What do we really know about the Delaware Division of Corporations, other than it is a one billion dollar revenue machine that manages the incorporation process in a state that is commonly referred to as the most secretive tax haven in the world?
As it turns out, not very much.
The Delaware Call’s months-long investigation has revealed that the Division of Corporations, a public agency within the Delaware Department of State, operates as a fortress designed to shield from scrutiny both its internal operations and details about the roughly 1.5 million businesses incorporated in Delaware.
According to Freedom of Information Act responses, correspondence with employees of the Division of Corporations, conversations with lawmakers, and documents shared with the Delaware Call, the result can only be described as a firewall separating the information held by a public agency from the citizens to whom that information rightfully belongs.
Delaware’s Incorporation “Industry”
In Delaware, the incorporation business is booming. In the past two years, more than 200,000 new business entities have formed in the First State, or about 550 daily, according to reports published by the Division of Corporations. In 2009, only 100,000 business entities were formed annually. Now, there are more businesses registered in Delaware than there are residents.
The Division of Corporations charges Limited Liability Corporations (LLCs) and Limited Partnerships an annual $300 Franchise Tax, and corporations pay anywhere from $225 to $200,000 based on the number of authorized shares the company has. These taxes have little to nothing to do with the operation or assets of the companies. The Secretary of State collects the fees to allow these entities to exist and asks few, if any, questions. Filing the appropriate paperwork and these annual payments are all that are required to maintain “good standing” in the state of Delaware.
The mountains of cash collected through the Division of Corporations account for more than one-quarter of the State’s revenue, according to the most recent budget presentation from the office of Governor John Carney. Totaling $1.3 billion in the 2018 fiscal year, it is second only to personal income taxes–a very close second. All the taxes and fees collected by the Division of Corporations contribute to the relatively light tax burden of Delaware as compared to other states.
However, annual reports issued by the Secretary of State offer little insight into the corporations that fill the state’s coffers. Beyond a handful of impressive numbers, the reports are essentially marketing materials touting “strong growth” in corporate filings, the “near-record pace” of new corporations, and “another record year for Delaware’s incorporation industry.” The 2015 annual report begins with the headline, “Serving Delaware and the World.”
“The Most Secretive Tax Haven in the World”
While the incorporation business boomed, the state’s laws became targets of criticism, including charges that Delaware is a corporate tax haven that enables both legitimate businesses and criminals to hide money through anonymous shell companies, Critics assert this has led to all sorts of nefarious activities from money laundering to human trafficking.
Most companies exist in Delaware on paper only. Of the 1.5 million businesses currently registered here, including 90 percent of Fortune 500 companies, 250,000 are housed at a single address in downtown Wilmington–1209 North Orange Street, home to Apple, American Airlines, Coca-Cola, and Walmart, among others.
The general wisdom is that businesses choose Delaware because of our business-friendly incorporation laws, which allow the formation of anonymous LLCs, and allow what is known as the “Delaware loophole.” The loophole permits companies to shift earnings from other states to Delaware, “where they are not taxed on non-physical incomes generated outside of the state,” such as trademarks.
According to data provided to the Delaware Call, LLC registrations have surged since 2009, doubling from 519,940 entities to 1,035,872 today. However, numerous corporations and LLCs registered in Delaware have been linked to notorious crimes, including a scheme involving eight companies and the Hollywood producer of The Wolf of Wall Street to embezzle hundreds of millions of dollars from the Malaysian government. Michael Cohen used a Delaware LLC to pay $130,000 in “hush money” to Stormy Daniels in an attempt to influence the outcome of the 2016 presidential election. During the 2017 FBI investigation of Paul Manafort, it was revealed that Trump’s former campaign manager was connected to a Delaware LLC that received more than $27 million in loans from entities linked to Russian oligarchs. An LLC once known as the “world’s top online brothel” was registered in Delaware and evidence linked the site to “nearly three-quarters of the 10,000 child-trafficking reports received annually by the National Center for Missing and Exploited Children.”
