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Financial Giants Are Moving Jobs Off Wall Street
By NELSON D. SCHWARTZ
New York’s biggest investment houses are shifting jobs out of the area and expanding in cheaper locales in the United States, threatening the vast middle tier of positions that form the backbone of employment on Wall Street.
The shift comes even as banks consider deeper staff cuts here, which could undermine the state and city tax base long term.
“Places like New York or London will remain financial centers, but most of the players are taking a much harder look and asking whether they can move large numbers of jobs,” said James Malick, a partner at the Boston Consulting Group who advises banks on relocation. In addition to higher taxes in the New York region, employers face real estate and labor costs significantly above the national average.
Consultants say they have seen a sharp pickup in this trend, known as near-shoring, as opposed to offshoring overseas. Goldman Sachs, during a presentation to investors in late May, even boasted of the cost savings that relocating jobs can bring.
“Some functions need to stay in the United States, but they don’t need to be in New York City or near the client,” Mr. Malick said. And with most investment giants facing anemic revenue and more stringent regulation that cuts into trading revenues, relocation is more tempting than it was before the financial crisis.
Low-level jobs have already migrated to call centers and back offices overseas, while top-end traders and bankers are secure in the New York area, experts say. Instead, services like accounting, trading and legal support, and human resources and compliance are being shifted to places like Salt Lake City, North Carolina and Jacksonville, Fla.
Garry Douyon enjoyed his job helping process trades and working with clients and traders at RBS in Stamford, Conn., earning nearly $100,000 a year, but when the firm decided last fall to move his team to Salt Lake City with a salary of $60,000, he said he really didn’t have much of a choice.
“I didn’t even consider moving,” said Mr. Douyon, who founded a biofuels company, All-City Clean Energy, in Brooklyn with four partners. “I liked RBS but I have my roots here, I have a home, I have kids in school.” A few members of his team decided to go, he added, but most chose to stay in the New York area.
The potential shift has profound implications for New York’s tax base and economy because of Wall Street’s outsize financial profile. Last year, the industry contributed 14 percent of New York State’s tax revenue.
After peaking at 213,000 in August 2007, securities industry jobs in the state fell more than 15 percent in the wake of the financial crisis, according to the Bureau of Labor Statistics. Since then they have risen nearly 12,000, but at 191,200, employment is well below pre-crisis levels. By contrast, over the same period, Delaware gained 1,300 securities jobs while Arizona picked up 2,600.
The federal government does not specifically track securities jobs in Utah, North Carolina or Florida, popular locations for near-shoring. But data from firms illustrates the trend.
Since the end of 2009, Deutsche Bank’s work force in the New York area has fallen to 6,900 from 7,400 even as its staff in Jacksonville rose to 1,000 from 600. Credit Suisse’s staff in the New York region has dropped by 500 in the past four years, but the firm has added 450 positions in North Carolina’s Research Triangle, in the area of Raleigh, Cary, Durham and Chapel Hill. And last year, Bank of New York Mellon cut 350 jobs in New York City while hiring 150 people in Lake Mary, Fla.
New York’s status as a financial capital is not likely to fade, and the state’s share of securities jobs in the United States has held steady at about 24 percent in recent years. “Even as the securities industry goes through a difficult time, New York remains the financial capital of the world and I don’t see that changing anytime soon,” said Thomas P. DiNapoli, the New York State comptroller.
But regional offices perform more and more of the sophisticated work usually associated with Wall Street and nearby trading hubs like Jersey City and Stamford. This parallels a shift in some technology jobs away from Silicon Valley to Portland, Ore., and cities in Texas, said Michael Shires, a professor at the School of Public Policy at Pepperdine, who prepares an annual ranking of the best cities for employment.
“I expect to see an acceleration,” he said, noting that while these middle-tier jobs may lack the salaries and glamour usually associated with Wall Street, “these are the support people that actually make the stuff work.” What’s more, there are many more positions in the middle of the jobs pyramid at Wall Street firms than at the top.
Deutsche Bank’s office in Jacksonville started out in 2008 as a back-office service center, according to bank officials. Since then, technology workers, legal and compliance staff members, and trading support jobs have been added. More recently, some traders who deal directly with clients are being located there. Lower costs and taxes are behind the moves, the officials said.
J. Keith Crisco, the North Carolina secretary of commerce, visits New York three to five times a year, meeting with executives from firms already in North Carolina, like Credit Suisse, while reaching out to prospects. Another trip is planned this month.
