Washington: A “better practices” state for LLC transparency

The Washington state Capitol building. Image credit: Wikimedia Commons

Last week, we took at look at how limited liability companies have served as a vector for limited liability donations. Lax LLC registration requirements place the U.S. in a lagging standing in corporate transparency among the international community, and allow for unprecedented anonymity in political donations. But delving beyond the national level, some states have implemented impressive corporate transparency practices–even comparable to that of countries lauded for their openly accessible corporate information.

In OpenCorporates’ analysis of corporate transparency among U.S. states, one state would have ranked in 3rd place internationally, within the ranks of Denmark, New Zealand and Latvia. Washington, with an OpenCorporates score of 70/100 – compared to the United States’ overall score of 28/100 – can serve as a “better practices” state in regard to disclosing corporate information. The Evergreen State boasts many practices that could shed light on anonymous political donations, including requiring disclosure of all LLC managers and members as well as an up-to-date corporate registry. The state’s missing 30 points, however, still indicate a need for progress. Holding back Washington from being a “best practices” state are possible loopholes in its LLC registration laws, in addition to the specter of undisclosed donations from outside corporate entities.

The Good

LLC founders in Washington state, referred to as “executors” in the law, are required to disclose their names and addresses when they register their company. Upon the inclusion of a new member or manager, a domestic Washington LLC must amend its records to reflect this change, and annual reports also must contain up-to-date member and manager contacts. While not explicitly mentioned in state law, foreign LLCs operating in the state must also disclose member or manager names and addresses on registration forms.

A corporate registration, after being processed, appears on Washington’s corporate data portal within 24 hours. Extracts of corporation registration data, as well as the names of their governing persons, are available in bulk, machine-readable datasets updated daily. We were surprised to find that a .XML data extract on Aug. 8, 2014, contained corporate registrations dating back to the late 19th century. The state also assigns Unified Business Identifiers (UBIs) to each corporate entity, which facilitates connecting the dots between the governing persons dataset and the corporation information dataset. Without UBIs, linking the information between corporate and governing persons data – as well as any other corporate records – would be extremely tedious, if not impossible.

The Improvable

While Washington collects and discloses valuable information about LLCs and their respective members and managers, parts of their massive datasets are curiously incomplete. Parsing through the state’s corporate data revealed that 679,989 named corporations are registered with the state, while 461,649 corporations – 68 percent of the registered total – have their executives, directors, managers and members listed in the governing persons dataset. In a cross-comparison of the state’s corporate and governing persons records, manager and member information for foreign LLCs was prominently missing in governing persons datasets – potentially a missed opportunity for the disclosure of LLC member and managers, who otherwise wouldn’t reveal their identities when registering in less transparent states.

In spite of Washington requiring the release of LLC member and manager names, the state’s LLC registration laws still allow for undisclosed beneficial ownership – that is, individuals who own shares of an LLC through a person as proxy. The state code makes no explicit mention of beneficial owners or their proxies, let alone asks beneficial owners and proxies to disclose their relationship. Consequently, if prospective company owners want to establish an LLC in Washington state while keeping their names off of the state’s datasets and records, they can file an LLC registration through proxy owners. Those beneficial owners, hidden behind the name of proxies, could still make political donations with a degree of anonymity.

Dark donations from entities registered in other states, and especially those who donate to super PACs or 501(c)6 dark money groups, also threaten Washington’s LLC transparency progress and, transitively, the state’s strides in campaign finance transparency. Donations from a foreign and anonymously owned LLC could theoretically be ferried to Washington by a PAC. Additionally, national groups supporting both Republicans and Democrats, from the conservative Crossroads GPS 501(c)6 to the more liberal Priorities USA super PAC, are no stranger to anonymous donations. In the past, Crossroads has thanked anonymous donors for over $50 million in funding, while Priorities has worked with nearly $11 million from nameless figures. Spending by anonymously funded PACs or 501(c)6 trade groups could undermine the corporate transparency laws that have shone sunlight on the state’s campaign finance records – a shame in a state whose LLC transparency has bolstered campaign finance disclosure.

Indeed, Washington’s LLC transparency laws have already shed additional light on state campaign finances in the lead-up to the 2014 midterms. This autumn, one of the state’s most contentious races is not for Congress, but at the state Senate level. Eastern Washington’s 6th Senate district, previously host to the most expensive state Senate race in Washington history, looks like it will play host to another pricey election this fall. Republican incumbent Michael Baumgartner, squaring off against Democratic candidate Rich Cowan, is locked in a campaign that could determine what party takes control of the state Senate in the next legislative session. Baumgartner seems to be getting help from his political allies, receiving a very sizable $20,000 donation from the Washington State Republican Party. One of the Party’s largest donors, tied for first place for largest donation with a $50,000 gift, is a Kemper Holdings LLC.

In states with less transparent LLC disclosure, the money trail could end at that company name. But using Washington’s corporate data, we were able to find Kemper Holdings’s owner, Kemper Development Co., and the names of and contact information for its board of directors, now donors now influencing a tight state race.

Sen. Carl Levin, D-Mich., famously stated in 2013:

Today, it takes more information to obtain a driver’s license or open a U.S. bank account than it does to form a U.S. corporation […] Our states don’t require anyone to name the owners of the corporations being formed under their laws, and the United States is currently one of the world’s biggest offenders in terms of creating corporations with hidden owners.

Levin, perhaps the largest critic of shell companies and the risks of anonymous corporate (and LLC) ownership, could find some faith in Washington’s LLC registration and disclosure policies. Its LLC transparency efforts still have the potential to become an even stronger paradigm for other states. If its dataset of corporate directors and owners could become one-to-one with the state’s corporation list, additional light could be shed over those who donate through structures like LLCs. Calling for the disclosure of beneficial ownership could ensure that the true identities of corporate owners – and donors – is disclosed. Washington State’s Public Disclosure Commission could also find inspiration in California’s Fair Political Practices Commission in publicly calling for and releasing the names of those who own dark money groups, such as 501(c)4 nonprofit groups and 501(c)6 trade groups. With such improvements in disclosure, Washington state can go beyond a “better practices” state to become a “best practices” example for corporate and campaign transparency.