Anonymous shell corporations and secret bank accounts are vital resources for those engaged in tax evasion and money laundering. But this web of secrecy has started to crumble in recent years due in part to revelations from whistle-blowers embedded in this complex web of tax havens and fake corporations.
The latest leak to the International Consortium of Investigative Journalists (ICIJ), dubbed the Panama Papers, reveals that a single law firm, Mossack Fonseca, facilitated the creation of more than 200,000 offshore entities.
The scope of the activity exposed so far is disturbing. Current and former heads of state have been implicated in the leaks, raising serious questions about the source of the money. The documents also connect celebrities and wealthy individuals to the Panama-based law firm.
Anonymous shell corporations are the lifeblood of illicit financial activities because they allow individuals to hide their identities, their activities and their source of financing behind a faceless corporate entity. But while Mossack Fonseca and Panama are each responsible for this tidal wave of financial skullduggery, neither the law firm nor the country is unusual.
Firms in the United States play the same role as Mossack Fonseca, possibly on a larger scale, and they are doing so with the tacit blessing of our lax financial secrecy laws.
In fact, a recent study by the Tax Justice Network found that the United States is the third-biggest offender in the world when it comes to facilitating financial secrecy and tax evasion. Due to lax requirements in Delaware, Nevada and a few other states, for example, it is far easier to set up an anonymous shell company in the United States than it is in well-known tax havens such as the Cayman Islands or the British Virgin Islands.
“In Delaware, for instance, you need to provide more information to obtain a library card than to start a company,” according to the Financial Transparency Coalition.
These shell corporations can be used to conceal tax avoidance or even outright fraud. For example, the Enron Corporation infamously used shell corporations to conceal its mounting debt and make the company seem more profitable than it actually was — a deception that ultimately proved costly to the company¹s investors.
But there are straightforward policy solutions. The United States could follow the lead of the United Kingdom and France and create a public registry of the owners of every corporation. This move would allow anyone, from members of Congress to the voting public, to know exactly who owns every shell corporation in America, and it would make it much harder for funds garnered from illicit activities to be sheltered here.
Short of that, Congress could immediately pass the bipartisan Incorporation Transparency and Law Enforcement Assistance Act, which would make information on shell corporation ownership available to tax administrators and law enforcement.
Apart from rolling out the welcome mat to organized crime and tax evasion, permissive financial secrecy regimes have a much more worrisome long-term effect: They undermine public confidence in government. In the United States, lax laws that enable tax evasion among those who can afford costly attorneys is yet another reminder to working families that dutifully pay their taxes that laws are not written for them.
The United States is among several countries that said Monday they will look into the ICIJ’s investigation. That investigation should come with clear recommendations and swift action. Putting an end to the creation of anonymous U.S.-based shell corporations will be a vital step toward restoring Americans’ fragile trust in their democratic institutions.