North Carolina provided Credit Suisse with roughly $14 million in incentives to bring it to the state.
Delaware, which announced in April it had lured up to 1,200 JPMorgan Chase jobs to the state, is set to pay the giant bank $10.1 million in cash incentives. Alan Levin, director of the Delaware Economic Development Office, estimates the typical salary for those jobs at $78,000 a year.
“These jobs will be here for a long time,” he said. “We want to create not just jobs but careers.”
The erosion of middle-tier jobs in the financial sector is not limited to New York. In a presentation to analysts in late May, the president of Goldman Sachs, Gary Cohn, described what he called the firm’s “high-value location strategy.” By looking outside hubs like New York, London, Tokyo and Hong Kong, he said, the firm could save 40 percent to 75 percent on job-related expenses.
Over a third of Goldman hires in 2011 and 2012 have been in cities like Bangalore in India, Salt Lake City, Dallas and Singapore, Mr. Cohn said. Utah, with looser regulation and lower taxes than New York, has been a particular area of growth for Goldman.
While Goldman’s work force in the New York area has been flat since the end of 2009 at just over 10,000, full-time employees in Salt Lake City have doubled to 1,400, making that office Goldman’s sixth-largest globally. In addition to its technology and operations staff, Goldman has expanded activities like research and investment management there.
These days, Mr. Douyon is building a refinery at the Brooklyn Navy Yard that aims to make biodiesel from waste products like vegetable oil and grease from restaurants. While he says it is a more flexible way of life and, he hopes, more lucrative, he still feels the tug of the trading floor.
“To be honest, I miss working on Wall Street,” he said.
http://www.nytimes.com/2012/07/02/bu...ef=todayspaper
The subject of hedge fund directors has become an industry obsession, headlining conferences, including one in April at the Grand Cayman Ritz Carlton.
By AZAM AHMED
GEORGETOWN, Cayman Islands - Just off the tarmac at the Grand Cayman International Airport, visitors were recently greeted by colorful banners advertising the Caribbean island's sunny offerings: waterfront seafood restaurants, tax-free shopping - and hedge fund directors for hire.
In the last decade, as hedge funds ballooned in size and number to become a dominant force in the investing universe, directorship services have grown from a cottage industry into a big business on the Cayman Islands. Many funds run by United States money managers have their legal residence here for tax reasons. And because of a quirk in the island's tax code, these funds must appoint a board.
As a result, dozens of operations have sprouted up on the Caymans to supply directors, from one-man bucket shops to powerhouse law firms. Directors are often Cayman-based professionals: accountants, lawyers and administrators of hedge funds.
They are rarely investors, though. Ostensibly, directors offer guidance and oversight to the funds. In return, a director is typically paid anywhere from $5,000 to $30,000 a year. With more than 9,000 funds domiciled on the tiny island, business is booming.
And so is a debate. Major investors and others are starting to question the value of offshore directors, especially in light of recent hedge fund frauds, liquidations and missteps. An analysis of thousands of United States securities filings by The New York Times shows that dozens of directors sit on the boards of 24 or more funds in the Caymans, which individually are supposed to be overseeing tens of billions of dollars in assets. Some hold more than 100 directorships, and one particularly busy director sits on the boards of about 260 hedge funds.
"You might as well save your $5,000 and buy a rubber stamp," said Luke Dixon, a senior investment manager at the British pension fund USS, which oversees more than £32 billion ($50 billion).
Directors have also been the target of lawsuits. A recent fraud case found two directors, who happened to be relatives of the hedge fund manager, liable for $111 million. The subject of directors has become an industry obsession, headlining hedge fund conferences, including one in April at the Grand Cayman Ritz Carlton.
The rise of the director-for-hire business - and the questions that surround it - underscore a transition for hedge funds. As the industry sheds its cowboy culture for a more button-down approach, it is adopting the structure and practices of mainstream investment firms. But even as funds hire compliance officers and marketers, some corners of the industry remain in a state of arrested development.
"The hedge fund industry is still trying to figure out what it wants to be when it grows up," said Greg Robbins, the chief operating officer at a unit of Mesirow Financial. "Like any industry, it is just going to have to get embarrassed along the way to stop doing the silly stuff it used to do."
