Panama Papers: The Response

By now, chances are that readers of this website have heard of the Panama Papers. So let’s get right to the point: what should be the responses from policymakers and activists? Here are some ideas to consider. Keep in mind the general rules of the game, as explained by Mark Hays of Global Witness:

“If you’re a corrupt government official, a shady business executive or a criminal operator, you generally need three things. First, a bank that’s willing to do business with you. Second, an attorney, accountant or other facilitator to broker your scheme. And third, a getaway car. Anonymous companies provide the perfect vehicle to move money without being detected.”

Last revised on April 15, 2016, this post will be updated as appropriate.

INVESTIGATIONS

The real scandal is what’s legal, but investigations of illegal conduct should be sought nonetheless. Sen. Elizabeth Warren (D-MA) and Sen. Sherrod Brown (D-OH) are already pressuring the Department of Treasury to investigate potential wrongdoing by Americans in connection with the Panama Papers, and the Department of Justice announced that it was reviewing the documents as well.

Those investigations are unlikely to be the end of it; one needs only to take a look at major law firms’ responses to the Panama Papers to guess what other law enforcement actions may be in the pipeline. Here’s an example from Gibson Dunn:

“The nature of the leaked documents, which include financial and corporate records, could give rise to investigations by the Department of Justice, Department of Treasury (Financial Crimes Enforcement Network (FinCEN) and Office of Foreign Assets Control (OFAC)), Securities & Exchange Commission, state Attorneys General, prominent banking regulators such as New York’s Department of Financial Services, and other regulatory bodies of potential violations of tax laws, the Bank Secrecy Act, money laundering, sanctions, mail and wire fraud, or avoidance of reporting requirements, the Foreign Corrupt Practices Act (including the accounting requirements), the Travel Act, and the Racketeering Influenced and Corrupt Practices Act.”

CORPORATE TRANSPARENCY

  • End anonymous business ownership and control. 

Lawmakers in Congress have long been working to enact federal legislation that would end corporate secrecy and require companies to disclose their beneficial owners. The most recent version of the bill was introduced in February 2016 by Rep. Carolyn B. Maloney (D-NY), Rep. Peter King (R-NY), and Sen. Sheldon Whitehouse (D-RI).

Ultimately, what should be on tap is a rethinking of the state-level corporate law system itself because it currently operates as a race to the bottom on the basis of how much companies can get away with thanks to a particular state’s lenient corporate laws. It’s no wonder why so many anonymous shell companies have addresses in corporate havens like Delaware, Nevada, and Wyoming. As a result, investigators are often left at a loss to verify the identity information that’s been collected.

  • Create a national public registry of who owns and controls all businesses in the country. 

For an example of a policy paper on the topic, see this document by OpenCorporates. Registries of business ownership are already in the pipeline in the United Kingdom, Norway, the Netherlands, and the European Union. But due to the global nature of financial networks, all nations should follow suit and collaborate to make their databases inter-operable. (Public access is crucial for obvious accountability reasons, but it would also enable private sector stakeholders like government watchdog groups to develop data search and analysis tools that the government cannot or will not.)

It should be especially high priority for America, given that some of the easiest places to set up anonymous companies are found here. In fact, a recent World Bank report concluded that America is the favorite place for corrupt politicians worldwide to establish anonymous shell companies. In the United States, new legislation and therefore Congressional approval might be necessary, although the Administration may be able to establish more limited registries of federal contractors on its own.

  • Require disclosure by federal contractors. If a company wishes to do business with the federal government, require it to disclose its ultimate beneficial owners and make this information easily accessible to the public.

The American people have a right to know who our government is doing business with and for what purposes. The same information, if made publicly available, would also make it easier for other businesses to know what business entities they’re dealing with—illustrating that greater corporate transparency benefits businesses and investors as well.

Specifically, as explained in this letter by Global Witness and other organizations, the federal government should “require all US agencies to collect, verify and publish on a centralized website, such as the System for Award Management (SAM), information on the beneficial owners for any entity other than a publicly listed company.”

Uncle Sam is the largest purchaser in the world economy, meaning that even a partial registry resulting from the reform could be substantial.

  • The U.S. Senate, U.S. House of Representatives, and individual Members of Congress should press their own contractors and vendors to disclose ownership and control information, then make this information easily accessible to the public.
  • So should the World Bank. See this letter by 107 organizations to the President of the World Bank urging it to require and publish “the beneficial ownership information of all legal entity bidders on Bank-financed procurements.”
  • Require banks to “know their customers”—to identify and record the beneficial owners of the shell companies that open accounts with them. 

U.S. financial institutions are already required to know the identities of their customers under current federal regulations, but shell corporations exploit loopholes to escape scrutiny. The Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) is close to finalizing a new “customer due diligence” rule to tighten these requirements.

However, the proposed FinCEN rule should be amended to address criticism from the likes of former Senator Carl Levin (who used to chair the Senate’s permanent subcommittee on investigations) that in practice the details could make it easier for shell corporations to obscure their owners and activities.

Furthermore, banks still would not have to actually investigate and verify the identity information they collect under the new rule. As a lawyer with the American Bankers Association described this “last mile” dilemma, “That’s always been the problem. Banks can collect information but there is currently no mechanism to verify it or keep it updated, outside asking the company.” It’s also worth noting that the identity information collected by the banks would not be made available to the general public.

