How Delaware Became the World’s Biggest Offshore Haven – Foreign Policy

Much like today, Delaware in the early 20th century wasnt known for a whole lot. The state maintained a small service sector and an even smaller industrial base. Without any real natural resources or tourist attractions, the state scraped by trying to leech business from those traveling between New York and Washington.

But just over a century ago, in the early 1910s, Delaware spied an opportunity.

In neighboring New Jersey, then-Gov. Woodrow Wilson took office pledging to clean up New Jerseys corporate sector, which had transformed the Garden State into the go-to destination for corporations across the country looking for protections and secrecy they couldnt find elsewhere. (Others referred to New Jersey as the traitor state, sucking up corporate taxes and fees other states suddenly lost out on.) Propelled by a reformist bent and concerned about who might be taking advantage of New Jerseys loose regulations, Wilson clamped down, forcing overdue regulations through. Corporate lobbyists decried Wilsons moves, but their calls were ignored.

Much like today, Delaware in the early 20th century wasnt known for a whole lot. The state maintained a small service sector and an even smaller industrial base. Without any real natural resources or tourist attractions, the state scraped by trying to leech business from those traveling between New York and Washington.

But just over a century ago, in the early 1910s, Delaware spied an opportunity.

In neighboring New Jersey, then-Gov. Woodrow Wilson took office pledging to clean up New Jerseys corporate sector, which had transformed the Garden State into the go-to destination for corporations across the country looking for protections and secrecy they couldnt find elsewhere. (Others referred to New Jersey as the traitor state, sucking up corporate taxes and fees other states suddenly lost out on.) Propelled by a reformist bent and concerned about who might be taking advantage of New Jerseys loose regulations, Wilson clamped down, forcing overdue regulations through. Corporate lobbyists decried Wilsons moves, but their calls were ignored.

Suddenly, those looking for lax corporate regulations had to turn elsewhereand they didnt have to look far. Just a few miles south stood Delaware, poised to capitalize on Wilsons decision and swipe the pro-corporate crown from New Jersey. Delaware, read one article in the American Law Review from the era, was gangrened with envy at the spectacle of the truck-patchers, sand-duners, clam-diggers and mosquito-wafters of New Jersey getting all the money in the country into her coffers. And the state was determined to get her little, tiny, sweet, round, baby hand into the grab-bag of sweet things before it [was] too late.

Delaware was perfectly placed to profit from New Jerseys decision. The state enjoyed many of the same geographic advantages New Jersey offered, situated between the United States financial and political capitals: New York and Washington. (Who wants to fly to Alaska [for corporate litigation]? one journalist wrote, highlighting Delawares prime location.) And while Wilson spooked corporate clients and pro-corporate interests with his pro-regulation reforms, Delaware did the opposite. As late Delaware Gov. Pete du Pont would later say, You cant trust the [Delaware] legislature to do a lot of things, but you can rely on it to keep the corporation law up to date.

The steps Delaware took effectively opened the doors for companies to relocate as easily as possible into the state, enticing them with new pro-corporate laws and protections. In addition to policies it had already borrowed from New Jersey and implementedincluding the ability to set up a company even if it never set foot in the stateDelaware soon began allowing corporations to reimburse directors for damages incurred if and when upset shareholders filed suit (invaluable protections as the United States grew more and more litigious). The state also soon began exempting corporations from state taxesmeaning a new Delaware companys only real connection to, or interaction with, the state came the moment the paperwork was filed.

With these new measures in place, corporations began racing to Delaware. By the 1920s, its position as a leader in the corporate race to the bottom was all but assured, with state legislators focused only on making corporations as happy as possible. Delaware, to steal a political science term, had been effectively captured: beholden to its corporate regime and the revenue coming in from the company-formation industry.