The data for this article was drawn largely from filings made with the Securities and Exchange Commission as part of its new oversight of hedge funds. Yet the filings do not paint a full picture. The directorships cited are only for funds with American investors, omitting thousands of funds that manage strictly overseas money.
Mesirow and other hedge fund investors, including USS and Man Group, have been clamoring for greater disclosure on how many boards directors serve on. They have taken their grievances to the Cayman Islands Monetary Authority, the local regulator, which has so far declined to release the information. Financial services are the island's lifeblood, accounting for more than 35 percent of its gross domestic product and employing about 15 percent of the work force, according to a 2008 study by Oxford Economics, an economics consultancy.
At the heart of the hedge fund business here is Don Seymour, who has financed a mini-empire on the island with his directorship services company, DMS Management. Mr. Seymour, a onetime hedge fund auditor at PricewaterhouseCoopers, declines to say how many boards he sits on, though he says he selectively tells investors. A review of the S.E.C. filings shows Mr. Seymour occupies roughly 180 board seats, according to the Foundation for Fund Governance.
Mr. Seymour likens his work as a hedge fund director to that of a top doctor, who can see hundreds of patients a year. Just as every patient is not equally sick, every directorship is not equal, he says. He points to proprietary computer systems that track information about the hedge funds served by DMS directors. And associate directors at his firm handle much of the day-to-day responsibilities.
The growing debate, Mr. Seymour says, is driven by competitors eager to snag a share of his business.
"We have a bit of a Goldman Sachs problem," he reflected from his company's offices at DMS House, a slate-colored stucco building resembling the White House. "We are the worldwide leader in fund governance."
A rival firm, IMS, also serves a large swath of the hedge fund industry. Its founder, Paul Harris, says focusing on numbers won't tell investors whether a director can fulfill his responsibilities.
"Sometimes two boards are too much," said Mr. Harris, who does not require his directors to disclose how many boards they serve on.
Mr. Seymour served as the head of investment services at the Cayman Island Monetary Authority, starting in 1998. While at PricewaterhouseCoopers, he says he audited the funds of the investor George Soros.
"I'm the guy that actually created the regulatory framework for hedge funds here," he said in a wood-paneled conference room at DMS House, flanked by nearly a dozen staff members. Outside, a rooster crowed in the distance.
While in that post, Mr. Seymour recognized there was a huge business opportunity in staffing boards, and in 2000, he left the regulator to start DMS.
Mutual funds also have directors, charged with responsibilities similar to those of their hedge fund brethren. And they, too, have also come under fire for failing to protect investors. But while some directors oversee dozens of funds, those funds are typically operated by the same mutual fund company.
With hedge funds, directors sit on the boards of dozens of distinct hedge fund managers. And directors face far fewer requirements than mutual fund directors.
Some large hedge fund firms don't even bother with outsiders for their Caymans funds board, choosing to stock their boards with people who work for the hedge funds or their lawyers.
In addition to firms like DMS and IMS, law firms like Ogier on the Cayman Islands offer hedge funds director services. That has raised questions about the dual role they can play, representing the hedge fund as counsel, and the investors of the same fund as directors.
Citing in part those potential conflicts of interest, the prominent law firm Walkers recently sold its directorship business. Before that, two Walkers directors had come under scrutiny for their oversight of two collapsed hedge funds of Bear Stearns Asset Management, which the law firm also counted as a legal services client.
"There is a trend toward complete independence," said Ingrid Pierce, a partner at Walkers. "I think we'll see more of that."
http://dealbook.nytimes.com/2012/07/...ef=todayspaper
and in a combination of the two . . .
This far-from-flashy site in Wilmington, Del., is the legal address of 285,000 businesses.
By NELSON D. SCHWARTZ
New York’s biggest investment houses are shifting jobs out of the area and expanding in cheaper locales in the United States, threatening the vast middle tier of positions that form the backbone of employment on Wall Street.
The shift comes even as banks consider deeper staff cuts here, which could undermine the state and city tax base long term.
“Places like New York or London will remain financial centers, but most of the players are taking a much harder look and asking whether they can move large numbers of jobs,” said James Malick, a partner at the Boston Consulting Group who advises banks on relocation. In addition to higher taxes in the New York region, employers face real estate and labor costs significantly above the national average.
Consultants say they have seen a sharp pickup in this trend, known as near-shoring, as opposed to offshoring overseas. Goldman Sachs, during a presentation to investors in late May, even boasted of the cost savings that relocating jobs can bring.
