COMMENTARY: FOSTA-SESTA could close Del. loopholes

While Delaware is popular for its low corporate tax rates and premier corporate jurisdictions, which make it a corporate haven, Delaware is also a well-known destination for criminal enterprises to remain anonymous.

The Delaware Limited Liability Company Act does not require beneficial ownership information of companies that incorporate here, which allows companies to remain anonymous. Due to Delaware’s secrecy law, many limited liability companies (LLCs) have been connected to money laundering, narcotics, sex trafficking and other crimes.

A recent Senate investigation named the website Backpage as liable for knowingly enabling prostitution and child sex trafficking. The site was a registered Limited Liability Company in “good standing” in Delaware. Backpage’s founders attempted to make it appear that they had sold their firm to the company CEO Carl Ferrer by creating a complex network of international and American shell companies using Delaware as its location.

Through this Delaware network, Backpage profited and received large bonuses while “knowingly” facilitating online sex trafficking. This past January, a multi-agency law enforcement operation in Delaware found that Backpage was used as a primary source of communication in initiating and arranging prostitution across New Castle County which resulted in more than 40 arrests.

Delaware is not an isolated case. A report by anti-slavery NGO Polaris found anonymous shell companies were responsible for the sex trafficking of women through U.S. massage parlors. It also named Delaware, Nevada and Wyoming as three well-known states for corporate secrecy, which enables popular criminal enterprises.

According to Secretary of State Jeffery Bullock, Delaware did not have the “legal authority” to dissolve Backpage because Backpage doesn’t have a physical presence in the state and Section 230 of the Communications Decency Act protects web publishers and platforms from legal liability for what their users post.

As a response to websites like Backpage, in March the Trump administration signed into law the Fight Online Sex Trafficking (FOSTA) and the Stop Enabling Sex Traffickers Act (SESTA).

The bill places legal liability on websites for the content that their users post and what users do on their platforms. The bill revises Section 230 of the Communications Decency Act so that companies can be prosecuted for knowingly facilitating sex trafficking. The fundamental goal of this legislation is to combat online sex trafficking, which companies like Backpage and Craigslist have been active participates in facilitating the criminal enterprise.

The Fight Online Sex Trafficking and the Stop Enabling Sex Traffickers Act could potentially close a lot of loopholes that limited liability companies use to facilitate online sex trafficking in Delaware through secrecy laws.

Days after the passage of the bill in Congress, platforms scrabbled to shut down forums and websites where sex trafficking could occur, and Google began to enforce terms of service around sexual speech. Days before President Trump signed this bill into law, the FBI seized Backpage.

The Fight Online Sex Trafficking and the Stop Enabling Sex Traffickers Act could be a step in the right direction to stopping online sex trafficking in Delaware. However, other criminal enterprises that take advantage of the Delaware Limited Liability Company Act still exist. Many local activist groups have made suggestions to revise the Delaware Limited Liability Company Act so that Delaware can no longer be a popular destination for criminal enterprises.

Tamar Epps

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