How tax havens like Delaware help traffickers sell children for sex

By Max de Haldevang, Quartz


Backpage.com is the world’s second-biggest classified advertising website. It is also the world’s “top online brothel” and a hotbed of human trafficking, according to US law enforcement.

In the US, the website is involved in seven out of ten reported child trafficking cases. In California alone, 2,900 suspected cases of child-trafficking were linked to the site between 2012 and 2016. There are several open lawsuits against Backpage.com, including one by the California attorney general’s office for 26 counts including money laundering, but US law law enforcement officials have so far failed to shut it down.

Backpage doesn’t deny (pdf, p.4) that people use its site to traffic children for sex, but it is protected by court rulings that say a site isn’t responsible for what users post on it. It also cites first amendment defenses of free speech. The firm operates in 97 countries and 943 locations, but in the US it is formally registered in the tiny state of Delaware, where authorities said last week that it is a company “in good standing,” and that they don’t have the power to shut down because it doesn’t have a physical presence in the state.

Delaware, which has 1.3 million businesses and less than one million people, is beloved of nefarious businesses. While a lot of firms flock to the state for its low corporate tax rates, a Senate investigation found that Backpage picked Delaware for another reason: secrecy. Delaware law allows companies’ owners to hide their true identity. This makes it very difficult to crack down on criminals who launder money through them.

In Backpage’s case, company founders Michael Lacey and James Larkin apparently tried to make it seem like they’d sold the firm by setting up a complex web of international and American shell companies, starting in Delaware. In reality, they loaned $600 million to the company’s CEO Carl Ferrer to make it seem as if he had bought it from them, while they continued to control the company and receive large bonuses from it.

Lacey and Larkin were still the company’s beneficial owners, alongside Ferrer, the Senate Subcommittee on Investigations revealed after subpoenaing company information for its 2017 report. It’s unclear exactly why Lacey and Larkin wanted to distance themselves from the company, but people often do so to avoid criminal liability.

This is far from an isolated case. A report by anti-slavery NGO Polaris published last month found that (pdf, p.10) anonymous shell companies were a “staple” of firms trafficking women through US massage parlors, a $2.5 billion industry. It named Delaware, Nevada, and Wyoming as the three most notorious states for corporate secrecy.

Tackling crime means forcing such companies to reveal their ownership, says Shruti Shah, vice president of the Coalition for Integrity (formerly the US branch of Transparency International). “If you really want to crack down on human trafficking, you want to find out who’s profiting from it—and that means ending the anonymity, because you want to know owns them, who benefits from the activities,” she says. Backpage’s owners have been revealed by the Senate and the site has so far stayed open using other legal defenses, but ending corporate secrecy would make it far easier to track down other criminals, Shah says.

Secrecy laws mean that even law enforcement can’t readily find out who actually owns many US companies. To unearth the owner of one company, investigators have to go through a lengthy subpoena application process, which will often then lead to another anonymous company, and so on.

Bipartisan bills in the House and Senate aim to tackle the issue by forcing companies to add their owners’ names to a registry accessible to law enforcement, but are currently sitting ignored in Congress. Only one hearing on the bills has been held since their introduction last summer.

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