MSA Speaks Out: Sunlight is the Best Disinfectant in Government Contracting

On Friday, October 28, Main Street Alliance policy staffer Michelle Sternthal participated as a panelist in an event , sponsored by Transparency International,  to discuss the harm that anonymous shell companies cause in federal contracting. The other participants included Eryn Schornick, of Global Witness, Gavin Hayman of Open Contracting Partnership, and Chip Cottrell, representing the B-Team.  Over 60 individuals attended the lively and engaging event. 

An anonymous company is one that does no real business but is often used to hide people's identities and move or launder money.  In the United States, the I.D. needed to set up a corporation is less strict than obtaining a library card. You can set up an anonymous company easily, without having to disclose you own it and use your new company to open a bank account.  It is one of the most effective smokescreens for criminal, illegal, or predatory activities.

When asked why small business owners care about beneficial ownership, Sternthal highlighted the specific impact that these anonymous companies have on small business owners. She argued that anonymously-owned companies, or those whose owners are hidden, fuel corruption, and corruption distorts markets.  Shell companies win contracts on the basis of false promises, rather than legitimate competitive advantage. Sternthal cited one case where a couple created a string of anonymously owned companies and won U.S. government contracts by submitting extremely low bids. They then subcontracted to other businesses for the actual goods and services. The couple received the fees from the government but never paid the subcontractors.  They shut down their anonymous company and set up new ones, frustrating law enforcement investigations and creating new opportunities to repeat the scam.

She also noted one U.S defense contractor, who used his position to secure more than $1.1 million worth of contracts for a Tennessee-based company that he secretly owned, but his wife ran under her maiden name to hide their conflict of interest.  She also described how anonymous companies are used by patent trolls to file lawsuits, costing the companies they target $80 billion per year in lost profits and legal fees.  These lawsuits serve to squash innovation and harm fragile start-ups. Finally, shell companies are used to shift profits to tax havens overseas, avoiding taxes in the U.S. or other countries where they actually transact productive businesses. This puts small business owners, who pay their fair share, at a competitive disadvantage.

The panelists argued for the adoption of Open Contracting Principles and requiring the collection and publication of ultimate ownership information of any company bidding for government business. To truly stop the corruption; however, they all agreed that federal legislation requiring all companies to disclose beneficial ownership information is needed.