Given the massive scale of the Panama Paperswhistleblower leak—terabytes of files documenting the business dealings of more than 200,000 offshore shell companies—many observers have been surprised to see that only 211 people with U.S. addresses have surfaced in the data. But while journalists working on the investigation have hinted that more Americans eventually will be implicated in tax evasion, sanctions violations, money laundering, and other financial crimes or sleight of hand, this low number actually should come as no surprise. Americans have little reason to hide money in offshore shell corporations when it is exceedingly easy to do so right here in the United States. In fact, the only place it can be easier to establish a functionally anonymous shell corporation is Kenya. The Panama Papers should serve as a wakeup call for lawmakers who have failed to implement simple disclosure rules that would dramatically increase financial transparency and accountability by applying the same open data principles that Congress has already recognized are necessary for the government.
Shell corporations are not inherently illegal, but their complicated, opaque ownership layers make them attractive covers for illicit financial activity. Their legal owners are typically law firms, trusts, other corporations, or individuals who don’t actually control the businesses, making it extraordinarily difficult to identify who actually influences and profits from a shell company’s transactions—the so-called “beneficial owner.” So difficult, in fact, that Mossack Fonseca, the Panamanian law firm at the center of the Panama Papers scandal, could only identify the real owners of 204 out of 14,086 shell companies it helped incorporate in Seychelles, a popular tax haven. Many countries require companies to disclose who their real beneficiaries are, at least in some capacity. But in the United States, only Alabama and Alaska do. This is a big reason why the U.K.-based Tax Justice Network found the United States to be the world’s third-biggest tax haven, behind only Switzerland and Hong Kong, in its 2015 Financial Secrecy Index. (Panama ranked 13th.)
Unfortunately, states have a competitive incentive to not collect this beneficial ownership data. If a state were to expand its corporate disclosure rules, then companies may look for somewhere else to incorporate, such as Delaware, which has notoriously minimal filing requirements for corporations and thus is able to collect revenue from over one million businesses that have incorporated there. This creates a race to the bottom for financial transparency. States certainly should be free compete to develop business-friendly environments, but as long as critical beneficial ownership data can be used as a bargaining chip, no state has incentive to collect it. Rather than restrict the availability of valuable data, states should instead compete by making corporate registration as inexpensive and efficient as possible.
Not collecting and disclosing beneficial ownership data creates major problems for the country as a whole. For example, an investigation by Reuters found that from 2007 to 2011, shell companies in just eight states were responsible for $1 billion in Medicare fraud. Similarly, The New York Times pieced together beneficial ownership information for 200 shell companies tied to just one luxury high-rise in New York City. The probe revealed that more than a dozen of these beneficial owners had been investigated or arrested for fraud, environmental violations, or other crimes around the world, underscoring the fact that U.S. corporate data transparency laws are just as attractive to foreign criminals as they are for Americans.
The U.S. government is well aware of this problem and has pledged to enact national rules to collect beneficial ownership data, yet neither the Obama administration nor Congress has made much progress. The Department of Treasury has proposed rules that would require financial institutions to request beneficial ownership data from shell companies they do business with. But there would be no method to verify this information, the rules would only apply to shell company dealings with financial institutions, and they would have no bearing on the state laws governing the formation of these shell companies. Congress meanwhile has repeatedly failed to pass bipartisan legislation requiring states to collect beneficial ownership data. Rep. Carolyn Maloney (D-NY) recently reintroduced this legislation. If passed, it would greatly aid law enforcement investigations—but it would allow states to restrict public access to this data, which would limit the ability of journalists, civil society groups, and well-meaning companies to vet suspicious business dealings and hold beneficial owners accountable for criminal activity. If no states are required to make this data as open as possible, it is unlikely that any, particularly those eager to court new businesses, would voluntarily adopt stricter disclosure rules.
Policymakers should fully embrace open data principles in the United States by acting quickly to enact corporate data transparency laws that require all states to both collect and publicly disclose beneficial ownership data. Thanks to the Panama Papers calling global attention to the issue, failure to enact such a straightforward solution would amount to passively tolerating this illicit financial activity within U.S. borders.
Joshua New is a policy analyst at the Center for Data Innovation (an affiliate of ITIF)), a think tank studying the intersection of data, technology, and public policy. Follow Josh on Twitter @Josh_A_New.