With tensions ramping up on North Korea — there’s been a lot of concern recently about how secret shell companies can be abused to undermine economic sanctions and hinder own national security.
But, these same phantom companies — which disguise the proceeds of human traffickers and drug cartels — are also undercutting small businesses and destabilizing our economy.
Patent trolls routinely abuse fake shell companies to extort legitimate businesses. These vultures hide behind anonymous entities and make fabricated or inflated patent claims and threaten lawsuits against honest business owners. Small companies can be especially vulnerable to this sort of extortion, as we have fewer resources to fight back. Some businesses can scrounge up the money to challenge the claims, but others may be forced to pay exorbitant licensing fees or royalties.
Additionally, fraudsters set up anonymous shell companies to falsely compete for contracts they either have no intention of fulfilling or no business receiving. The federal government sets aside a number of contracts explicitly for small businesses and veterans, but, too often, larger companies, or those not owned by veterans, set up fake shell firms to bid on contracts for which they don’t actually qualify. A friend of mine with a small contracting business told me, “I’m sick and tired of losing contracts to con artists.”
Fake businesses are also regularly used to disrupt business supply chains. Seeking quality vendors and subcontractors is a major endeavor in the best of circumstances, and (while we all do our due diligence) the internet and modern technology are making it ever harder to truly know with whom you are doing business — particularly when they’re hiding behind anonymous shell companies with generic-sounding names. This is especially problematic for small businesses like mine, which have limited resources. Things slip through the cracks. One mistake, subcontracting to a fraudulent entity that runs off with the money and doesn’t deliver the services, can shutter a smaller company. And when police start probing, they hit a dead-end. Not even they can follow the money trail.
The problem is that — unlike in other developed countries — when you set up a company in the U.S., you don’t have to disclose any information about the real people who actually own the company. Delaware, Nevada, and Wyoming are the states that most people think of as problematic, but you can actually form an anonymous corporation to launder money with impunity in any state.
Indeed, a recent academic study found that America was the easiest country in the world for criminals to open anonymous companies to launder money.
This is ridiculous, and it needs to stop. For years, there has been bipartisan legislation that would require secretaries of state — the officials who incorporate companies at the state level — to collect this information at the time that companies are formed and keep it up to date. It didn’t go anywhere due to a lack of knowledge about the seriousness of the issue as well as opposition from state secretaries of state, who didn’t want to deal with the problem.
Things have changed. There is a new bipartisan bill in the House and Senate, the Corporate Transparency Act of 2017, that would have the federal government collect the information unless a particular state chooses to do it itself. This change should garner the support of Maine Secretary of State Matthew Dunlap.
Moreover, Rep. Bruce Poliquin holds a key vote on the U.S. House Financial Services Subcommittee on Terrorism and Illicit Finance, where committee leadership have made tackling the problem of anonymous companies a priority. Rep. Poliquin should step up to protect Maine businesses by co-sponsoring the legislation.