If I asked you to name the world’s biggest tax haven, you might come up with the Cayman Islands, Bermuda, or Luxembourg. Those of you following the recent series of so-called “corporate tax inversions” might guess Ireland.
You probably wouldn’t think of the United States, but the latest edition of Bloomberg Businessweek points its finger squarely at Uncle Sam—and not without reason.
Indeed, the U.S. has passed the Caymans, Luxembourg, and Singapore on the list of the world’s leading secrecy jurisdictions, according to the Financial Secrecy Index, compiled by the Tax Justice Network. America now ranks third in the world, behind only Switzerland and Hong Kong, on the list of nation’s that promote and profit from secret accounts used by drug dealers, arms traders, tax evaders, and even terrorists to hide their money.
There is a sad irony here.
The United States has led the way in confronting other tax haven nations, by insisting that foreign countries that protect illicit assets with harmful secrecy laws share information with the U.S. Government on American citizens’ foreign assets. But when it comes to reciprocating by sharing information on the assets held in the U.S. by foreign nationals, the Obama Administration has been dragging its feet.
The U.S. signed a few reciprocity agreements with a small number of mostly rich, Western European countries, but the poorest countries in the world—where tax dodging has the biggest impact on the lives of people—have been left out in the cold. Even the few reciprocity agreements that exist with the U.S. can be skirted by opening bank accounts in the name of an anonymous shell company instead of the actual person.
While the rest of the world is moving quickly towards reciprocal information exchange and ending the establishment of anonymous shell companies, the U.S. remains the second easiest place in the world (after Kenya) for a criminal, kleptocrat, or terrorist to open an anonymous company to launder their money with impunity, according to a 2012 study.
The problem of anonymous shell corporations is not new and the solution is widely known. Many times a year, media documents new cases of illicit funds being channeled through networks of anonymous companies in the United States.
Up until U.S. officials moved to seize the ritzy Piaget Building in midtown Manhattan in 2013, the government of Iran was able to use anonymous companies to evade U.S. sanctions and profit from owning the office building that housed a Juicy Couture store in its street-level retail space. International arms dealer Viktor Bout used several American shell corporations to hide assets to fund his illegal international arms trading network until his arrest in 2008. Teodorin Obiang, the son of the dictator of Equatorial Guinea, used a U.S. shell corporation to buy a $30 million Malibu mansion.
Over the weekend, CBS’s 60 Minutes documented how easy it can be for shady individuals to find prominent American lawyers to provide suggestions on how to set up anonymous U.S. companies to bring suspect funds into the U.S. financial system (unlike other professions, such as bankers—or even European lawyers—American lawyers are not required to report suspicious activity to regulators).
But anonymous shell companies also hurt U.S. taxpayers. Without anonymous shell corporations, crooks seeking to defraud Medicare would have a much more difficult time, and so would those who steal taxpayer’s identities and claim their tax refunds from the IRS.
Taxpayer dollars are also wasted when law enforcement investigating white collar crime runs into a series of dead ends, as they identify illicit monies moving through dizzying, untraceable webs where one anonymous corporation owns another, and no real human person is ever named. It is no surprise that many major law enforcement organizations including the Fraternal Order of Police, the Society of Former Special Agents of the F.B.I., and the National Association of Assistant United States Attorneys have called for new laws to require incorporation transparency.
It is time for Congress and the White House to act.
The Incorporation Transparency and Law Enforcement Assistance Act would put an end to anonymous shell corporations and make it likely that the U.S. would fall well down the list the next time that TJN’s Financial Secrecy Index is published.
The bill—set to be introduced in Congress this week by a bipartisan group of lawmakers—would simply require that one additional piece of information be collected when companies are registered: the names of the true, individual, human beings who actually receive the profits of the corporation, also known as the “beneficial owners” of the corporation. No states currently require this basic disclosure. In some states, it is actually easier to incorporate a business than it is to get a library card. Pay a small fee, fill out a simple form, no identity checks required, and you suddenly have the ability to move or hide millions or even billions of dollars secretly.
The most outspoken opposition to the legislation comes from state Secretaries of State, who complain of the added costs of collecting one piece of additional information. While it is difficult to quantify exactly what these costs would be, they are likely to be minimal. Furthermore, two large federal agencies have pledged $40 million of the funds they have seized from drug dealers and other criminals to help the states pay the costs of additional data gathering. A more important reason for state resistance is that incorporation fees are an important revenue steam for many states. Delaware —infamously known for its corporate friendly tax regimes, court system, and incorporation process — alone collects enough annually in corporate registration fees and franchise taxes to fund a third of the state’s budget.
It is time for the United States to match its insistence that other nations become more transparent in sharing tax information by also insisting that the identities of the beneficial owners of corporations registered in this country are known and shared appropriately with both domestic and foreign officials investigating tax fraud and other crimes.
Clark Gascoigne is the Interim Director of the FACT Coalition, a network of over 100 U.S.-based organizations working to curb offshore tax haven abuse, end the misuse of anonymous shell companies, and combat the facilitation of money laundering and other criminal activity by the financial system. Scott Klinger is the Director of Revenue and Spending Policies at the Center for Effective Government, a member of the FACT Coalition.