“Some functions need to stay in the United States, but they don’t need to be in New York City or near the client,” Mr. Malick said. And with most investment giants facing anemic revenue and more stringent regulation that cuts into trading revenues, relocation is more tempting than it was before the financial crisis.
Low-level jobs have already migrated to call centers and back offices overseas, while top-end traders and bankers are secure in the New York area, experts say. Instead, services like accounting, trading and legal support, and human resources and compliance are being shifted to places like Salt Lake City, North Carolina and Jacksonville, Fla.
Garry Douyon enjoyed his job helping process trades and working with clients and traders at RBS in Stamford, Conn., earning nearly $100,000 a year, but when the firm decided last fall to move his team to Salt Lake City with a salary of $60,000, he said he really didn’t have much of a choice.
“I didn’t even consider moving,” said Mr. Douyon, who founded a biofuels company, All-City Clean Energy, in Brooklyn with four partners. “I liked RBS but I have my roots here, I have a home, I have kids in school.” A few members of his team decided to go, he added, but most chose to stay in the New York area.
The potential shift has profound implications for New York’s tax base and economy because of Wall Street’s outsize financial profile. Last year, the industry contributed 14 percent of New York State’s tax revenue.
After peaking at 213,000 in August 2007, securities industry jobs in the state fell more than 15 percent in the wake of the financial crisis, according to the Bureau of Labor Statistics. Since then they have risen nearly 12,000, but at 191,200, employment is well below pre-crisis levels. By contrast, over the same period, Delaware gained 1,300 securities jobs while Arizona picked up 2,600.
The federal government does not specifically track securities jobs in Utah, North Carolina or Florida, popular locations for near-shoring. But data from firms illustrates the trend.
Since the end of 2009, Deutsche Bank’s work force in the New York area has fallen to 6,900 from 7,400 even as its staff in Jacksonville rose to 1,000 from 600. Credit Suisse’s staff in the New York region has dropped by 500 in the past four years, but the firm has added 450 positions in North Carolina’s Research Triangle, in the area of Raleigh, Cary, Durham and Chapel Hill. And last year, Bank of New York Mellon cut 350 jobs in New York City while hiring 150 people in Lake Mary, Fla.
New York’s status as a financial capital is not likely to fade, and the state’s share of securities jobs in the United States has held steady at about 24 percent in recent years. “Even as the securities industry goes through a difficult time, New York remains the financial capital of the world and I don’t see that changing anytime soon,” said Thomas P. DiNapoli, the New York State comptroller.
But regional offices perform more and more of the sophisticated work usually associated with Wall Street and nearby trading hubs like Jersey City and Stamford. This parallels a shift in some technology jobs away from Silicon Valley to Portland, Ore., and cities in Texas, said Michael Shires, a professor at the School of Public Policy at Pepperdine, who prepares an annual ranking of the best cities for employment.
“I expect to see an acceleration,” he said, noting that while these middle-tier jobs may lack the salaries and glamour usually associated with Wall Street, “these are the support people that actually make the stuff work.” What’s more, there are many more positions in the middle of the jobs pyramid at Wall Street firms than at the top.
Deutsche Bank’s office in Jacksonville started out in 2008 as a back-office service center, according to bank officials. Since then, technology workers, legal and compliance staff members, and trading support jobs have been added. More recently, some traders who deal directly with clients are being located there. Lower costs and taxes are behind the moves, the officials said.
J. Keith Crisco, the North Carolina secretary of commerce, visits New York three to five times a year, meeting with executives from firms already in North Carolina, like Credit Suisse, while reaching out to prospects. Another trip is planned this month.
North Carolina provided Credit Suisse with roughly $14 million in incentives to bring it to the state.
Delaware, which announced in April it had lured up to 1,200 JPMorgan Chase jobs to the state, is set to pay the giant bank $10.1 million in cash incentives. Alan Levin, director of the Delaware Economic Development Office, estimates the typical salary for those jobs at $78,000 a year.
“These jobs will be here for a long time,” he said. “We want to create not just jobs but careers.”
The erosion of middle-tier jobs in the financial sector is not limited to New York. In a presentation to analysts in late May, the president of Goldman Sachs, Gary Cohn, described what he called the firm’s “high-value location strategy.” By looking outside hubs like New York, London, Tokyo and Hong Kong, he said, the firm could save 40 percent to 75 percent on job-related expenses.
