The fallout from the release of the Panama Papers continued last week as the Obama administration announced new steps to fight tax evasion, money laundering, opaque corporate registers and corruption in the financial services sector. Not expecting to score any cooperation from Congress in an especially combative presidential year, Treasury Secretary Jack Lew said new regulations will improve transparency and bolster the integrity of the U.S. -- and global -- financial system.
These moves come as the person who leaked the Panama Papers to media groups, including the BBC and the German newspaper Süddeutsche Zeitung, explained in a 1,800-word statement why such action was taken. And while the White House has touted its leadership in curbing abuses within the global financial system, plenty of observers have pointed out that one of the biggest offshore business havens is actually the U.S.
The White House’s agenda in tackling money laundering and offshore tax havens will involve some unilateral executive branching and quixotic lobbying of Congress. New Treasury regulations on “customer due diligence” will seek to boost transparency by requiring financial institutions to collect, verify and disclose as necessary (as when requested by law enforcement) personal information of individuals who own the companies that use these banks’ services.
The Treasury and Internal Revenue Service (IRS) will also forbid non-U.S. citizens from hiding behind “autonomous entities” (i.e. shell companies) that are formed in this country. Setting up single-member limited liability companies (LLCs) is currently an easy process to complete and often does not require personal identification. New rules, however, would require an employer identification number (EIN), which would make it more difficult to shield foreign owners from the IRS and make these entities less effective in hiding assets.
The Obama administration also said it will ask Congress to pass new legislation that would require law firms and their attorneys to both know and report information on beneficial ownership to the Treasury Department. Professional services firms such as Mossack Fonseca, the law firm implicated in the Panama Papers, were previously not required to disclose such information to government agencies such as the IRS; new rules will change that practice as non-compliance will result in legal penalties.
Meanwhile, the White House is also asking Congress to draft legislation to fight cross-border corruption, has urged the Senate to take action on tax treaties the administration says are long overdue, and pass legislation that will strengthen America’s ability to reciprocate work with other nations in order to fight tax evasion.
This action may all sound like an effective response to what has been disclosed in the Panama Papers. But as plenty of nonprofit and civil-society organizations pointed out, offshoring is about more than having a law firm office in Panama City create shells to hide assets, or to hide accounts in the Cayman Islands, Switzerland or Dubai. Offshoring is less about physical location and more about a legal process. In fact, the Tax Justice Network’s Financial Secrecy Index ranks the U.S. third on this front, behind only Switzerland and Hong Kong.
Part of the reason for the U.S. leading in financial opaqueness is because this country has 50 states with 50 different sets of rules to register business entities. While American politicians love to pontificate on how we need to go after those terrorists and wipe out their financial networks, the fact is that several states in the U.S. make it easier to create autonomous business entities than famed offshore tax havens such as the Bahamas, Jersey and, of course, the Cayman Islands.
One Australian university study posited that lax disclosure rules in states such as Delaware, Florida and Texas allowed the notorious Russian arms dealer Viktor Bout to aid terrorist organizations accused of murdering U.S. citizens. Such lax rules are why, in 2009, Raymond Baker of Global Financial Integrity complained, “In many states, starting a company is easier than obtaining a library card.”
“The most glaring omission in the company formation process is a lack of requirement for disclosure of beneficial ownership. In other words, when forming a company it is not necessary to disclose who the primary beneficiary and controller of the newly formed entity will be.” – Raymond Baker, Global Financial Integrity
“Banks, financial regulators and tax authorities have failed. Decisions have been made that have spared the wealthy while focusing instead on reining in middle- and low-income citizens," said "John Doe," the Panama Papers' whistleblower. "Hopelessly backward and inefficient courts have failed. Judges have too often acquiesced to the arguments of the rich, whose lawyers — and not just Mossack Fonseca — are well trained in honoring the letter of the law, while simultaneously doing everything in their power to desecrate its spirit.”
Image credit: Ken Lund/Flickr
Leon Kaye has written for TriplePundit since 2010, and became its Executive Editor in 2018. He's based in Fresno, CA, from where he happily explores California’s stellar Central Coast and the national parks in the Sierra Nevadas. He's worked an lived in South Korea, the United Arab Emirates and Uruguay, and has traveled to over 70 countries. He's an alum of the University of Maryland, Baltimore County and the University of Southern California.