Corporate Shell Game

By this time, I am sure most of you have heard about the secrecy levels Nevada and particularly, Wyoming provide their corporate clients. What I am guessing few of you know is that Somalia (that grand bastion of free market capitalism) is home to greater levels of corporate transparency than Nevada and Wyoming.

As I sit back relax, while sipping on a Beck’s I look at where our financial system is going and I begin to see why increased regulation in markets is increasingly unavoidable. Notice, I do not condone. But I certainly understand. I also understand the need and desire to make money, but the way certain people go about doing it, definitely ruins it for those of us doing it the old fashioned way.

The pervasiveness of corporate secrecy on America’s shores stands in stark contrast to Washington’s message to the rest of the world. Since the September 11 attacks in 2001, the U.S. has been calling forcefully for greater transparency in global transactions, to lift the veil on shadowy money flows. During a debate in 2008, presidential candidate Barack Obama singled out Ugland House in the Cayman Islands, reportedly home to some 12,000 offshore corporations, as “either the biggest building or the biggest tax scam on record.

Yet on U.S. soil, similar activity is perfectly legal…. Convicted felons can operate firms which create companies, and buy them with no background checks. No states license mass incorporators, and only a few require them to formally register with state authorities. None collect the names and addresses of “beneficial owners,” the individuals with a controlling interest in corporations, according to a 2009 report by the National Association of Secretaries of State, a group for state officials overseeing incorporation. Wyoming and Nevada allow the real owners of corporations to hide behind “nominee” officers and directors with no direct role in the business, often executives of the mass incorporator.

This is dangerous territory, folks. Though the notion of a corporate jet setter with mass foreign assets and the Mark Rich lifestyle sounds sexy to most young financiers, the reality is starkly different. I have described my vigorous hatred for taxation and government intrusion into my fiscal affairs many times in my posts. That does not, however, mean that I don’t understand the need for regulation. Expanding on that thought, regulation should exist and definitely should be vigorous and perhaps, intrusive on the subject of transparency.

I would argue that transparency is perhaps the crucial feature governments must insure for investors, big and small if they hope to maintain fair and orderly markets. Without fairness and order, markets became slaughterhouses where the big eat the small and where minds are crushed by might.

The luxuries afforded by mass incorporators to some very murky potential investors are a great danger to all of us. Specifically those who make a living analyzing financial statements and projecting earnings. When a company allows itself to be a front for anyone who wishes to remain anonymous…bad shit starts to happen.

Regardless of how tempting it may be, do not get involved with people who do business this way. Do not invest in these sorts of companies and think long and hard the next time you are asked to value a company incorporated in Nevada and Wyoming. You never know how fudged the numbers might be.