s why you have registrations,” Lobel said. “Why does Nevada want to be a center of activity for terrorists?”
The Legislature could have required owners identities to be filed confidentially with the state, but Miller objects to having ownership records maintained by his office.
Requiring his office to continually update corporate ownership records would make Nevada less attractive to businesses, he said. Pro-business allure is important, he added, given the $90 million in revenue the state collects yearly from businesses registering with his office.
Legitimate companies need to keep their ownership secret sometimes, Miller said. He said Walt Disney Co. would have been forced to pay huge sums for the Walt Disney World site in Orlando, Fla., if property owners had learned who was buying their land.
Corporate ownership isn’t the only controversial issue. The use of nominee directors and officers also angers critics of Nevada’s incorporation laws. Derek Rowley, president of the Nevada Resident Agents Association, a trade group for registered agents, defended the practice. He said it often works well for subsidiaries of large corporations.
“I’m not aware of any states that have prohibited agency nominee officers,” Rowley said.
Arizona, he noted, requires corporations to identify real officers, directors and major shareholders.
Rowley said his association wanted to require registered agents to get licenses and be overseen by a board. That would have enabled Nevada to prevent felons from serving as registered agents, but Rowley met opposition from the secretary of state, who didn’t want to share power with a board and large national registered agent companies.
The Legislature dropped the idea of a state board and licensing registered agents.