Over a third of Goldman hires in 2011 and 2012 have been in cities like Bangalore in India, Salt Lake City, Dallas and Singapore, Mr. Cohn said. Utah, with looser regulation and lower taxes than New York, has been a particular area of growth for Goldman.
While Goldman’s work force in the New York area has been flat since the end of 2009 at just over 10,000, full-time employees in Salt Lake City have doubled to 1,400, making that office Goldman’s sixth-largest globally. In addition to its technology and operations staff, Goldman has expanded activities like research and investment management there.
These days, Mr. Douyon is building a refinery at the Brooklyn Navy Yard that aims to make biodiesel from waste products like vegetable oil and grease from restaurants. While he says it is a more flexible way of life and, he hopes, more lucrative, he still feels the tug of the trading floor.
“To be honest, I miss working on Wall Street,” he said.
http://www.nytimes.com/2012/07/02/bu...ef=todayspaper
The subject of hedge fund directors has become an industry obsession, headlining conferences, including one in April at the Grand Cayman Ritz Carlton.
By AZAM AHMED
GEORGETOWN, Cayman Islands - Just off the tarmac at the Grand Cayman International Airport, visitors were recently greeted by colorful banners advertising the Caribbean island's sunny offerings: waterfront seafood restaurants, tax-free shopping - and hedge fund directors for hire.
In the last decade, as hedge funds ballooned in size and number to become a dominant force in the investing universe, directorship services have grown from a cottage industry into a big business on the Cayman Islands. Many funds run by United States money managers have their legal residence here for tax reasons. And because of a quirk in the island's tax code, these funds must appoint a board.
As a result, dozens of operations have sprouted up on the Caymans to supply directors, from one-man bucket shops to powerhouse law firms. Directors are often Cayman-based professionals: accountants, lawyers and administrators of hedge funds.
They are rarely investors, though. Ostensibly, directors offer guidance and oversight to the funds. In return, a director is typically paid anywhere from $5,000 to $30,000 a year. With more than 9,000 funds domiciled on the tiny island, business is booming.
And so is a debate. Major investors and others are starting to question the value of offshore directors, especially in light of recent hedge fund frauds, liquidations and missteps. An analysis of thousands of United States securities filings by The New York Times shows that dozens of directors sit on the boards of 24 or more funds in the Caymans, which individually are supposed to be overseeing tens of billions of dollars in assets. Some hold more than 100 directorships, and one particularly busy director sits on the boards of about 260 hedge funds.
"You might as well save your $5,000 and buy a rubber stamp," said Luke Dixon, a senior investment manager at the British pension fund USS, which oversees more than £32 billion ($50 billion).
Directors have also been the target of lawsuits. A recent fraud case found two directors, who happened to be relatives of the hedge fund manager, liable for $111 million. The subject of directors has become an industry obsession, headlining hedge fund conferences, including one in April at the Grand Cayman Ritz Carlton.
The rise of the director-for-hire business - and the questions that surround it - underscore a transition for hedge funds. As the industry sheds its cowboy culture for a more button-down approach, it is adopting the structure and practices of mainstream investment firms. But even as funds hire compliance officers and marketers, some corners of the industry remain in a state of arrested development.
"The hedge fund industry is still trying to figure out what it wants to be when it grows up," said Greg Robbins, the chief operating officer at a unit of Mesirow Financial. "Like any industry, it is just going to have to get embarrassed along the way to stop doing the silly stuff it used to do."
The data for this article was drawn largely from filings made with the Securities and Exchange Commission as part of its new oversight of hedge funds. Yet the filings do not paint a full picture. The directorships cited are only for funds with American investors, omitting thousands of funds that manage strictly overseas money.
Mesirow and other hedge fund investors, including USS and Man Group, have been clamoring for greater disclosure on how many boards directors serve on. They have taken their grievances to the Cayman Islands Monetary Authority, the local regulator, which has so far declined to release the information. Financial services are the island's lifeblood, accounting for more than 35 percent of its gross domestic product and employing about 15 percent of the work force, according to a 2008 study by Oxford Economics, an economics consultancy.