The barrage of negative headlines began in the early 2000s when the FBI, along with international anti-corruption groups, grew more outspoken about the difficulty of tracing criminal activity through the complex network of anonymous shell corporations permitted under Delaware law.
In 2000, the Government Accountability Office revealed that one person associated with Russian entities was able to establish more than 2,000 shell corporations in Delaware, without disclosing the identity of a single “beneficial owner.” This person then opened bank accounts in the United States for those corporations, which were used to move $1.4 billion out of Russia and Eastern Europe. In 2008, based on the findings of this report, Senator Carl Levin of Michigan called on Congress to enact stricter guidelines that would prevent LLCs registered in places like Delaware and Wyoming from operating anonymously.
Delaware fought back. Secretary of State Jeffrey Bullock enlisted the help of a lobbying firm to build opposition to the bill, according to Reuters. When the bill came before the Homeland Security and Government Affairs Committee, Senator Tom Carper testified against it.
The bill died in committee and nothing came of Levin’s efforts. In the introduction to the 2013 Incorporation Transparency and Law Enforcement Assistance Act, the GAO report from 2000 was cited as “one of the earliest government reports to give some sense of the law enforcement problems caused by U.S. corporations with hidden owners. The alarm it sounded years ago is still ringing.”
Freedom of Non-Information
Despite the gravity of the problem, Delaware has done little to reform its incorporation industry. The 2017 rule that requires “all commercial agents representing more than 50 business entities to conduct quarterly checks, comparing their lists of existing clients against a federal sanctions list updated by the Treasury Department’s Office of Foreign Asset Control,” does little to address the root of the problem, according to a report in The News Journal.
However, the state has taken steps to ensure that as little information as possible regarding the Division of Corporations is shared with the public. Of all the FOIA requests submitted between January 2019 and December 2020, nearly every request that asked for more information than what appears in the annual reports or is available on the website was denied, according to the agency’s FOIA logs.
On November 13, 2020, the Delaware Call filed a FOIA request with the Division of Corporations, asking for “a copy of any remarks prepared by or for agents of the Division of Corporations and the Office of the Secretary of State, including Secretary of State Jeffrey Bullock, that were delivered during the annual Executive Strategic Planning Conference held on Wednesday, October 28 and Thursday, October 29, 2020.” This annual conference is a cordial meeting between the Division of Corporations and agents who file paperwork on behalf of corporations and individuals looking to incorporate in Delaware.
A spokesperson for the Division of Corporations responded, “There are no documents or records responsive to your request.”
A confidential source has since provided the Delaware Call with the meeting minutes prepared by the Division of Corporations which appear to include remarks by agency employees. The Delaware Call has filed an ethics complaint with the Delaware Department of Justice against the Division of Corporations for their handling of that FOIA request.
The agency was asked to give an on-the-record explanation regarding the main topic of discussion at the conference. According to the meeting minutes, there was a proposed rule change that would require LLCs to file annual reports that divulge information about company ownership. A spokesperson responded, “What was discussed during the conference, and in a subsequent discussion as a follow-up, was that in light of the recent passage of the federal [National Defense Authorization Act],” which included the Corporate Transparency Act outlawing anonymous shell corporations, “the State is no longer looking to require annual reports from LLCs.”
When asked if the agency’s explanation was factual, a confidential source with knowledge of the event said, “Not really.” According to that source, “At the time of the meeting, the plan was to require annual reports.”
The meeting minutes also hint at why reform has been so difficult in Delaware. During a group discussion, commercial agents pushed back on talk of new rules regarding shell corporations. “Shell Companies have a daily legitimate purpose for these complex restructuring and financing deals that we want to take place in Delaware,” and that the real answer is not reform, but rather, “to educate the legal community.”
