What's the Matter with Delaware?

How the First State Has Favored the Rich, Powerful, and Criminal—and How It Costs Us All

Hal Weitzman

• Publisher: Princeton University Press
• Year: 2022
• ISBN:
  9780691185774
• Topic: Business
• Subtopic: Finance
• Index: Business

How the "First State" has enabled international crime, sheltered tax dodgers, and diverted hard-earned dollars from the rest of us The legal home to over a million companies, Delaware has more registered businesses than residents. Why do virtually all of the biggest corporations in the United States register there? Why do so many small companies choose to set up in Delaware rather than their home states? Why do wealthy individuals form multiple layers of private companies in the state? This book reveals how a systematic enterprise lies behind the business-friendly corporate veneer, one that has kept the state afloat financially by diverting public funds away from some of the poorest people in the United States and supporting dictators and criminals across the world.Hal Weitzman shows how the de facto capital of corporate America has provided safe haven to money launderers, kleptocratic foreign rulers, and human traffickers, and facilitated tax dodging and money laundering by multinational companies and international gangsters. Revenues from Delaware's business-formation industry, known as the Franchise, account for two-fifths of the state's budget and have helped to keep the tax burden on its residents among the lowest in the United States. Delaware derives enormous political clout from the Franchise, effectively writing the corporate code for the entire country—and because of its outsized influence on corporate America, the second smallest state in the United States also writes the rules for much of the world. What's the Matter with Delaware? shows how, in Joe Biden's home state, the corporate laws get written behind closed doors, enabling the rich and powerful to do business in the shadows.

1

Introduction

WILSON’S GIFT

John Cassara first became aware that Delaware was a problem around the turn of the millennium.

Commanding, chiseled, and intense, with a thatch of graying hair, Cassara spent twenty-six years investigating international drug traffickers, arms dealers, and terrorist cells for the US government.

Cassara began his career as a CIA operative in the late 1970s, recruiting spies in Angola and writing reports that often found their way into President Ronald Reagan’s daily CIA briefing. He went on to work for the Secret Service and then the US Customs Service. He went undercover to expose arms dealers trying to break the US trade embargo on apartheid South Africa. He worked with the Italian authorities to investigate money laundering by the Mafia. He worked in the Middle East, probing cases of fraud, intellectual property rights, smuggling, and high-tech crimes.

The United States at that time was a global leader in countering money laundering. In 1986, it became the first country in the world to make money laundering a crime, enacting a powerful law with tough penalties and extraterritorial reach and authorizing civil penalty lawsuits by the government.

These days, Cassara is widely recognized as an expert on the subject. He’s one of very few people to have been both an intelligence agent for the Secret Service and a US Treasury special agent. He’s testified to a string of congressional committees on complex issues such as alternative remittance systems and trade-based money laundering.

In the late 1990s, he was working back in Washington at the US Treasury, in the Financial Crimes Enforcement Network (FinCEN), a somewhat obscure department that had been established a decade earlier to help detect, investigate, and prosecute domestic and international money laundering and other financial crimes. Cassara toiled away in FinCEN’s small international division, tasked with cooperating with similar agencies in other countries to investigate financial wrongdoing.

In 1995, the United States joined the Egmont Group, an alliance of these agencies from 152 countries that have pledged to share their expertise and financial intelligence to combat money laundering and terrorist financing. The group took its name from the location of its founding meeting: the Egmont Arenberg Palace, an elegant sixteenth-century mansion in Brussels that hosted the fencing events for the 1920 Summer Olympics. Today the palace houses Belgium’s Ministry of Foreign Affairs.

FinCEN, which employs a few hundred people, takes in financial intelligence such as currency transaction reports, analyzes that information, and distributes it for law enforcement purposes. The agency shares the information with its colleagues in the Treasury, with other US government departments such as the FBI and the Drug Enforcement Agency, and with states and municipal authorities.

As part of its commitment as an Egmont Group member, FinCEN also shares information with foreign governments, if it’s working on joint investigations with them. Cassara recalls fielding calls from his law enforcement counterparts in other countries who were on the trail of suspects in a terrorist investigation or a money-laundering probe. When the trail led to the United States, the foreign agency would ask Cassara if FinCEN could supply information to help their investigation. Cassara wanted to help, but often he couldn’t. There was no information to be had.

