Panama Papers and The US Government

The Obama Administration, the US Treasury Department and the IRS are waging an all-out war on offshore tax evasion and money laundering. Their actions have been stimulated by the shocking disclosures in the Panama Papers of world-wide tax cheating and corruption by celebrities, politicians and the wealthiest Americans who hide their criminal activities thru anonymous shell companies. The attack is against the “shell companies” that facilitate tax evasion and money laundering by hiding behind nominee owners, officers, directors, trustees, powers of attorney and a cottage industry of lawyers, CPAs and financial advisors who make billions of dollars by facilitating tax evasion and money laundering.

In the words of John Doe, the anonymous source behind the Panama Papers: “Banks, financial regulators and taxing authorities have failed… decisions have been made that spared the wealthy while focusing instead on reigning in middle and low-income citizens… the law firm at the heart of the Panama Papers (Mossack Fonseca) “did not work in a vacuum… despite repeated fines and documented regulatory violations it found allies and clients at major law firms in virtually every nation.”

John Doe calls for an end to the “abuse of corporate registrations … putting an end to the financial secrecy that enables tax evasion and money laundering and the hiding of other ill-gotten sources of wealth… the collective impact of these failures has been a complete erosion of ethical standards, ultimately leading to a dual system we still call capitalism but which is tantamount to ECONOMIC SLAVERY”.

ON 5/9/16 the International Consortium of Investigative Journalists published a searchable database detailing over 368,000 of the world’s richest people and their over 300,000 offshore entities created by Mossack Fonseca, which was the result of the media leak of 11.5m e-mails and client records covering nearly 40 years from Mossack Fonseca. The database involved more than 350 journalists in 77 countries.

To date, those outed have included: 12 current and former heads of state and government, 61 relatives and associates of leaders and 128 other public officials. John Doe further alleged, “in the United States, tax evasion could not be fixed while politicians relied on the super-rich for campaign funding.”

The ICIJ database release in tandem with efforts by the White House, US Treasury Dept. and the IRS seeks to combat tax evasion by eliminating the illicit use of secret offshore bank accounts and shell companies to hide the real owners. The ICIJ database confirmed companies, trusts, foundations, funds in 21 tax havens from Hong Kong to Nevada with links to people in more than 200 countries and territories. The new rules announced by the White House include:

1) Increased transparency and disclosure requirements that will enhance law enforcement’s ability to attack tax evasion, money laundering and terrorist financing;

2) Customer due diligence for banks & financial institutions on who owns the companies that use their services as well as for prepaid credit cards and debit cards;

3) Close existing loophole that allows foreigners to hide assets or financial activity behind anonymous entities established in the US;

4) Request Congress to pass legislation to increase transparency and set up a national registry of the real owners of companies;

5) Request Congress to ratify 8 tax treaties pending for years to crack down on offshore tax evasion.

The White House efforts are in tandem with the Foreign Account Tax Compliance Act (passed into law March 2010), under which over 150,000 foreign financial institutions in over 80 countries have agreed to report customer information to the US in an effort to ensure that wealthy US “tax cheats” can no longer hide assets offshore, commit tax evasion and then use the tax evasion proceeds (i.e. unpaid tax) to launder money and buy investment assets (e.g. stock, bonds, real estate, cars, boats, planes, jewelry and art).

The key new rule to disclose the real owners of shell companies (i.e. the beneficial owners) requires financial institutions (banks, brokers, mutual funds) to obtain the identities of “beneficial owners of companies verified by documentation (e.g. passports), and at least one senior manager who are clients of the firm. The US Treasury Dept. has a two-year transition for the implementation of the new rule which will be effective in 2018.