Data Requests Denied
Much of the information held by the Division of Corporations is shielded from disclosure under an obscure amendment to Delaware’s Freedom of Information Act, according to conversations with officials employed with the office of the Secretary of State. An agency spokesperson cited a subsection of the General Corporation Law, Delaware Code Title 8 §391(c), which supposedly exempts the agency from sharing “bulk data, digital copies of instruments, documents and other papers, databases or other information.” The Delaware Call has been unable to verify if the Division of Corporations is the only public agency with such a unique FOIA exemption.
“Boiled down,” the spokesperson elaborated via email, “this means that [the Division of] Corporations only issues copies of records when the request is associated with a specific file number, not bulk requests.” Those requests would also include a $10 fee per document produced, with an additional charge of $2 per page after the first page.
The bulk data FOIA exemption is a relatively young and obscure addition to the Delaware code. The language was added in a 2015 amendment to the General Corporation Law and was co-sponsored in the state Senate by Bryan Townsend and Margaret Rose Henry, and in the House by Melanie Smith and Sean Lynn. Additional sponsors included Republican senators Colin Bonini, Cathy Cloutier, and Greg Lavelle.
The amendment updated the Delaware code to, in some ways, reflect twenty-first-century realities. References to “microfiche” were deleted along with the microfiche reproduction fee. Following that, lawmakers added language laying out the agency’s responsibility regarding open records laws:
“…and in no case shall the Secretary of State be required to provide copies (or access to copies) of such public records (including without limitation bulk data, digital copies of instruments, documents and other papers, databases or other information) in an electronic medium or in any form other than photocopies or electronic image copies of such public records…”
The Division of Corporations cites this section of the Delaware Code to refuse all bulk data requests, according to the agency’s internal logs of incoming FOIA requests.
Many FOIA requests submitted by The Delaware Call for data held by the Division of Corporations have been unsuccessful, with agency officials citing the bulk data exemption in the General Corporation Law as grounds for refusal.
When The Delaware Call asked for documents related to the total number of certain types of businesses incorporated in Delaware, the Division of Corporations again referred us to the annual reports archived on the website, where the requested information could not be found. (The Division’s annual reports only include a breakdown of new corporations, not total.)
Another agency spokesperson said, “Anything beyond what is published [in the annual reports] is considered ‘bulk’.”
Subsequent FOIA requests for documents that may have been generated in the creation of the annual report, including spreadsheets, PDFs, or other printed documents, were denied because “no responsive records” were held by the agency, leaving one to believe that these reports manifest out of thin air.
A request asking for the total number of foreign corporations registered in Delaware was also denied, citing the bulk data exemption, even though The Delaware Call was asking for a number, not the data itself. This would appear to be an easy request to accommodate, as the agency requires a specific form and additional filing fee for foreign corporations.
But does the language actually exempt bulk data from FOIA requests? Or does it merely exempt the sharing of electronic data files? Should the agency, for example, be required to provide that same information in other forms, like PDFs?
When asked if the amendment exempts bulk data entirely, as the agency suggests, or if it merely exempts the sharing of electronic data files, as The Delaware Call suggests, Senator Bryan Townsend replied, “The spirit of the 2015 legislation was to exempt from FOIA the various kinds of voluminous, commercially-focused information that Delaware maintains due to its preeminent position as the leading state of incorporation, and from which Delawareans derive significant tax relief. If there is uncertainty about how the law is intended to, should, or does operate, I would support an amendment to clarify.”
Indeed, the agency’s interpretation of the law has some lawmakers crying foul. In an interview with The Delaware Call, state Representative John Kowalko reprimanded the agency for its secrecy.
“The Secretary of State and Division of Corporations are manipulating the language of the law to make it much more difficult to get information,” says Kowalko, adding that Delaware, as the country’s leading incorporation hub, should be setting a good example. “If we set the trend, that’s the way the trend will follow across the country, and I believe that the Division of Corporations is deliberately avoiding responsibility to be more accessible by erecting obstacles to discourage legitimate citizen oversight.”
(image source: The Delaware Call)