On April 3, the International Consortium of Investigative Journalists began publishing articles based on 11.5 million documents from Mossack Fonseca, a Panamanian law firm, revealing the offshore holdings and shell corporations of some of its wealthy clients worldwide.
The information, obtained by German newspaper Süddeutsche Zeitung from an anonymous source identified by the pseudonym “John Doe” and analyzed by over 400 journalists from 100 news media outlets, has identified prominent world figures and people close to them among Mossfon’s clients.
While not illegal in the tax jurisdictions where they exist, anonymous holdings and corporations may be used to channel money for use in illegal activities, including, but not limited to, tax evasion and money laundering.
“The idea of the shell corporation is, you’ll set that up to interrupt the trail of ownership so that … the concept of the shell is you don’t know who the owners are,” said John Darcy, an attorney and retired certified public accountant, who is a professor in the School of Accountancy in UTRGV’s College of Business and Entrepreneurship.
The articles published so far, however, mention few prominent American citizens. McClatchyDC, a website of a news and information provider The McClatchy Co., part of the group of media outlets that reviewed the documents, reports that at least 200 scanned individual U.S. passports appear in the leaked documents. Some of the names mentioned include that of former child star and Hyatt hotels fortune heiress Liesel Pritzker Simmons billionaire film and music producer David Geffen.
Pritzker Simmons told McClatchy she and her husband are minority investors in a sustainable agriculture project in Colombia and that any income she and her husband earn is fully taxed.
Geffen’s lawyer, Bertram Fields, told McClatchy that Geffen has “never used an offshore account for business or commercial purposes or has any kind of tax haven.”
On April 19, the U.S. Attorney for the Southern District of New York announced that the Justice Department opened an investigation related to the information provided by the leaked documents, according to several major news outlets.
“The U.S. is considered to be a tax haven jurisdiction in its own right,” Darcy told The Rider. “It is not as attractive for citizens of the United States to put money, considerable amounts of money, in these foreign accounts, because we have reporting requirements. In the recent years, which includes the last 20 years, the United States and the [Organization for Economic Cooperation and Development] … have been working aggressively to create transparency in commercial and tax transactions.”
The 2010 Foreign Account Tax Compliance Act (FATCA) requires U.S. citizens to report any non-U.S. financial accounts on a yearly basis and all non-U.S. foreign financial institutions to search their records for any U.S. person account holder and report their assets and identity to the U.S. Department of Treasury.
Darcy also mentioned recent efforts by the Internal Revenue Service to address the issue.
“The IRS has been negotiating very aggressively, pursuing transparency with even the Swiss banks, who have historically named bank secrecy,” the accountancy professor said. “They have been successful in doing this. Bank secrecy is something that is going away bank by bank, but it’s by no means gone.”
Decades ago it was far more common for U.S. citizens to have offshore holdings mostly due to lax foreign holdings tax reporting laws.
In the 1970s, the IRS conducted Operation Tradewinds to investigate tax avoidance schemes used by Castle Bank & Trust, a Bahamian bank used by U.S. celebrities, wealthy business owners, criminals and even the Central Intelligence Agency to avoid paying taxes and to funnel money for illicit operations.
Heightened requirements for reporting overseas holdings, along with attractive corporate law regimes, make it unattractive for Americans to seek offshore havens for their money.
“In the U.S. you can set up an anonymous company basically in every state of the country,” said Liz Confalone, a policy counsel at Global Financial Integrity, a nonprofit research and advisory organization that analyzes illicit financial flows, advises governments on effective policy solutions and promotes transparency measures in the international financial system. “This isn’t just a problem with Panama. It is certainly a problem in the U.S. and many other places as well.”
The Tax Justice Network, an organization dedicated to high-level research, analysis and advocacy in the area of international tax and financial regulation has ranked the U.S. third in its Financial Secrecy Index, which ranks jurisdictions according to their secrecy and the scale of their offshore financial activities; the U.S. is surpassed only by Switzerland and Hong Kong, in first and second place, respectively.
A narrative report on the U.S. by the TJN also claims that the U.S. counts for 19.6 percent of the global market for offshore financial services.