But there was also one other advantage Delaware maintained: anonymity. And toward the end of the Cold War, the state began marketing its anonymous shell companies to foreign officialsincluding rising kleptocrats growing in stature in their home countriesas a means of keeping their assets safe. These shell companies were effectively black boxes: They couldnt be tracked back to the foreign officials, increasingly flush with illicit wealth, who owned them, but those officials could still protect and control them. And Delaware was offering these shell companies to whomever wanted one. Thanks to these anonymous shell companies, the New York Times reported, Delaware officials found a way of making everybody rich in the state, regardless of the funds source.

Viktor Bout was one of the leading members of a long list of international crime lords who raced to Delaware, building out his operations with the anonymity the state provided. A scrawny, Tajik-born Russian national with a bushy mustache the size of a clipped cigar, Bout built an arms-trafficking empire amid the Soviet Unions collapse. (For a taste of Bouts murderous exploits, check out actor Nicolas Cages title character in the 2005 film Lord of War, which was based on Bout.)

With clients and partners from Central America to Central Asia and from warlords in sub-Saharan Africa to the Taliban, Bout was involved in nearly all of the major illicit arms transfers that took place in the 1990s and early 2000s. Fighter jets and anti-aircraft weapons, machine guns and machetes: The products didnt matter. All that mattered was moving merchandise to waiting clientsand making sure those investigating him, including U.S. officials, never uncovered the financial networks that facilitated his arms trafficking.

Nicknamed the Merchant of Death, Bout was eventually picked up in Thailand in 2008 and remains housed in a Supermax prison in Illinoisbut not before splattering nation after nation with bullets and blood. And as later court documents made clear, much of the butchery left in Bouts wake tracked directly back to anonymous shell companies, including two based in Delaware, right under the noses of U.S. officials who spent years trying to track him down.

But Bout was hardly the only globe-trotting criminal to turn to Delaware. Paul Manafort, the convicted (and now pardoned) former campaign chairman for former U.S. President Donald Trump, used multiple Delaware shells as part of a scheme to hide payments from foreign clients. Timothy Durham, nicknamed the Madoff of the Midwest for conning thousands of older investors out of hundreds of millions of dollars, centered his operations in Delaware. A Romanian accountant named Laszlo Kisswho once wrote a book (accurately) describing the United States as a tax havenapparently got a bit too familiar with his research and allegedly used a series of Delaware shell companies to help hide millions and millions of dollars.

The examples are too numerous to count. International criminals and crooked foreign officials, gun smugglers and rhino poachers, human traffickers and inside tradersall of them have taken advantage of Delawares friendly corporate environment. And these are just the examples we know about. As one lawyer said in 2017, Its not entirely beyond the realms of possibility that ISIS could be operating companiesand trust funds domiciled in Delaware.

All of which points to one clear, inescapable conclusion: As the most corporate-friendly state in the unionand the greatest fount of anonymous shell companies the world has ever seenDelaware has extracted blood from corporate stones.

Much of this was a direct outgrowth of policies implemented a century agoand, in that sense, was never predicated on necessarily transforming Delaware into an offshore haven or creating the tools that foreign kleptocrats and crooks would eventually need. But by the time postcolonial and post-Soviet regimes started opening up, the states offshoring infrastructure was already in place. And by the time the geysers of illicit wealth began spewing around the world toward the end of the 20th century, Delaware officials were perfectly happy to share the offshoring and anonymous services already in place, regardless of who ended up taking advantage.

And theres little evidence that Delaware ever cared much about who was taking advantage anyway. As one of Delawares official websites states, Delaware is not a secrecy haven, any more than any other state or the United States itselfwhich is telling, given the United States, itself, is a secrecy haven. The claim would be laughable if the states anonymous shell corporations hadnt been linked directly to the deaths of hundreds of thousands of people, the swindling of billions of dollars, and the looting of entire nations.

Just as Delaware once knocked New Jersey from its perch, other states watching Delaware rake in billions in corporate fees have begun putting forth their own financial secrecy reforms. These other states want to attract some of the capitalclean, dirty, it doesnt matterthat Delaware sponged up. And although they havent yet stolen Delawares crown, theyve begun carving out their own empires of financial anonymity.

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How Delaware Became the World's Biggest Offshore Haven - Foreign Policy