At the heart of the hedge fund business here is Don Seymour, who has financed a mini-empire on the island with his directorship services company, DMS Management. Mr. Seymour, a onetime hedge fund auditor at PricewaterhouseCoopers, declines to say how many boards he sits on, though he says he selectively tells investors. A review of the S.E.C. filings shows Mr. Seymour occupies roughly 180 board seats, according to the Foundation for Fund Governance.
Mr. Seymour likens his work as a hedge fund director to that of a top doctor, who can see hundreds of patients a year. Just as every patient is not equally sick, every directorship is not equal, he says. He points to proprietary computer systems that track information about the hedge funds served by DMS directors. And associate directors at his firm handle much of the day-to-day responsibilities.
The growing debate, Mr. Seymour says, is driven by competitors eager to snag a share of his business.
"We have a bit of a Goldman Sachs problem," he reflected from his company's offices at DMS House, a slate-colored stucco building resembling the White House. "We are the worldwide leader in fund governance."
A rival firm, IMS, also serves a large swath of the hedge fund industry. Its founder, Paul Harris, says focusing on numbers won't tell investors whether a director can fulfill his responsibilities.
"Sometimes two boards are too much," said Mr. Harris, who does not require his directors to disclose how many boards they serve on.
Mr. Seymour served as the head of investment services at the Cayman Island Monetary Authority, starting in 1998. While at PricewaterhouseCoopers, he says he audited the funds of the investor George Soros.
"I'm the guy that actually created the regulatory framework for hedge funds here," he said in a wood-paneled conference room at DMS House, flanked by nearly a dozen staff members. Outside, a rooster crowed in the distance.
While in that post, Mr. Seymour recognized there was a huge business opportunity in staffing boards, and in 2000, he left the regulator to start DMS.
Mutual funds also have directors, charged with responsibilities similar to those of their hedge fund brethren. And they, too, have also come under fire for failing to protect investors. But while some directors oversee dozens of funds, those funds are typically operated by the same mutual fund company.
With hedge funds, directors sit on the boards of dozens of distinct hedge fund managers. And directors face far fewer requirements than mutual fund directors.
Some large hedge fund firms don't even bother with outsiders for their Caymans funds board, choosing to stock their boards with people who work for the hedge funds or their lawyers.
In addition to firms like DMS and IMS, law firms like Ogier on the Cayman Islands offer hedge funds director services. That has raised questions about the dual role they can play, representing the hedge fund as counsel, and the investors of the same fund as directors.
Citing in part those potential conflicts of interest, the prominent law firm Walkers recently sold its directorship business. Before that, two Walkers directors had come under scrutiny for their oversight of two collapsed hedge funds of Bear Stearns Asset Management, which the law firm also counted as a legal services client.
"There is a trend toward complete independence," said Ingrid Pierce, a partner at Walkers. "I think we'll see more of that."
http://dealbook.nytimes.com/2012/07/...ef=todayspaper
and in a combination of the two . . .
This far-from-flashy site in Wilmington, Del., is the legal address of 285,000 businesses.
WILMINGTON, Del.
NOTHING about 1209 North Orange Street 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 North Orange, you see, 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 North Orange, they simply have a dropbox.
What attracts these marquee names to 1209 North Orange and to other Delaware addresses also attracts less-upstanding corporate citizens. For instance, 1209 North Orange was, until recently, a business address of Timothy S. Durham, known as “the Midwest Madoff.” On June 20, Mr. 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 increasingly 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 Joseph R. Biden Jr., 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 today playing faster and looser than the offshore jurisdictions that raise hackles in Washington.
And international bodies, most recently the World Bank, are increasingly pointing fingers at the state.
Of course, business — the legal kind — has been the business of Delaware since 1792, when the state established 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 — something that most stockholders applaud.
President Obama has criticized outposts like the Caymans, complaining that they harbor giant tax schemes. But here in Wilmington, just over 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 state is so eager to attract businesses that the office of its secretary of state stays open until midnight Monday through Thursday — and until 10:30 p.m. on 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 that favors Mitt Romney for president. Restore Our Future ultimately disclosed that the money came from a former Bain Capital executive. The Romney campaign declined comment, and Restore Our Future did not return calls.
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 total 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.”
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 now 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.”
WHAT does it take to incorporate a company in Delaware? Not a lot, tax experts say. Shell companies — those with no employees, no assets and, in fact, no real business to speak of — are remarkably easy to establish here, and it doesn’t always matter who you are or what business you are in. Viktor Bout, the Russian arms dealer known as “the merchant of death,” used two Delaware addresses. In April he was sentenced to 25 years in prison on terrorism charges resulting from an American sting operation.
