The outrage heard around the world on the release of the Panama Papers brings to mind Claude Rains’s turn as the Vichy prefect of police in Casablanca, “discovering” gambling going on at Rick’s Café. The fact that many of the world’s richest people and most corrupt politicians squirrel away hundreds of billions of dollars in secret offshore accounts has been common knowledge for years. Less well known is the dogged opposition of Congressional Republicans to reforms that would end much of the secrecy surrounding the untaxed offshore wealth of the very rich and very powerful, reforms that most other countries have embraced.
The ownership and assets of these offshore accounts are hidden by complex networks of trusts and shell companies, often distributed across multiple tax havens from the Cayman Islands and Bermuda to Luxembourg and Singapore. Lawyers and bankers create and maintain these trusts, shell companies and accounts in ways that have kept them hidden; at least until hackers accessed 11.5 million pages of files on the networks held by the Panamanian law firm Mossack Fonseca, a leading fixer in this shady practice.
The outstanding question is why governments allow these networks to remain secret, when they shield trillions of dollars in investment gains and profits that escape normal taxation and the ill-gotten riches of criminal and terrorist organizations and crooked politicians. The United States has two major laws in this area. For 46 years, the Bank Secrecy Act of 1970 has directed that any U.S. citizen, resident or business with financial interests in offshore accounts must report any income earned on those accounts.
The Foreign Account Tax Compliance Act of 2010 goes further. It directs all American citizens and residents that file U.S. income tax to report all offshore financial assets valued at $50,000 or more, and mandates that all foreign financial institutions report to the U.S. Treasury all of their accounts with substantial U.S. owners that also receive payments from the U.S. Both laws carry big financial penalties for violation; but neither law has any enforcement provisions, so the laws have little effect.
As financial losses from cross-border tax evasion and corruption have mounted, the Organisation for Economic Co-operation and Development (OECD) stepped in to sponsor new international standards for financial transparency and, equally important, new protocols for the automatic exchange by governments of the information they collect. Under these OECD standards and protocols, each government agrees to collect information on all account balances, investment income and other proceeds from financial assets within its jurisdiction; and to automatically share that information with the tax administrators of the nations where the owners of those accounts, investments and assets reside.
The G-20 finance ministers endorsed these standards and protocols in 2014. Since then, 97 countries have signed on, including most tax havens. Even Panama agreed to the new standards and protocols, although the OECD reports that Panama and 10 other countries have not yet implemented them.
But the whole system is on hold, because the United States has not signed on. The Obama administration endorsed the new transparency system and proposed legislation to require U.S. financial institutions to collect the information on foreign-owned accounts held here and to authorize the automatic exchanges. Citing their longtime “respect for privacy rights,” Congressional Republicans flat-out reject both proposals.
On top of the administration’s proposals, Senator Sheldon Whitehouse has offered new legislation to strengthen the proposed transparency regime. His proposal targets many of the stratagems used by U.S. multinationals to avoid U.S. taxes, including shifting profits to tax haven countries. He also would tighten the OECD’s transparency standards and beef up compliance in several ways.
Whitehouse’s bill states that any foreign trust or shell company with substantial assets in the U.S. and managed here will be deemed a U.S. taxpayer, that U.S. taxpayers who set up entities in tax havens will be considered to control those assets, and that funds transferred from the U.S. to those entities will be deemed taxable income not yet taxed. Most important, the proposal would bar U.S. banks from dealing with any foreign financial institution that fails to disclose offshore accounts opened by Americans and holding non-U.S. investments. Unsurprisingly, the Senate GOP has blocked the bill.
Such a bar is the big stick required to pierce the global secrecy treasured by the very rich and the very corrupt, and ensure that the automatic exchanges of information happen. In 2017, Hillary Clinton and a Democratic or divided but chastened Congress should pass reforms directing that all U.S. financial institutions comply with the OECD standards and protocols. This step would not only create real transparency; it also should produce several tens of billions of dollars in new annual revenues for the Treasury.
These reforms also must bar U.S. financial institutions from conducting business with any foreign financial institution that fails to disclose the ownership and holdings of accounts, trusts and shell companies owned by U.S. citizens, residents and businesses, within their jurisdiction. That’s a threat that every financial institution in the world will have to take seriously.