Cracking the Shell


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Faced with mounting foreign pressure and a looming global anti-corruption summit, the Obama administration outlined steps to address weaknesses in financial transparency raised in the so-called Panama Papers.

The administration partially unveiled legislative proposals it said would combat money laundering and financial chicanery, and for the first time, establish a central federal registry of the real owners of all companies created and operating in the United States. The Treasury Department also said it has finalized a rule that will require banks and a range of financial institutions to collect and verify personal information on the real owners of shell companies. The Treasury Department also said it has finalized a rule that will require banks and a range of financial institutions to collect and verify personal information on the real owners of shell companies when bank accounts are opened for these companies. “Some of the proposals, like the new anti-money-laundering bill, are valuable, but others are disappointing,” said Elise Bean, former staff director of the U.S. Senate Permanent Subcommittee on Investigations, which conducted a number of anti-corruption and anti-money-laundering investigations under former Sen. Carl Levin, D-Mich. The White House also released a letter from Treasury Secretary Jacob Lew to House Speaker Paul Ryan, R-Wis., asking for swift action in Congress. “Additional statutory authority is necessary to put the United States in the strongest position to combat bad actors,” Lew wrote, “who seek to hide their financial dealings and evade their tax responsibilities.”

The steps are the first concrete action by an administration that has been largely silent for the past month amid a flurry of stories across the globe detailing how shell companies are used for a range of illicit or questionable purposes. The announcement also came a week before Britain hosts the International Anti-Corruption Summit next Thursday. Front and center will be the global impact of the Panama Papers – a leak of 11.5 million files from the Panamanian law firm Mossack Fonseca.

Journalists from 78 countries, including a team from McClatchy, pored over documents for nearly a year. What they unearthed was a worldwide network of politicians with potential conflicts, powerful people facing U.S. sanctions and drug cartels – all using shell companies created by the firm in 21 tax havens. Individual states have their own rules on the information required when registering a company. Some states – such as Delaware, Nevada and Wyoming – offer low fees and ask few questions of owners, even when they are foreigners. Other countries say this makes the United States part of the global financial problem. Proposed legislation that the White House will send to Congress on Friday “would require companies to report adequate and accurate beneficial ownership information at the time of a company’s creation or when company ownership is transferred,” said Jennifer Fowler, the Treasury Department’s deputy assistant secretary for terrorist financing. The proposal would create the registry under the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, allowing law enforcement to gain easier access to information on true ownership of companies.

The IRS presently gets information on company owners, through employer identification numbers, but law enforcement generally cannot see this information without a subpoena. The White House plan “gives us some benefit for law enforcement,” Fowler said. Delaware and some other states have proposed, as an alternative to a central registry, just making it easier for the IRS to share information. But that would require changing laws from the Watergate era, when President Richard Nixon used the IRS to go after opponents. “This (proposed) legislation closely tracks a similar proposal we are working on that takes a slightly different approach,” Delaware Secretary of State Jeffrey W. Bullock said in a statement to McClatchy. “Hopefully this is a sign that something will get done in Congress this year.” It also addresses a gap highlighted by McClatchy, the sole U.S newspaper partner in the Panama Papers project, in a story last month set in Wyoming. While most business entities formed in the United States report basic information to the IRS, some foreign-owned companies are exempt.

These companies are often owned by Russians, Brazilians and other foreigners but own no assets in the United States nor do any business here. The rule changes outlined Thursday would, if adopted, require foreign-owned limited liability companies with a sole member to get an employer identification number with the IRS and to report the same information as any other company or nonprofit. “Once these regulations are finalized, they will allow the IRS to determine whether there is any tax liability due . . . and to share information with other tax authorities,” Robert Stack, Treasury deputy assistant secretary for international tax affairs, told reporters.

Limited liability companies are popular because they limit an owner’s liability and offer protection from lawsuits. For example, presumptive GOP presidential nominee Donald Trump has hundreds of LLCs in Delaware. McClatchy’s story showed how Mossack Fonseca created shell companies in Nevada that conducted no U.S. business and that were tied to a widening corruption scandal in Brazil. The story also prompted an investigation by Wyoming’s secretary of state.

The Obama administration called on Congress to support other steps, including:

— Proposing legislation to help prosecutors seeking convictions of foreigners who bring the proceeds of corruption into the United States.
— Creating a mechanism to use and protect classified information in civil cases. That would make it easier to use foreign bank and business records in criminal cases.
— Providing reciprocity to partners who accept the Foreign Account Tax Compliance Act. This means banks in the United States would have to share customer information with foreign tax authorities.
–Making changes to allow the Treasury to collect data such as bank wire transfer information from title insurance companies when expensive real estate is sold for cash. The agency has been analyzing these kinds of purchases in Miami and New York.
— Calling on Congress to ratify tax information-sharing treaties with eight countries, including Switzerland and Luxemburg, that have languished for years. The treaties are considered key tools in fighting tax evasion.

The initiatives include final and proposed rules from the Treasury Department, as well as administration calls for congressional action. “Nobody should be able to hide in the shadows of their legal obligations,” Wally Adeyemo, deputy national security adviser for international economics, said in a call with reporters. The issues of money laundering and tax evasion have been brought to the forefront recently as a result of the “Panama Papers,” documents from a Panama-based law firm that sets up anonymous shell companies for its clients. While having a shell company itself is not illegal, they can be used for illegal purposes such as money laundering and tax evasion. Administration officials said the executive branch’s latest actions have been in the works for a while. But, “the Panama Papers underscore the importance of the efforts the United States has taken domestically, and the efforts we have undertaken with our international partners, to address these shared challenges,” the White House said in a fact sheet. One of the new actions is a final rule from Treasury that requires financial institutions to know and verify the identities of the actual people who own and control companies or of the “beneficial owners,” when the entities open accounts. The rule also helps make information available to law enforcement officers that could help them disrupt illicit financial networks, according to the fact sheet. Treasury and the IRS are also proposing regulations on Friday that would close a loophole that enables the shielding of foreign assets through U.S.–based anonymous companies.

A narrow class of foreign-owned U.S. companies currently has no requirement to report tax information to the IRS. But the rule requires these companies to obtain IRS-issued employer identification numbers. The Obama administration is also urging Congress to pass legislation and ratify treaties that would help the U.S. fight financial crimes. Treasury on Friday will send draft legislation to Congress that would require companies to report information on their beneficial owners to the department. The Justice Department announced that it is also sending Congress legislative proposals that concern the illegal proceeds of transnational corruption and substantive corruption offenses. Treasury Secretary Jack Lew on Thursday sent a letter to members of Congress urging the Senate to approve eight tax treaties that have been awaiting action for several years. The treaties would help the U.S. enforce tax laws, Lew said. Lew also urged Congress to pass an administration proposal that would allow the U.S. to provide its partner countries under the Foreign Account Tax Compliance Act with the same information that the partners provide to the IRS.

“Additional statutory authority is necessary to put the United States in the strongest position to combat bad actors who seek to hide their financial dealings and evade their tax responsibilities,” Lew said in the letter. “That is why I am urging legislative action on these important issues.”