Let the Sunshine In
Shady shell companies thrive on secrecy. It's time to force their hidden owners into the open.
The veil of offshore secrecy has been momentarily lifted. Over the last two weeks, the world has looked on with fascinated horror as the “Panama Papers” leak revealed stories of political corruption, tax dodging, and money laundering that reached across the globe. The ramifications have been immediate. Iceland lost its prime minister, tax authorities around the world demanded access to the trove of data, and a number of countries have begun investigations.
The world of offshore can be baffling at first glance. But in many ways, it’s actually quite simple. Firms like Mossack Fonseca (the origin of the leak from Panama) are glorified paper pushers that create layers of companies to allow their clients to hide their identity and, therefore, their assets.
But there’s a common misconception, perhaps not helped by the latest leaks, that this is exclusively an offshore problem. In fact, according to a major academic study, the United States is the easiest place in the world to start an anonymously owned company. The World Bank also found that the U.S. is the favored destination for the corrupt to set up secret corporate structures.
In January, my organization, Global Witness, published the results of an undercover investigation into money laundering. We sent an undercover investigator into 13 Manhattan law firms. The investigator posed as an adviser to an African minister who wanted to secretly bring suspect funds into the U.S. to buy a house, a yacht, and a jet. The results were shocking: 12 of the 13 lawyers provided suggestions on how to move the money. Eleven of them suggested using American shell companies to hide the fictitious minister’s identity.
Many of the lawyers indicated that they would have to do further checks before agreeing to take our investigator on as a “client,” and none broke the law. This only goes to show you that all of this — from the Panama Papers to our investigation — is not about the behavior of individuals, however odious. It’s about what is wrong with the law, which makes it far too easy for crooks, corrupt officials, and sanctions-busters to hide behind the secrecy of anonymously owned companies. Around the world, laws allow companies to be set up with nominee boards and owners “on paper” who are really just fronting for the people who run things behind the scenes.
The easiest way of doing this is through publicly accessible registers of beneficial ownership.
Business figures, such as Richard Branson, Arianna Huffington, and Mo Ibrahim, have called on world leaders to tackle the problem. Following the Panama Papers revelations, law enforcement figures have also joined the calls for greater company transparency. This includes Patrick Fallon Jr., head of the FBI’s financial crimes unit. British Prime Minister David Cameron has also been a big champion of greater transparency. In 2013 he argued that public access to beneficial ownership information would be better for authorities tracking down wrongdoers, better for companies trying to understand whom they’re trading with, and better for developing countries trying to collect taxes.
The good news is that there has already been some progress. Starting in June, U.K. companies will have to publicly disclose information on who really owns and controls them. The European Union has passed legislation requiring member states to create central registers of the real owners of companies and provide access to the public if they can show a “legitimate interest.” Countries such as the Netherlands (and of course the U.K.) have promised to go further and make these new registers fully accessible to the public.
In 2014, the G20 heads of state agreed to a set of high-level beneficial ownership principles that stopped short of recommending public registers, but at least put the issue on the political agenda. (Although a review by Transparency International of whether G20 countries are living up to their commitments makes for depressing reading.)
On top of countries taking action, there are some useful attempts at transparency in more specific contexts. For example, the Extractives Industry Transparency Initiative, the global body that promotes good governance of natural resources, has agreed that companies that get natural resource concessions will have to publish their beneficial ownership information. The World Bank is exploring how to publish information about the real owners of companies that participate in Bank-financed contracts. And a group of organizations is considering how to create a global, open source beneficial ownership register.
Despite all of this, there are two big gaps where progress has been glacial: the tax havens and the United States.
Since the Panama Papers scandal broke, Cameron has come under increasing pressure to force the tax havens linked to the U.K. to open up. This is because British territories are home to more than half of the shell companies created by Mossack Fonseca. The havens have resisted calls for greater transparency, reportedly even refusing to meet with U.K. ministers. Cameron has a perfect opportunity to raise the pressure when he hosts an international anti-corruption summit in London in May.
In the United States, there are also moves to try to collect more information on corporate ownership. Barack Obama, then a senator, supported legislation to deal with the problem in 2008. This bill was stymied due to opposition from the states and powerful lobby groups, including the American Bar Association and the Chamber of Commerce.
A bipartisan bill introduced in February marks another attempt to bring greater transparency to who really owns U.S. companies by ensuring that ownership information is, at the very least, collected and available to law enforcement. Introducing the bill, Rep. Maloney (D-N.Y.) said, “Our legal system should not protect the rights of bad people to do bad things in secret.”
The White House is also reportedly close to issuing a final regulation that would require banks to identify customers hidden behind shell companies. Previous drafts have been weak, but it’s a step in the right direction.
The Panama Papers leak has sparked a global debate about the ability of crooks and others to hide their assets and identities behind anonymous companies. While anger is mounting about the role of tax havens, the U.S. peddles just as much corporate secrecy as the offshore world — if not more. The time has never been better for politicians to take action — both in the tax havens and in major countries such as the United States.
In the photo, activists in Berlin on April 13, 2016, throw fake money into the air while demanding greater transparency.
Photo credit: SEAN GALLUP/Getty Images