  • Require all real estate companies to know and report the true owners involved in their real estate deals.

In response to concerns raised about shady real estate transactions by anonymous shell companies, the Department of Treasury recently announced an initiative to require real estate companies to report the true owners behind all-cash real estate deals in Manhattan and Miami-Dade County. Specifically, the proposal requires “title insurance companies, which are involved in virtually all sales, to discover the identities of buyers and submit the information to the Treasury”; that information would be made available to law enforcement. The order would be effective only for 180 days, from March to August 2016.

Why stop there? The Administration should cover the whole country, not just the two cities, and make the order permanent.

  • Require not just banks but also “registered agents” that incorporate businesses on behalf of others to know the ultimate owners of those businesses. 

There is no such requirement under federal law, nor under state law in states like Wyoming that are notorious for enabling corporate secrecy. The Obama Administration has proposed the requirement in its budget proposal; Congress should step forward to enact it.

  • Close the legal loopholes for LLCs and other private companies that are easily exploited to hide wrongdoing. Subject them to the same disclosure rules as publicly-traded companies with shareholders.

Making use of such corporate structures is not necessarily a sign of corruption, malfeasance, or suspicious intent. For example, limited liability companies (“LLCs”) are routinely used to protect individual business owners from certain forms of legal liability and personal financial ruin. That said, depending on state law, “pass through” corporate entities like LLCs can be and are used to shield true owners from public scrutiny and accountability as well. The potential for abuse is high enough that Global Witness advises bringing private companies under the same ownership disclosure rules as publicly-traded companies with shareholders.

  • Require the stronger disclosure and reporting of energy market participants to the Federal Energy Regulatory Commission (FERC), as the Commission is proposing.

In an effort to thwart anti-market manipulation, the Federal Energy Regulatory Commission is proposing a new regulation (Docket No. RM15-23-000) to require stronger disclosure and documentation of energy companies’ corporate affiliates and subsidiaries. While the rule covers only one sector (albeit a major slice of the U.S. economy), it would be an important step towards greater corporate transparency and could also serve as a model for other federal agencies. The Administration should move forward with the rule despite opposition from the industry groups trying (unsuccessfully so far) to derail it.

INCENTIVES

  • Force individual banking executives to take the rules more seriously by changing to rules to hold them personally responsible.

Banks should be required to put a high-ranking executive in charge of compliance with anti-corruption regulations—and make them personally liable for violations. It’s an idea that the United Kingdom is adopting this year.

As Global Witness noted, changing the incentives is crucial: “It is not until senior bankers start to lose their jobs, have their bonuses withheld or clawed back, get fined, risk being barred from practice, and in extreme cases face criminal sanctions including jail, that many banks will start to take anti-money laundering and other laws as seriously as they should.”

With respect to federal law in the United States, Congress would likely need to intervene. As Global Witness explains, “officials have claimed it is extremely difficult for them to establish legal liability for executives, which is something that lawmakers should look to address.”

  • Increase penalties on violators.

Financial penalties shouldn’t be a trivial cost of banks doing business the crooked way. The solution? Increase the monetary punishment so that it has real bite. Other penalties could be considered, such as disqualification from contracting or dealing with government officials. (Background information on the enforcement and administration of the Bank Secrecy Act can be also found in this U.S. Government Accountability Office report.)

  • The Federal Election Commission (FEC) should enforce existing laws to stop de facto anonymous contributions to super PACs.

As the Campaign Legal Center explains:

“The FEC could begin to address these problems by enforcing its already-existing rules requiring LLCs that are taxed as partnerships to attribute donations to the individual owners. It could also take greater steps to clarify disclosure requirements for LLCs, such as requiring even those LLCs that are taxed as corporations to report the true “beneficial owner(s)” of the entity when making contributions and to put more of a duty on super PACs receiving LLC donations to inquire into the source of the funds.”

TAXES

  • Create a corps of government investigators and tax lawyers who will travel to overseas tax havens to sue American tax evaders on the foreign turf.

A key reason why smaller tax havens like the Cook Islands are popular with tax-dodging wealthy Americans is that the locations are physically remote and legally outside U.S. jurisdiction. In order to investigate and collect, federal officials would have to travel there and navigate the foreign court system under foreign law.

Here’s what Uncle Sam can do: call their bluff. Create a corps of government tax lawyers to travel to these overseas tax havens and pursue American scofflaws in the foreign courts. The need to do so will likely increase anyway because the wealth sloshing around in financial systems is expected to flow to these smaller locales as the U.S. government chases after bigger fish in higher-profile tax havens.

  • In the United States, modernize the corporate tax system so that companies are taxed “based on the location of their sales, employees, and capital assets rather than the address of their LLCs and various affiliates.”

The proposal would likely require federal and/or state legislation. For more information, see the Roosevelt Institute’s blog post on the topic.

  • To crack down on tax evasion by wealthy investors, create an international register of who owns which financial securities.

The purpose of an international financial registry of investments and their owners would be to enable local tax authorities to more accurately verify filed tax returns.