Delaware haven for corporate America

WILMINGTON, Del. -- Nothing about 1209 N. Orange St. hints at the secrets inside. It's a humdrum office building, a low-slung affair with a faded awning and a view of a parking garage. Hardly worth a second glance. If a first one.

But behind its doors is one of the most remarkable corporate collections in the world: 1209 N. Orange is the legal address of no fewer than 285,000 separate businesses.

Its occupants, on paper, include giants like American Airlines, Apple, Bank of America, Berkshire Hathaway, Cargill, Coca-Cola, Ford, General Electric, Google, JPMorgan Chase, and Wal-Mart. These companies do business across the nation and around the world. Here at 1209 N. Orange, they simply have a dropbox.

What attracts these marquee names to 1209 N. Orange and to other Delaware addresses also attracts less-upstanding corporate citizens. For instance, 1209 N. Orange was, until recently, a business address of Timothy S. Durham, known as "the Midwest Madoff." On June 20, Durham was found guilty of bilking 5,000 mostly middle-class and elderly investors out of $207 million. It was also an address of Stanko Subotic, a Serbian businessman and convicted smuggler -- just one of many Eastern Europeans drawn to the state.

Big corporations, small-time businesses, rogues, scoundrels, and worse -- all have turned up at Delaware addresses in hopes of minimizing taxes, skirting regulations, plying friendly courts or, when needed, covering their tracks. Federal authorities worry that, in addition to the legitimate businesses flocking here, drug traffickers, embezzlers, and money launderers are heading to Delaware too. It's easy to set up shell companies here, no questions asked.

"Shells are the No. 1 vehicle for laundering illicit money and criminal proceeds," said Lanny A. Breuer, assistant attorney general for the criminal division of the Justice Department. "It's an enormous criminal justice problem. It's ridiculously easy for a criminal to set up a shell corporation and use the banking system, and we have to stop it."

In these troubled economic times, when many states are desperate for tax dollars, Delaware stands out in sharp relief. The First State, land of DuPont, broiler chickens and, as it happens, Vice President Joe Biden, increasingly resembles a freewheeling offshore haven, right on America's shores. Officials in other states complain that Delaware's cozy corporate setup robs their states of billions of tax dollars. Officials in the Cayman Islands, a favorite Caribbean haunt of secretive hedge funds, say Delaware is playing faster and looser than the offshore jurisdictions that raise hackles in Washington.

More international bodies, most recently the World Bank, are pointing fingers at the state.

Of course, business -- the legal kind -- has been the business of Delaware since 1792, when the state set up its Court of Chancery to handle business affairs. By the early 20th century, the state was writing friendly corporate and tax laws to lure companies from New York, New Jersey, and elsewhere. Most of the businesses incorporated here are legitimate, and many are using all legal means to reduce their tax bills.

President Obama has criticized outposts like the Caymans, complaining that they harbor giant tax schemes. But here in Wilmington, just a little more than 100 miles from Washington, is in some ways the biggest corporate haven of all. It takes less than an hour to incorporate a company in Delaware, and the office of its secretary of state stays open until midnight Monday through Thursday -- and until 10:30 p.m. Friday.

Nearly half of all public corporations in the United States are incorporated in Delaware. Last year, 133,297 businesses set up here. And, at last count, Delaware had more corporate entities, public and private, than people -- 945,326 to 897,934.

One Delaware company was used last year to make an anonymous $1 million donation to Restore Our Future, a super PAC backing Mitt Romney for president. Restore Our Future disclosed that the money came from a former Bain Capital executive. The Romney campaign declined comment, and Restore Our Future did not return calls.

State bonanza

Delaware's tax laws are a bonanza for the state. At a time when many states are being squeezed by a difficult economy, Delaware collected roughly $860 million in taxes and fees from its absentee corporate residents in 2011. That money accounted for a quarter of the state's budget.

"Companies choose our state and we are proud of it," said Richard J. Geisenberger, Delaware's chief deputy secretary of state and its leading ambassador to business.

"We spend a lot of time in the United States and traveling internationally to let people know that Delaware is a great place to do business," he said.

It is also a great place to reduce a tax bill. Delaware today regularly tops lists of domestic and foreign tax havens because it allows companies to lower their taxes in another state -- for instance, the state in which they actually do business or have their headquarters -- by shifting royalties and similar revenues to holding companies in Delaware, where they are not taxed. In tax circles, the arrangement is known as "the Delaware loophole."

Over the last decade, the Delaware loophole has enabled corporations to reduce the taxes paid to other states by an estimated $9.5 billion.

State lawmakers in Pennsylvania are trying to close the loophole, arguing that their state is being robbed of its tax dollars.

Of particular concern is that many companies involved in drilling for natural gas in the Marcellus Shale region of Pennsylvania are, in fact, incorporating in Delaware instead.

"Delaware is an outlier in the way it does business," said David E. Brunori, a professor at George Washington Law School and an expert on taxation. "What it offers is an opportunity to game the system and do it legally."

The Organized Crime and Corruption Reporting Project, an international group based in Sarajevo, has identified Eastern Europeans with Delaware links. Among them is Laszlo Kiss, a Romanian accountant and author of United States, Tax Heaven -- Uncle Sam Will Fight Your Taxes! that praised the state's lax rules. He is awaiting trial in Bucharest on charges of helping embezzle and launder $10 million through Delaware shells.

"Delaware is the state that requires the least amount of information," says David Finzer, the chief executive of Capital Conservator, a registration agent that sets up accounts in Delaware and elsewhere for non-U.S. citizens. "Basically, it requires none. Delaware has the most secret companies in the world and the easiest to form."

That is exactly what troubles law enforcement agencies and some in Congress who are trying to rein in Delaware. The state is seen as an onshore alternative with regulations more lax than such well-known offshore tax havens as the Isle of Man, Jersey, and the Caymans, which require greater disclosure.

Even more, a Delaware registration allows a business, legitimate or not, to open a bank account anywhere in the world with the patina of a U.S. address.

Opposition

For years, Sen. Carl Levin (D., Mich.), has been leading a quixotic effort to adopt legislation that would require states to collect information on the "beneficial ownership" of companies incorporated within their borders.

That would require states to add the name of the person standing behind the corporation -- its beneficial owner -- on incorporation papers.

Law enforcement agencies, human rights groups, and the administration are on his side. Last month, a letter backing Mr. Levin's measure and signed by 41 groups was sent to every member of Congress.

But that has been no match for the opposition. Most vocal is the National Association of Secretaries of State, a politically powerful group. It is backed up by the Chamber of Commerce, the American Bar Association, and the state of Delaware, which is the lone state to have hired a lobbyist to work on the matter.

The secretaries of state, along with Delaware, argue that the Levin measure would be costly and burdensome, and would discourage business incorporation and capital formation.

They add that their offices are generally ill-equipped to process the additional data that would be required. Even more, determining beneficial ownership may not be a simple matter.

Mr. Geisenberger, the chief deputy secretary of state of Delaware, said of the Levin measure: "This would be a massive inhibitor to starting a business. It would end up taking weeks or months to get a business started.

"And I think a lot of them would move underground and into the black market and just not form a legal entity."