Jack Abramoff, the former Washington lobbyist jailed on corruption charges, set up a sham Delaware corporation to hide millions in payments and circumvent federal laws. Mr. Subotic, the Serbian businessman who was tried in absentia last October for his role in a cigarette smuggling scheme and sentenced to six years, used three airplanes that were registered in Delaware, including two at 1209 North Orange. Mr. Subotic lives in Geneva and denies the charges.
The Organized Crime and Corruption Reporting Project, an international group based in Sarajevo, has identified other Eastern Europeans with Delaware links. Among them is Laszlo Kiss, an Romanian accountant and author of “United States, Tax Heaven — Uncle Sam Will Fight Your Taxes!” that praised the state’s lax rules. He is now 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-United States citizens. “Basically, it requires none. Delaware has the most secret companies in the world and the easiest to form.”
Mr. Finzer, an American based in Novi Sad, Serbia, advertises his services online. “Tax-Free Havens for Non-U.S. Citizens,” his Web site, says. It goes on: “More than 50 percent of the major corporations in the world are incorporated in Delaware. Why? Because in provides the anonymity that most offshore jurisdictions do not offer.”
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 an American address.
“You can have companies in Delaware that have no U.S. bank accounts, no requirements for documentation and no one knows who owns them,” says Anthony B. Travers, chairman of the Cayman Islands Stock Exchange and former chairman of that country’s Financial Services Association. “There should be a level playing field and Delaware should have to comply with the same standards as the Caymans.”
Delaware isn’t the only state that has gone this route. Three others — Nevada, Wyoming and Oregon — have also been cited by the Financial Crimes Enforcement Network, a division of the United States Treasury Department, as “particularly appealing” for the formation of shell companies. Of those four states, Delaware stands out as the one offering the least transparency and the most secrecy, this group says.
“What is so galling about secrecy in the United States is that there is no attempt to document who owns a corporation,” said Richard Murphy, a senior adviser at the Tax Justice Network, an independent organization based in London that researches tax havens. “Two million corporations are formed each year in the United States, more than anywhere else in the world. Delaware, in turn, is the biggest single source of anonymous corporations in the world.”
Mr. Murphy adds: “Why go to the Caymans when you can just go down the street?”
In 2009, the Tax Justice Network named the United States as No. 1 on its Financial Secrecy Index, ahead of Luxembourg and Switzerland. It cited Delaware as one of the reasons.
That, Mr. Murphy says, elicited howls in Wilmington. “The reaction was: ‘This cannot be true.’ Not only can it be true, it is true.” (The United States has since fallen to fifth place, behind Switzerland, the Caymans, Luxembourg and Hong Kong, after the group changed its method.)
For years, Senator Carl Levin, a Michigan Democrat, 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. To sweeten the pot, the legislation would exempt public companies, hedge funds and other large corporations, along with mom-and-pop businesses where ownership is clear. In addition, the federal government would pick up the tab for putting the law into effect.
Senator Levin has long complained that it takes more information to get a driver’s license than to set up a corporation in America. Three times since 2000, he has introduced his legislation — once co-sponsored by Barack Obama when he was a senator from Illinois — and each time the effort has been rebuffed. He has never even been able to get the measure out of committee.
Law enforcement agencies, human rights groups and the administration are on his side. Last month, a letter supporting Mr. Levin’s measure and signed by 41 different 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.
Senator Thomas R. Carper, a Delaware Democrat, is in line to be the next chairman of the Senate Homeland Security and Government Affairs Committee, which has jurisdiction over the measure. Mr. Carper has expressed concerns about the measure but has taken no formal position on it.
“Levin is hitting a brick wall,” said Heather Lowe, director of government affairs for Global Financial Integrity, an anticorruption research group. “It’s frustrating. Delaware is playing a significant role in the committee. Senator Carper is well liked and well respected and he’s not moving on this issue.”
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.
“This would be a sea change in how things are done,” said Ross Miller, Nevada’s secretary of state and president-elect of the National Association of Secretaries of State. “It would add red tape and increasing processing time. And if you had a money launderer and asked for his name, he probably wouldn’t be truthful.”
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.”
COMPANIES that are incorporated in Delaware need someone on the ground here — an agent or go-between to act on their behalf. That is where the CT Corporation comes in.
