What Happens to Money in Nevada Stays in Nevada

As the U.S. focuses on people and companies using “offshore” tax havens, the “Panama Papers” indicate it doesn’t need to look beyond its own barren backyard. Nevada’s wild, wild west of lax financial and corporate secrecy regulations make it one of the more popular destinations for those looking to hide their money in the shadows of shell companies.

The massive leak from Panamanian law firm Mossack Fonseca, analyzed by hundreds of journalists, cast a harsh, Las Vegas-strip-style light on Nevada, placing it No. 8 in a top-10 list of tax havens favored by the firm, one of the largest incorporators of shell companies worldwide. Though the more than 1,200 companies incorporated in Nevada paled in comparison to infamous tax havens such as the British Virgin Islands, with more than 113,000 companies, and Panama, where Mossack Fonseca is headquartered, Nevada topped Hong Kong and the United Kingdom, according to the papers.

The Panama Papers investigation cited a specific case filed in U.S. District Court in Las Vegas. A “vulture fund” chasing some $2 billion it says Argentina owes it following the country’s defaults, in 2001 and 2014, claims to have run into 123 shell companies created by Mossack Fonseca to embezzle and launder millions from Argentine government contracts. The money was allegedly moved by a businessman with close ties to the political dynasty of former Argentine President Cristina Fernández de Kirchner, and her late husband Nestor Kirchner, who was also president.

In the wake of the Panama Papers’ revelations, the U.S. Treasury Department took steps Monday to crack down on corporate inversions. That’s when companies shift their “citizenship” overseas to avoid taxes even though their operations remain in the United States. President Barack Obama told reporters at the White House on Tuesday that Congress should block companies from “gaming the system” and taking advantage of the tax loopholes.

“It sticks the rest of us with the tab, and it makes hardworking Americans feel like the deck is stacked against them,” Obama said.

Vermont Sen. Bernie Sanders, running for the Democratic presidential nomination as anti-inequality crusader, seized on the massive leak Wednesday to link rival Hillary Clinton to a free-trade pact he claims is largely responsible for those loopholes.

“I don’t think you are qualified if you supported the Panama free trade agreement, something I very strongly opposed, which has made it easier for wealthy people and corporations all over the world to avoid paying taxes owed to their countries,” Sanders said at a campaign rally in Philadelphia, referring to the former secretary of state.

But the tax havens aren’t just in Caribbean locales or European duchies. The U.S. legal system offers plentiful opportunities for companies and individuals, American or foreign, to stash money and avoid the tax man. States such as Nevada and Wyoming, which are named in the papers, as well as Delaware, are fast making Panama defunct as a favored tax haven. In the United States, income passed through shell companies, often in the form of a limited liability company, or LLC, avoids the corporate income tax; if foreign-owned, the shell company can dodge U.S. taxes altogether. Banks aren’t required to know the identities of those who open accounts on behalf of shell companies.

Enter Nevada. It has no individual or corporate income tax, so there’s no state probing into a company’s or individual’s bank account. Steve Oshins, a lawyer at the Las Vegas law firm Oshins & Associates, also said Nevada law protects assets from creditors — hence the Argentine investment there. Until recently, New York hedge funds were in a 15-year legal battle to get Argentina to make good on loans they defaulted on in 2001 and 2014. The dispute ended in late March, when Buenos Aires agreed to pay back what it owed.  

Money stashed in Nevada “tends to be here because of creditor protection reasons,” Oshins told Foreign Policy. But the vast majority of bank accounts and companies in Nevada are above board, he stressed.

Gary Hufbauer of the Peterson Institute for International Economics noted Nevada’s financial system is awash in cash from the casino industry, including foreign money. That makes it easier for someone trying to hide illicit funds without attracting notice.

But Hufbauer, who was deputy assistant secretary for international trade and investment policy of the U.S. Treasury in the late ’70s, said Obama and other U.S. officials are “going after exactly the wrong target.”

“My big complaint about the way we go about our taxing practices is it’s a lot of attention on Apple, Google, Starbucks, and so forth and so on,” he said. “I happen to think what they’re doing is perfectly legal, and in fact we should be going to a much lower corporate tax rate,” he said. “The real problem in our system, I think, is exemplified by what’s going on in Panama: It’s wealthy individuals escaping their fair tax burden by these devices,” he noted. “And there’s a lot less effort in trying to get at that by the U.S.”

On Wednesday night, the New York Times reported the U.S. “is close to issuing a rule” — a “customer due diligence” proposal — that would require financial institutions for the first time to identify people behind shell companies. A handful of U.S. lawmakers have for some time attempted to require greater transparency from shell companies, with bills introduced as recently as February, but banks and conservatives have opposed similar measures as bad for business.

The Panama Papers revelations of alleged abuses of Nevada’s light regulatory touch could put some top politicians on the spot, from Sen. Harry Reid of Nevada, the Senate Democratic leader, to rising Republican star and popular Nevada Gov. Brian Sandoval. Earlier this year, Sandoval’s name was tossed around as a possible White House pick to replace the late Supreme Court Justice Antonin Scalia.

A spokeswoman for Sandoval told Foreign Policy that the governor is “concerned” about any allegations of Nevada state law being abused.

“For a multitude of reasons, Nevada is a preferred destination for many of the world’s leading businesses and emerging industries,” Mari St. Martin, Sandoval’s spokeswoman, said in a statement. “The governor is concerned by any allegations that Nevada state law may have been broken or circumvented to further illegal activities.”

Nevada’s secretary of state will review the allegations and any legal steps that may be taken as a result, St. Martin said.

Reid, who is retiring, did not return requests for comment. Sen. Dianne Feinstein, D-Calif., who introduced the Senate’s version of the shell company legislation, declined to comment.  

Photo credit: ETHAN MILLER/Staff