Shell companies are national security risk
President Barack Obama is calling on Congress to give federal investigators greater ability to investigate corruption and money laundering, to address gaps in financial transparency exposed by the Panama Papers.
Obama called Friday for Congress to act hours after the administration unveiled its own package of anti-corruption initiatives, which include requiring banks and other financial institutions to verify the identities of people opening bank accounts for their offshore companies.
Obama said the administration’s moves would “make a difference,” but noted that “having said that, we are not going to be able to complete this job unless Congress acts as well.”
Congress should pass legislation requiring all companies formed in the United States “to report information about their real owners” to the Treasury Department’s Financial Crimes Enforcement Network, he said, adding that he also wants Congress to give the Justice Department additional tools to investigate corruption and money laundering.
He urged the Senate to approve income tax treaties with various nations – singling out Sen. Rand Paul, R-Ky., whom he accused of being “a little quirky on this issue” by blocking the treaties. Paul has opposed the treaties, citing privacy rights.
Obama argued that the proposed income tax treaties with countries such as Luxembourg “actually improve law enforcement’s ability to investigate and crack down on offshore tax evasion. And I’m assuming that’s not something that he’s in favor of.”
The moves come amid mounting foreign pressure and ahead of a looming global anti-corruption summit. “Tax evasion, tax avoidance, you know, money laundering: These things are all taking place in a global financial system,” Obama said at the White House. “And if we can’t cooperate with other countries, it makes it harder for us to crack down.”
Earlier, the administration had 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.
As a senator, Obama co-sponsored similar legislation authored by former Sen. Carl Levin, a veteran Democrat from Michigan, who spotlighted the abuse of offshore shell companies.
Levin tried for a decade to require greater reporting of the true owners of companies, retiring in 2014 having failed to see it happen. He issued a statement Friday calling the Obama proposals a “significant step backwards,” and criticized the idea of ending the practice of states keeping information about ownership of companies.
“The administration proposes instead directing a federal agency to hold the ownership information for millions of U.S. corporations,” he complained. “That approach is not in line with U.S. incorporation practice and tradition, and is a mistake.”
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 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.
The proposed legislation “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 office of Wyoming Secretary of State Ed Murray declined to comment Thursday.
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.