Cassara knew there was no point in even asking. “Every time that happened, we would have to say, ‘There is nothing we can do,’” he recalls. “These weren’t isolated incidents. This happened repeatedly, on multiple cases. There were so many that I can’t even remember which the first one was, the first time I ever heard about it.”¹

One dead end that Cassara and his colleagues frequently ran up against was the US state of Delaware. The process of creating a company in Delaware didn’t require any information to be collected about the real, individual owners of companies—what lawyers call the “beneficial owners.” Even if Cassara had secured permission from Delaware authorities to pursue the investigation, he would not have been able to find any useful information.

His department would go through the motions. They knew they couldn’t get anything out of Delaware, but they would search their databases to see what they could find—information in the public domain or on commercial databases. It was rarely sufficient or particularly useful, and it made Cassara feel both irritated and embarrassed. “We’d write it up and send it back to them saying, ‘We’re sorry, we can’t get anything out of Delaware. We can’t answer your specific question, but we do have a little bit of additional information.’ We would always try to give them something, but far too often, the answer was, ‘There’s nothing in the database. We can’t assist.’ They were frustrated and we were frustrated.”

After Cassara left the federal government in 2005 he went around the world, training financial crime investigators in dozens of countries about money laundering and terrorist financing. During these presentations, Cassara would share his expertise and show the officials how to “follow the money.” When there was a break, one of the local officials would invariably approach him, Cassara recalls. “They’d come up to me and say, ‘Mr. John, we’re working on a money-laundering case in my country, and the trail goes to this place in the United States called Delaware. Have you heard of it?’ I’d nod, and they’d say, ‘Can you help us follow the money?’ It was extremely embarrassing. I was going out there telling them how to follow the money trail, kind of criticizing what they’re not doing, and then they’d just throw it right back in my face, very politely of course. It underlined how hypocritical it was of the United States to preach to others when we didn’t clean up our own mess.”

Eventually, Cassara gave vent to his frustrations in a blistering op-ed in the New York Times in 2013. Delaware and a few other states allowed companies to wrap themselves in multiple cloaks of anonymity, Cassara argued, and had “become nearly synonymous with underground financing, tax evasion and other bad deeds facilitated by anonymous shell companies.”²

That wasn’t just speculation.

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The first thing you notice is the lighthouses. You can’t miss them on the way into Rehoboth Beach, a community on the Atlantic Coast in southern Delaware, about a 100-mile drive down the coast from Wilmington. The lighthouses are decorative rather than cautionary, adorning shopping malls and traffic signs. Rehoboth Beach is a typical seaside town—heaving in the summer, dead in the winter. It’s about one square mile, with lots of trees almost all the way to the shore. Its main street is dotted with restaurants, bars, and curiosity shops selling shells and assorted maritime tchatchkes.³

The 1,400 or so permanent residents of Rehoboth Beach are a somewhat mixed bunch. Not racially—the town is overwhelmingly white—but they do include retired Midwesterners, assorted beach bums and hippies, middle-aged gay couples, and Tom Larson, imperial wizard of a Ku Klux Klan affiliate organization called the East Coast Knights of the True Invisible Empire.⁴

The town is particularly popular with the politicians, their staff, and lobbyists who work on Capitol Hill, roughly two hours away if you don’t get stuck in a weekend traffic jam. In 2001, top Republican lobbyists Jack Abramoff and Michael Scanlon established what was billed to clients as a “premiere international think tank” with the generically pompous title the American International Center. Scanlon asked two of his childhood friends to run it: Brian Mann, a yoga instructor, and David Grosh, a lifeguard. They operated out of a small house at 53 Baltimore Avenue, across the street from the yoga studio where Mann worked and two blocks from the beach.

