Panama Papers and State Responses

Joshua M. Twilley, President of Incorporating Services, Ltd. shares with us the following with regards to the Panama Papers.

The release of the Panama Papers has spotlighted the use of corporate entities for the purposes of hiding assets in offshore accounts. While relatively few US individuals or entities were named in the Panama Papers, the papers did cause states to look more carefully at their practices to see if they could be the next Panama.

Some states have been using best practices for years, and other states are just now beginning to adopt best practices. Other states, in the meantime, have seen the introduction of legislation designed to make beneficial owners public record. At the Federal level, the Office of Foreign Asset Control (OFAC) offers some guidance for registered agents, while there is some movement to federalize certain record keeping practices.

Delaware
Under the guidance of the Deputy Secretary of State, Rick Geisenberger, Delaware has been a leader in developing and implementing best practices. Delaware standards can be found here (https://corp.delaware.gov/agtwebreq.pdf), but in summary, professional registered agents must:

• Adhere to a high level of honesty and integrity; registered agents who have been  convicted of a felony or any crime which includes elements of dishonesty, fraud, or moral turpitude may may lose registered agent status
• Maintain a “Communications Contact” for every legal entity for which they represent
• May not market “shell”, “shelf” or “aged-shelf” companies
• May not market or make claim for offering “anonymity”, “secrecy” or “hidden owners”, or market deceptive or other services contradictory to the Delaware entity statues

Further, the Delaware Division of Corporations frequently conducts audits of it’s professional registered agent community to make sure these Standards are adhered to.

Wyoming
Twenty-four Wyoming entities were implicated in the Panama Papers, which resulted in discussion within the state on adopting best practices. Earlier this month, the Secretary of State, Ed Murray, published the results of an internal audit of its processes, and recommended two important practices. First, he recommended addressing the practice by registered agents of offering “secrecy”, “anonymity”, or “hidden owners”. Second, he proposed to disallow registered agents from being named as the communications contact for entities they represent. For a discussion of his methodology and recommendations, check out this summary: http://www.wyomingnews.com/opinion/murray-wyoming-business-laws-effective/article_ae326a6c-1f14-11e6-bb98-bf65271db2d8.html

Federal Level
The Office of Foreign Asset Control (OFAC) has specific guidelines governing the professional registered agent industry “Foreign Assets Control Regulations for the Corporate Registration Industry”. While these guidelines acknowledge the primary burden of asset control falls on the financial industry, it does lay clear expectations for organizations involved in the corporate registration process. Specifically, these organizations are not to do business with a sanctions target, and if there is a reason to be suspicious of an applicant, the organization should request further information to determine if they are working with a sanctions target, and if so, OFAC should be contacted. It should be noted that OFAC has recently removed these guidelines from it’s website, perhaps in anticipation of the new Federal guidelines as outlined in the next paragraph.

In early May, the Federal government issued two new sets of proposed regulations that give the Federal government authority to collect and track beneficial ownership information. The first would require business entities owned by foreign individuals to obtain an EIN, maintain adequate records, and file informational returns to the IRS (see http://www.cadwalader.com/resources/clients-friends-memos/in-wake-of-the-panama-papers-treasury-proposes-new-reporting-requirements-for-foreign-owned-legal-entities for a discussion). The second is final update to FinCEN rules which would require financial institutions to identify beneficial ownership and control of entity customers at the time of account opening, and conduct ongoing customer due diligence for high risk customers (see http://www.cadwalader.com/resources/clients-friends-memos/fincen-issues-final-rules-for-customer-due-diligence-requirements) . With the proposal and adoption of these rules, the Federal government is taking a leadership role in maintaining and tracking foreign ownership legal entities in the US.

For more information or to reach out to Josh, contact us at 302-531-0855 or info@incserv.com.