“I would say certainly the ease of incorporation and the limited amount of information the individual has to provide are definite benefits for some folks, for incorporating in these areas,” Confalone said by phone from her office in Washington, D.C. “You need very little information to form a company in most states in the U.S.”
States like Nevada, Wyoming and Delaware are the most well-known states for creating shell corporations because of the ease of incorporation and the limited amount of information the individual has to provide. (Nevada and Wyoming are both places where Mossack Fonseca incorporated several of its clients’ offshore corporations; 37 and 1,260 respectively, according to the International Consortium of Investigative Journalists.)
“You need the name of the corporation; you need a registered agent, there in Delaware; you need to provide informational name, number of authorized shares; and then you need the incorporator’s name and contact information,” she said. “That is essentially it.”
The registered agent would be the person receiving legal service of process, and the incorporator is the person who is filing the documentation to form the company; both roles are commonly played by lawyers, making them bound by attorney client privilege to not reveal any information about the beneficial owner.
State corporate laws allow for the incorporation of anonymous organizations, making it incredibly difficult for government authorities to find their beneficial owner, or the person who enjoys the benefits of ownership despite not being the title holder or legal owner.
“The problem is that in the U.S. you can form a company in any state and not disclose who those beneficial owners, who those living, breathing people who own or control the company are,” Confalone said. “You can have a shell company that has names attached to it and is completely on the up-and-up and is used for true legitimate purposes. And then you have anonymous companies that have no meaningful name attached to the company.”
The TJN’s narrative report on the U.S. states that about 2 million limited liability companies (LLCs) are formed in the U.S. by domestic and international citizens without the states ever asking for the identities.
This level of anonymity is worrisome for the nation’s law enforcement agencies given that it opens the door for illicit activity to take place within U.S. borders.
A report by the Financial Accountability and Corporate Transparency (FACT) Coalition, states: “The U.S. Department of Justice, U.S. Immigration and Customs Enforcement, the former District Attorney of New York and the Federal Law Enforcement Officers Association all have testified at congressional hearings that the ability of criminals to wash their dirty money through anonymous U.S. shell corporations significantly impedes their efforts to fight terrorism and other serious crime in the U.S. and internationally.”
The legality of the anonymity provided by shell corporations allows for terrorists, narco-traffickers and other criminals to access world’s financial system.
The report makes mention of a skyscraper in Manhattan owned by Assa Co. Ltd., a shell corporation that after a lengthy investigation was found to be owned by Iranian citizens representing the interests of Bank Melli, which is owned and controlled by the Iranian government. This allowed Iran to evade U.S. sanctions and funnel U.S. dollars into their country.
“There are nations that are engaged in activities that we don’t consider to be legal, and shielding their activities from scrutiny and diverting money into accounts and organizations that can’t be traced furthers those activities,” Darcy said. “That’s the major problem, just the ubiquity of it, the so-called banality that is … it’s just so common for people to do this that it’s just frustrating.”
Even after the enactment of FATCA and aggressive negotiations between the IRS and banks, the actions of a single government might not suffice. Most, if not all, possible solutions will require significant multilateral cooperation given the globalized nature of the modern financial system.
“Well [the government is] doing anything they can,” Darcy said. “We’ve been engaged in a number of initiatives worldwide, and what we do is, we act on a multilateral basis because doing things on our own is very limited, but we need cooperation.
“We negotiated our treaties with most of our treaty partners up until this point … to require that the ultimate beneficial owner of the income is the person entitled to the treaty benefits, … We’ve eliminated treaty benefits to persons who are just using shell corporations. So, we’re eliminating treaty benefits from these shell corporations that aren’t what they call the beneficial owner of the income.”
However, the implementation of international treaties and initiatives such as the OECD’s Common Reporting Standards is hindered by the U.S.’ inability to change the laws to force banks to be able to report the necessary beneficial ownership information.
“We need Congress to pass a law,” Confalone said. “We need the administration to do their part and require banks to require to collect beneficial ownership information, meaningful beneficial ownership information, when corporate accounts are established. There are also other things that can be done.”
“The question that we all need to be asking, is how much are we losing by allowing anonymous companies to remain a reality in our world?”
–Oscar Castillo contributed to this report
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