CT, a subsidiary of the Dutch information services company Wolters Kluwer, is the largest registered agent in Delaware and, it turns out, the registered agent for 1209 North Orange Street. CT is authorized to transact business at that address, and its main duty is to accept legal notices on behalf of the businesses incorporated here and to pass them along.
CT represents nearly a third of all companies registered in Delaware and 60 percent of Fortune 500 companies. It says that before accepting clients, it screens them against the government’s “Specially Designated Nationals,” a list of people barred from doing business in the United States.
Mainly, however, CT says it acts as a middleman. “We check names and addresses against various federal agency lists,” says Timothy Hall, a spokesman for the company, which has no position on the Levin measure. “We will comply with whatever law is passed,” he added.
(The New York Times Company has seven corporate subsidiaries registered at 2711 Centerville Road in Wilmington. The registered agent for that address is the Corporation Service Company, which is the second-largest agent in the state.)
For corporate tax planners, Delaware is a dream. The state helps companies legitimately reduce their United States taxes and, sometimes, obscure profits in other countries.
“Companies are able to turn taxable income into tax-exempt income in Delaware and then use it to reduce their tax bills in other states,” said Bradley P. Lindsey, an accounting professor at North Carolina State University and one of three authors of a 2011 study titled “Exploring the Role Delaware Plays as a Domestic Tax Haven.” Delaware does not tax certain profit-making intangible items — like trademarks, royalties, leases and copyrights. Yet those same intangibles can be part of a tax strategy that allows them to be classified as deductions in other states, reducing a company’s tax bill there.
“Delaware serves as a domestic tax haven, much like the Cayman Islands serves as an offshore foreign tax haven, and offers a similar level of tax avoidance,” the report states.
American corporations find the Caymans alluring for many reasons. There, they can operate in relative secrecy, attract more foreign customers, avoid regulation and enjoy a low tax rate. In one respect, however, Delaware is even better than the Caymans. At some point, American companies have to bring back their foreign profits from the Caymans and pay federal taxes. But in Delaware, the state tax savings through the Delaware loophole are permanent.
And on the reputational front, “Delaware doesn’t carry the same stigma as the Caymans or Bermuda,” Mr. Lindsay said, adding, “Why not attract business to my little state and get something at the expense of the other states?”
WorldCom, the telecom giant that collapsed into bankruptcy after an accounting scandal, could be a symbol for the Delaware loophole. Bankruptcy court filings showed that the company had cut $20 billion from state taxes thanks to an intangible asset it called “management foresight.”
Delaware subsidiaries are especially popular with global energy and mining companies like Exxon, Chevron and Rio Tinto. Among the top 10, some 915 subsidiaries have been set up in Delaware, compared with 51 in Switzerland and 49 in the Caymans, according to a report last September by the Norway chapter of Publish What You Pay, a London-based group that studies natural resources. The study said that this allows these resource extraction companies to put up a “wall of silence” about their far-flung operations and profits, especially from poor countries that may want a greater slice of the revenue. Exxon, Chevron and Rio Tinto declined to comment.
STATES like Pennsylvania are increasingly fed up. More than 400 corporate subsidiaries linked to Marcellus Shale gas exploration have been registered in Delaware, most within the last four years, according to the Pennsylvania Budget and Policy Center, a nonprofit group based in Harrisburg that studies the state’s tax policy.
In 2004, the center estimated that the Delaware loophole had cost the state $400 million annually in lost revenue — and that was before the energy boom.
More than two-thirds of the companies in the Marcellus Shale Coalition, an industry alliance based in Pittsburgh, are registered to a single address: 1209 North Orange Street, according to the center.
“So many of these Marcellus Shale companies have figured out that it is fairly easy to siphon profits from Pennsylvania, so that they don’t pay taxes here,” said Michael Wood, research director at the Harrisburg center.
The center is urging Pennsylvania to try to close the Delaware loophole. But it is running into opposition from Pennsylvania companies that want to retain the break. And, in Delaware, state officials say that their approach to business is good for America.
“We have a system that is the greatest creator of wealth in the history of the world,” said Mr. Geisenberger, the Delaware official.
“We will not support any changes that change the friendliness of American business and close our doors to capital formation and the ease of doing business.”
“We will not support any changes that change the friendliness of American business and close our doors to capital formation and the ease of doing business.”
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