The US response has been a 3 pronged attack against money laundering and tax evasion:

1) Released a Customer Due Diligence Rule for Banks/Mutual Funds/Securities Brokers/Financial Institutions to disclose 25% owners of companies;

2) Issued Proposed IRS regulations relating to foreign-owned LLCs requiring them to obtain an IRS Employer ID # and authorizing the IRS to calculate their taxes due;

3) Send to Congress legislation to create a federal registry of beneficial owners of US companies (these appear unlikely for passage as law due to pending November 2016 elections and the currently dysfunctional Congress).

The US Treasury Dept. has announced that the Panama Papers exposed that politicians, criminals, and celebrities are avoiding paying taxes by hiding their wealth in offshore shell companies so their efforts will be to “target key points of access to the international financial system, when companies open accounts at financial institutions, when companies are formed, or when company ownership is transferred and when foreign-owned US companies seek to evade taxes”. The goal is to prevent wealthy individuals from using offshore shell companies to hide assets, receive bribes, embezzle funds, avoid taxes and launder money.

The center point to their attack is the new Customer Due Diligence Rule for financial institutions which includes banks, stock brokers, mutual funds, securities dealers, commodities brokers who must collect and verify the personal information of real people (i.e. the beneficial owners who own, control and profit from companies when those companies open accounts. According to the Treasury Dept. the rule contains 3 core requirements: identifying and verifying the identity of the beneficial owners of companies opening accounts, understanding the nature and purpose of customer relationships to develop customer risk profiles, conduct ongoing monitoring to identify and report suspicious transactions and to maintain and update customer information.

The Treasury Dept. has requested that Congress pass legislation that would require companies formed in the US to file beneficial ownership information with Treasury and face penalties for failure to file. The proposed Congressional legislation would amend the current GTO (geographic targeting order) which would clarify Fincen’s ability to collect information under GTOs such as bank wire transfer information.

Proposed IRS regulations would require foreign-owned “disregarded entities” (including foreign owned single member LLCs) to:

1) Obtain an Employer ID # from the IRS to prevent foreign owners from shielding disclosure of non-US assets or non-US bank accounts;

2) File IRS Form 5472 to disclose 25% or greater ownership in a US company;

3) Subject these tax returns to IRS tax audit and tax due.

As stated by Wally Adeyemu, National Security Advisor for International Economics:

“Our financial system should not provide the rich, the powerful and the corrupt with the opportunity to shield their assets and avoid paying their fair share of taxes or with the opportunity to hide any illicit activity… nobody should be able to play by a different set of rules”.

The Customer Due Diligence Rules will be phased in over 2 years. The rule requires that banks and other financial institutions in the US must collect and keep accurate records on these same beneficial owners after they open a new bank account. The rule mandates that banks know the identities of anyone who owns at least 25% of an entity, or who controls it which information could be provided to law enforcement or tax authorities.

The Treasury Dept. called on Congress to pass 8 separate tax treaties stalled in the Senate including Switzerland and Luxembourg, two know tax havens (Switzerland has $2.7 Trillion; Luxembourg $600 billion in tax haven assets). The tax treaties would allow for a greater exchange of tax information so that cross border tax cheating may be stopped. The Treasury Dept. wants to allow the federal government to determine whether companies owed any taxes in the US or whether they were set up to illegally shield owners from having to pay taxes overseas. The goal is to end anonymous shell companies for politicians, criminals, and corrupt financiers and go after “tax cheats, kleptocrats, and other criminals who abuse the financial system thru shell companies.”

To date, 36 Americans accused of financial fraud and other financial crimes are on the Panama Papers list. Many athletes are also listed: Golfers: Padraig Harrington, Retief Goosen, Ian Woosnan, Tennis Player: Thomas Enqvist, whose accounts were apparently set up offshore (tough to trace at the direction of their agency IMG, International Management Group).

In the end, the Panama Papers have shown how the rich and powerful exploit offshore tax havens, working with major banks and law firms to create hard to trace companies, and a “long history of corruption” in which the Political Leaders around the world have been found to have “taken and made bribes, dodged taxes and amassed fortunes of unimaginable scale”.


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