The Obama administration announced several rules Thursday evening meant to combat tax evasion, money laundering and financial crime amid renewed scrutiny over the use of offshore accounts and anonymous companies to conceal money.
The rules, which include requiring financial institutions to find out and keep records on the real owners behind the companies that use their services, aim to help U.S. law enforcement pierce the layers of anonymous shell companies that people can use to disguise their financial dealings around the world.
The announcement follows a month of intense scrutiny after the release to media organizations of more than 11 million leaked documents detailing the global offshore industry.
The Panama Papers, which are the corporate records of one global law firm, Panama City-based Mossack Fonseca, show how wealthy individuals have masked their identity and secretly stashed money across the globe. There’s nothing illegal about the use of offshore companies; in practice, however, criminals take advantage of the anonymity that these companies provide.
The United States itself has become one of the most secretive jurisdictions for establishing these types of companies, analysts say. That's because while countries around the world, often under U.S. pressure, have signed agreements for sharing financial information, the United States has not. That has left America in the position of being a comparatively easy place to set up offshore companies, ranked by the Tax Justice Network as third in terms of secrecy and scale.
States such as Delaware, Wyoming and Nevada don’t require proof of identification when setting up a company, a task that can be accomplished in a few hours by paying only a few hundred dollars.
Since the states have been reluctant to ask companies to report their real owners, the Obama administration is now compelling financial institutions to do it, with what it has termed a “customer due diligence” rule. The regulation requires banks, securities brokers and dealers, mutual funds and other financial institutions to collect and verify personal information on the people who own, control or profit from companies that are their clients.
Advocates for financial transparency have welcomed the rule, though some say it doesn’t go far enough in requiring financial institutions to verify that the person providing the information is the actual owner.
“Our view is that this should be the start of the due diligence, not the end of it,” Heather Lowe of Global Financial Integrity said about the proposed rule in April. It remains to be seen whether privacy advocates or banks could challenge the rule in the courts.
The administration also proposed regulation that would close a small, but significant, loophole allowing one type of foreign-owned company — called a single-member limited liability company — to operate anonymously in the United States. It also issued draft legislation — which needs congressional approval to go into effect — that would require the real owners of companies to file their information with the Treasury Department at the time a company is created, information that could then be shared with law enforcement.
Reps. Carolyn B. Maloney (D-N.Y.) and Peter T.King (R-N.Y.), and Sen. Sheldon Whitehouse (D-R.I.) have also introduced a bill calling for all shell companies registered in the United States to report their real owners.
“The administration is doing everything we can, but we also need Congress to take action,” Adewale Adeyemo, the deputy national security adviser for international economics, said in a press call Thursday evening.
In a letter, Treasury Secretary Jack Lew also called upon the Senate to approve eight pending tax treaties with other countries that he said would help law enforcement investigate financial crime and catch tax evaders.