Panama Papers Show How Everyone from Terrorists to Your Cat Could Funnel Money into U.S. Elections

foreign money.

LLCs are increasingly becoming a vehicle to anonymously make donations to super PACs

Terrorists, Russian oligarchs, and even cats could find a way to funnel money into U.S. elections, thanks to lax U.S. rules for shell corporations and a deadlocked Federal Election Commission (FEC) that refuses to enforce the law.

Anonymous shell corporations have been pushed into the headlines by the “Panama Papers,” a trove of 11.5 million documents leaked from the Panama-based Mossack Fonseca law firm, which are shining a rare spotlight on the shady world of money laundering. The documents show how dozens of foreign leaders, as well as Russian oligarchs, terrorists and celebrities, hide their money and dodge taxes through a web of shell companies and offshore bank accounts. Iceland’s Prime Minister has already resigned, and the fallout will likely continue to spread.

But the documents also show that offshore tax havens aren’t isolated to Panama and the Cayman Islands: the U.S. is becoming an increasingly popular place to launder money, given the ease with which anonymous Limited Liability Companies (LLCs) can be created in places like Delaware, Wyoming and Nevada.

A Fusion reporter showed how easy it is to create an anonymous LLC by setting one up in Delaware, under the name of a generic “registered agent” in order to hide the identity of the true owner – her cat, Suki. But the secrecy surrounding LLCs can raise serious issues. A few years ago, a Russian arms dealer known as the “Merchant of Death” (played by Nicholas Cage in the 2005 movie Lord of War), who was charged with selling weapons to terrorists, was found to have laundered his ill-gotten gains through LLCs in Delaware.

And increasingly, LLCs are not only a vehicle for foreign oligarchs and felines to hide their money, but also a way to anonymously make donations to super PACs. Federal law prohibits foreign nationals from making contributions and expenditures in elections, but LLCs potentially offer an easy way to sidestep those rules – and the deadlocked FEC has signaled that it won’t scrutinize most donations from these often-shadowy entities.

FEC Won’t Enforce Law Prohibiting Use of LLCs as “Straw Donors”

In fact, just a few days before the Panama Papers story broke, the FEC’s three Republican Commissioners issued their reasons for voting to dismiss four complaints filed by Campaign Legal Center and Democracy 21 challenging the use of LLCs to hide the real source of millions in super PAC donations during the 2012 elections. The FEC’s three Democratic commissioners voted to open investigations, but as a result of the 3-3 deadlock, the Commission dismissed our complaints.

Although those complaints didn’t allege that the LLCs violated the ban on foreign contributions, the FEC’s move highlights the agency’s refusal to address the threat that shell corporations can pose to the integrity of our electoral system. 

One of the complaints related to “W Spann LLC,” which Mitt Romney ally Edward Conard created “for the sole purpose” of making a $1 million donation to a Romney-supporting super PAC in 2011, and then dissolved after making the contribution.

After Campaign Legal Center filed its complaint, Conard acknowledged his scheme to evade disclosure laws by making his donation through the LLC rather than in his own name. But the FEC still deadlocked 3-3 and consequently didn’t take action against even this egregious violation.

The Republican commissioners suggested that, in the future, they might enforce the straw donor ban – but only when presented with “specific evidence” that funds used to make a contribution were intentionally funneled through an LLC for the purpose of evading federal law disclosure requirements.

The problem with this, however, is that LLCs can be formed and operated with almost total anonymity. And as the Panama Papers demonstrate, there is a sophisticated network of operators whose job is to create layers of secrecy around these shell corporations.

In other words, absent a Panama Papers-style leak, the public will almost never have enough “specific evidence” to meet the Republican commissioners’ high bar for opening an investigation into an LLC.

Longstanding FEC rules do require that LLCs electing to be taxed as partnerships report the individual owners as the source of the donation, rather than the LLC itself. But the FEC has declined to enforce the rules against LLCs that bankroll super PACs in the post-Citizens United era, making it even harder to uncover potential violations.

Miami Bringing the Heat

The FEC’s unwillingness to enforce its own rules against straw donors and LLCs is a problem, since LLC donations to super PACs have grown increasingly common. Campaign Legal Center has already filed four complaints against LLCs this year. And the use of LLCs as anonymous donation vehicles is moving from the presidential level to down-ballot races.

Center for Responsive Politics reporter Will Tucker found that one-fifth of the funds raised by “Reform Washington,” a super PAC supporting Florida Lt. Gov. Carlos Lopez-Cantera’s run for U.S. Senate, came from LLCs, mostly Miami-based real estate holding companies. Because these LLCs were not formed for the exclusive purpose of making donations, however, the FEC has signaled that it won’t scrutinize their donations or require disclosure of anything beyond the LLC’s name. 

Notably, the Panama Papers revealed that Miami’s real estate market is a prime spot for foreign interests to launder funds held in offshore accounts, with foreign investors regularly using anonymous LLCs to buy luxury beachfront condos. The Miami Herald’s analysis found that at least 19 foreign nationals—eight of whom are under investigation for corruption, embezzlement or other crimes in their home countries—have used shell companies like LLCs to buy real estate in Miami.

There is no indication that any of the Reform Washington donations were tied to foreign interests. But given the secrecy surrounding LLCs, and the lack of disclosure requirements, it is not known if any LLC contributions this cycle actually came from foreign sources.

An entity called “Isaias 21 Property LLC,” for example, appears indistinguishable from any other Florida LLC. It has a Miami Beach address and in filings with the state lists its owner as “Mateus 5 International Holding,” which also has a Miami Beach address.

Yet according to the leaked documents, “Mateus 5 International Holding,” is actually an offshore company registered in the British Virgin Islands, and the true owner of “Isaias 21 Property LLC” is Paulo Octávio Alves Pereira, “a Brazilian developer and politician now under indictment for corruption in his home country,” according to the Miami Herald.

“Isaias 21 Property LLC” has not contributed to any federal political committees, according to publicly-available records, but if it had, the FEC would likely have given it a pass. Given the intentional steps the group’s owners took to shroud its activities in secrecy, there would not be any “specific evidence” that the LLC violated the law, and the public would never have any idea where the funds actually came from.

Thanks, Citizens United

This is a problem created in part by the U.S. Supreme Court’s 2010 decision in Citizens United v. FEC, which allowed corporations—including LLCs taxed as corporations—to spend in federal elections (as FEC Commissioner Ellen Weintraub recently noted in a New York Times op-ed.). But it is also the result of the FEC’s failure to act.

The FEC could begin to address these problems by enforcing its already-existing rules requiring LLCs that are taxed as partnerships to attribute donations to the individual owners. It could also take greater steps to clarify disclosure requirements for LLCs, such as requiring even those LLCs that are taxed as corporations to report the true “beneficial owner(s)” of the entity when making contributions and to put more of a duty on super PACs receiving LLC donations to inquire into the source of the funds.

As long as the FEC refuses to act, we might never know if the Merchant of Death or Suki the cat are using LLCs to secretly funnel money into our elections. 

Brendan directs CLC’s work before federal regulatory agencies, such as the Federal Election Commission (FEC).