What is the most business-friendly US state? One might instinctively say New York or California, where many large corporations are headquartered. Or maybe Texas, which exports the most goods and services. But humble Delaware arguably tops the list, a state where starting a business is easier than getting a library card, and where there are more registered businesses than residents.
who own Barronsis incorporated in Delaware, with two-thirds of Fortune 500 companies.
Hal Weitzman, executive director of intellectual capital at the University of Chicago Booth School of Business and former Financial Times reporter, investigated Delaware’s corporate policies for his new book, What’s wrong with Delaware? : How the First State Favored the Rich, the Powerful, and the Criminals – and How It Costs Us All. Weitzman spoke on the phone about Delaware and the far-reaching effects of his system last week. This transcript has been condensed and edited for clarity.
Barons: How would you describe, overall, what the Delaware system does?
Hal Weitzman: In many ways, Delaware is more like a financial services company than a state. You can start a Delaware corporation in minutes without showing any documents or identifying yourself. So there is time efficiency. Then there is tax efficiency. You can save money on taxes legally. And then there’s decision-making efficiency in that they’ve streamlined the process of developing corporate rules.
I am for efficiency. I am for the reduction of bureaucracy. But that begs the question: what is the cost of all efficiency?
What is the cost?
The cost is a chronic lack of transparency and oversight. Identities are not verified. Legislation is not controlled. State governments are deprived of tax revenue. All of this has enabled and encouraged tax evasion and money laundering, the flow of black money into our political system, and the trafficking of drugs, arms, and people.
You mentioned in the book that part of the economy is “going dark”. How does Delaware contribute to this?
Delaware is of concern because we don’t know who the owners of the businesses are, the state doesn’t require them to identify themselves. So we really have no idea of the most basic information about the US economy. The Securities and Exchange Commission questions the extent to which this affects retail investors. I think there’s probably good reason to suspect that’s the case, because when you and I put our retirement funds into Vanguard or TIAA, those funds are invested, and some of it is where they’re invested, c is in the non-public economy.
The Corporate Transparency Act, which was passed in 2020, aims to address this corporate secrecy. Will these efforts make Delaware companies more transparent?
I’m not even sure we’ll get there with the legislation that’s been passed. In America, we are proposing to set up a register of beneficial owners [the true owners of companies]but because it’s going to be private and visible only to federal government and law enforcement people, I don’t think we have the ability to verify all identities. [The Financial Crimes Enforcement Network, which is tasked with implementing the CTA] is already overwhelmed by red flags from the banking sector. Now we are going to dump tens of millions of new documents on them and expect them to be able to verify all of this information. And then we depend on government agencies to cooperate and share information, which hasn’t worked so well in the past. That’s why I think everything should be public.
You will still be able to register a limited company in Delaware. None of this is going to change, but we now expect people who were registering a corporation in Delaware to then turn around and file new paperwork with the federal government. So we’re setting up this bifurcated system.
Making ownership information public is therefore the best way to reduce the level of corporate anonymity.
If you ask activists for transparency best practices, they will always tell you that the best way to run a beneficial ownership register is to make it public. This has been done in many countries. This way, journalists and transparency activists can begin to tie these things together. There are cobwebs of corporate entities all over the world that are used to hide money and launder money and other activities that we don’t want. And unless we can spot the patterns, there’s nothing we can do about it. And that requires us to have information.
What does this have to do with the situation in Ukraine?
Debate [about corporate transparency] was renewed because of Ukraine and the desire to suppress the Russian oligarchs. For example, the Corporate Transparency Law provides an exemption for trusts that are well known to be used by wealthy Russians trying to evade sanctions. It has become so obvious that we have no idea who is behind the companies operating in this country. And it’s not just a loophole, it’s a huge mistake. It undermines our foreign policy.
If sanctions are in place and an individual uses an anonymous entity in the United States to evade those sanctions and other companies in the United States do business with that entity, then they are effectively violating the sanctions. Every business in the United States, regardless of size, wants to exercise due diligence on its partners. We undermine this process.
As you know, President Biden was a senator from Delaware for a very long time. What has been its role in maintaining the status quo of business friendliness in Delaware?
It really is a creature of the system. He was funded by this system and his Senate voting record reflects this system. During his 36 years in the Senate, his donors were all the major law firms that benefited from the system. And then, in terms of voting, he led efforts to tighten bankruptcy rules, and there was strong suspicion at the time that he did so because of the importance of the credit cards for Delaware.
He is therefore a creature and a product of the system but he did not create the system.
Do you think that has any effect on his policies now?
No, I do not think so. He is actually an advocate for corporate transparency. At some point there was a tipping point when it became clear that something was going to have to change.
If Delaware were to abandon this heavily business-driven economy, do you think another state would pick up the slack?
Several states are trying to attract business registrations and allow limited companies, but none have reduced Delaware’s market share in the industry. There are four things that make Delaware different. One is the industrial scale of the business. One is its importance to the local economy. One is the power it gives to this small state in making the rules. For example, not just company code rules and what we expect of corporate executives, but the power of the state in things like the Corporate Transparency Act. I mean why are we setting up this bifurcated system? Because Delaware ran a campaign to make sure registration officers didn’t have to ask more questions and check more documents. Delaware has played an outsized role in resisting attempts at change.