Neither Mann nor Grosh was qualified to run a think tank. In a 2005 Senate hearing, Grosh recalled his initial conversation with Scanlon, who he said had asked him, “Do you want to be head of an international corporation?” It was a proposal Grosh said was “a hard one to turn down,” particularly after “I asked him what I had to do, and he said ‘Nothing.’ So that sounded pretty good to me.”⁵

The think tank on the beach was part of Abramoff and Scanlon’s scheme to steal millions from the Native American tribes who were their clients. This involved tribes paying money to the American International Center and other shell companies, which, in turn, paid money to Abramoff and Scanlon. The American International Center paid Abramoff about $1.7 million in lobbying fees from 2001 through 2003. Grosh got free accommodation in the beach house and $3,000 in cash. Mann did better, scoring four lavish trips to the Caribbean island of St. Barts, paid for by Scanlon. Meanwhile, Abramoff and Scanlon each bought luxury real estate in Rehoboth Beach.

In 2005, Scanlon agreed to testify against Abramoff, pleaded guilty, and was ordered to repay $20 million to his former clients. Abramoff was found guilty the following year and sentenced to six years in federal prison. In 2010, Abramoff’s story was made into a feature film, Casino Jack. Barry Pepper played Scanlon. Kevin Spacey played Abramoff.

The scandal was merely one in a string of international criminal and otherwise dubious activities—some illegal, some strictly legal but less than ethical—linked to Delaware in the first two decades of the twenty-first century.

There were US political scandals. In 2018, Paul Manafort, the flamboyant and vain former campaign chairman for ex-president Donald Trump, was convicted on eight counts of hiding millions of dollars in foreign accounts to evade taxes and repeatedly lying to banks to obtain multimillion-dollar loans. Manafort’s scheme was conducted using sixteen companies, nine of them registered in Delaware. The same year, Michael Cohen, Trump’s bungling former lawyer and fixer, was convicted of campaign finance violations, tax fraud, and bank fraud. Cohen had become a household name when he was revealed to have tried to pay adult movie star Stormy Daniels $130,000 to keep quiet about an alleged affair with Trump, via a limited liability company he formed in Delaware. Cohen used another Delaware LLC to pay $120,000 to former Playboy Playmate Karen McDougal to buy her silence.

There were domestic and international corporate scandals.⁶ Jeffrey Skilling, Kenneth Lay, and Andrew Fastow, the most senior executives at Enron, perpetrated one of the biggest frauds in US corporate history using a sprawling, twenty-three-state network of two thousand corporate subsidiaries, 685 of which were registered in Delaware. In 2016, LAN, the Chilean airline, was found guilty of concealing bribes to Argentine labor union bosses by using a Delaware LLC.

There were cases of international kleptocracy and dirty-dealing. Malaysian officials used eight companies in Delaware to steal billions of dollars of public funds, some of which were used to produce the 2013 Hollywood movie The Wolf of Wall Street. Frederick Chiluba, Zambia’s second president, siphoned at least $25 million from the impoverished African country, using a company registered in Delaware to help hide the money. In 2015, the government of the United Arab Emirates looked for hitmen to assassinate its political opponents in nearby Yemen. It hired Spear Operations Group, a company of mercenaries registered in Delaware.

There were cases involving the trafficking of arms, drugs, and people. In 2011, Viktor Bout, an international arms trafficker known as the “Merchant of Death,” was convicted of conspiring to kill US citizens and officials, delivering anti-aircraft missiles, and aiding terrorists. He disguised the profits from his weapons sales in part with at least two businesses registered in Delaware. Meanwhile, Serbia’s most feared crime bosses, Luka Bojović and Darko Šarić, laundered proceeds from their narcotrafficking empire through two companies registered in Delaware. In 2018, US federal agents raided the homes of the owners of Backpage, a Dutch classified ads website that served as a front for child sex trafficking. The company’s US operations were registered in Delaware.

Delaware wasn’t the exclusive US home of wrongdoing, domestic or international. Viktor Bout, for example, used ten companies registered in Texas and Florida. Paul Manafort set up companies in Virginia, Florida, and New York. Frederick Chiluba had a company registered in Virginia.

But often when misconduct was exposed, there was a connection to a company registered in Delaware. What was it that attracted shadowy political operatives, sketchy lawyers, fraudulent lobbyists, hitmen for hire, thieving foreign officials and kleptocratic leaders, arms smugglers, international ...