The following letter was sent to Rehoboth Beach Mayor and Commissioners, with a copy submitted to the Cape Gazette for publication.
The Delaware Coalition for Open Government is submitting these comments and questions for the record regarding Rehoboth Beach's impending LLC voting ordinance. DELCOG has been studying the Delaware Limited Liability Company Act, and has concerns about possible difficulties you may encounter in the future if the ordinance passes. The Nov. 10 Cape Gazette article noted that you have rewritten the ordinance because of the importance of the "one person-one vote" principle.
This is an important addition to the ordinance and demonstrates commendable caution. DELCOG is not opposed to LLCs, which promote business development, protect personal assets, and offer a low-cost and simplified method of forming a business entity. Moreover, DELCOG is not opposed to foreign investment in the United States; foreign investment is encouraged to expand our economy. With that said, there are provisions in the LLC Act that are troubling: that is, non-U.S. entities appearing as Domestic Delaware LLCs (6 Del.C. 18-212); and Series LLCs that are not responsible for the actions of other LLCs in the series (6 Del.C. 18-215).
These LLC provisions may cause problems in identifying beneficial ownership, locating owners, and holding owners responsible for damages or taxes. No information on the owners is required for the registered agent to have a certificate issued to create a LLC. The registered agent shields the LLC from anyone but a court seeking information. Documented cases of money laundering, embezzlement, bribery, and narcotics trafficking byforeign entities, enabled by the secrecy of Delaware's LLC Act, have been reported.
A Nov. 1 News Journal article reported that a Delaware LLC was a front for narcotics trafficking kingpins from Venezuela. This Delaware LLC remained in "good standing" for months at the Division of Corporations in spite of having been placed on the Sanctions Lists of the Office of Foreign Assets Control in February. The managing owner of this narcotics trafficking enterprise purchased millions of dollars of properties in Miami through three Florida LLCs. The frequent purchase of high-value real estate by LLCs or shell companies to launder profits from narcotics trafficking is a problem recognized by federal law enforcement agencies. High-value real estate purchases are also used to launder the profits of state industries by dictators and oligarchs.
Rehoboth Beach may not be NYC or Miami yet, but DELCOG suggests that you consider the possibilities. Provisions in Delaware's LLC Act raise questions which we think are germane to your pending LLC property owners - voting rights debate:
1. Who or what is the beneficial owner of the LLC? How many persons own the LLC? Are business entities rather than persons involved in ownership of the LLC? How can countries, groups, organizations, and businesses that are beneficial owners be verified?
2. Can a non-U.S. company vote if the company is the beneficial owner of property through a LLC? What are the ramifications of non-U.S. ownership of a property having voting rights through LLCs?
3. Is there now a Rehoboth Beach ordinance permitting voting rights by foreign persons, groups, companies, or even governments? Assuming a non-U.S. resident or non-U.S. entity owns a property, does your city code need to be amended to allow voting rights? The possibility of secret offshore ownership of LLCs in Rehoboth should not be dismissed. As the Nation's Summer Capital, are there presently properties owned by individuals from foreign countries in the diplomatic corps, or owned by their countries? If they own property openly, is that different than owning property secretly in a LLC?
4. How will Rehoboth Beach filter out voter registration errors or persons identified as ineligible to vote, as defined by your city code. Is an "ownership affidavit" adequate from a purported owner of a LLC? It may be adequate for a person known to have owned property in Rehoboth for many years. On the other hand how will you verify unknown LLC property owners without incontrovertible evidence?
5. Will Rehoboth check LLCs on the OFAC Sanctions List before approving voter registration? (The sanctions list is a compilation of foreign persons, groups, companies, and countries that have been investigated by federal security agencies and deemed dangerous because of narcotics trafficking, money laundering, terrorism, etc. Federal law prohibits Americans from conducting business with entities on the OFAC sanctions list, and there are severe monetary penalties for doing so.) A voting rights debate should recognize that Delaware's LLC Act permits secrecy, and thus the potential exists for manipulation and abuse. For example, an entity acquiring a number of adjacent residential properties could do so through a Series LLC without the community realizing that a redevelopment project, such as a hotel casino, is in progress. Moreover, LLCs are unique investment tools that can hold millions of dollars in cash. The implication is that property ownership and voting rights by LLCs could change the landscape of Rehoboth.
The citizens of Rehoboth need to carefully consider the downside of allowing LLCs the right to vote. DELCOG encourages the mayor and commissioners to authorize your city solicitor to research the Delaware LLC Act and report back the findings prior to a vote on the change to your election law. DELCOG believes you may wish to consider further provisions be added to your ordinance to avoid negative consequences if in the future you allow LLCs the right to vote.
The LLC Act was passed to make it easier to establish small businesses, but the act has been misused in ways that are not beneficial. Corruption enabled by Delaware LLCs, appearing to be legitimate businesses, has been disclosed. The Delaware LLC Act is complicated, and provisions in the act can lead to abuse.
For the record, none of DELCOG's board members are residents of Rehoboth Beach. We all hope that Rehoboth will endure as the charming family resort it has always been.
Nick Wasileski
president, Delaware Coalition for Open Government
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