A year ago this week, the 11.5 million leaked documents known as the Panama Papers implicated hundreds of wealthy individuals and public officials from around the globe in transferring funds to anonymously owned offshore business entities known as shell corporations. While this practice isn’t technically illegal, many clients of Mossack Fonseca, the Panamanian firm at the center of the controversy, used the anonymous accounts associated with these organizations to conduct illegal activities including tax evasion, money laundering, and dodging sanctions.
One year later, it is still legal and permissible for corporations in America to be anonymously owned. On March 30, the Center on Regulation and Markets at Brookings hosted Senator Sheldon Whitehouse (D-RI) for a panel discussion on the efforts to end the use of shell corporations.
HOW EASY IS IT TO SET UP A SHELL CORPORATION?
In a recent report, event panelist Aaron Klein, a Brookings fellow and policy director of the Center on Regulation and Markets, explained that while one of the core tenets of America’s terrorism finance and anti-money laundering (AML) strategies is that financial institutions must “know your customers,” anonymous shell companies render this impossible. American corporations can legally set up anonymous entities and open bank accounts through them, without disclosing any information about the company’s beneficiaries. How, Aaron asks, can banks be expected to know your customer when the customer is entitled to anonymity, and what does this mean for the U.S.?
As Sen. Whitehouse explained, one consequence is that the United States has become “a haven for those who are doing mischief through shell corporations.”
Starting a shell corporation in this country can be easier than getting a library card. A library may actually require you to show up in person and sign for your card whereas you can form a shell corporation with a few clicks of your mouse and modest online fee.
We in the United States of America have now become a favorite destination for tax cheats, drug traffickers, terrorists, and other criminals from around the world seeking to form shell companies to hide assets and obscure illegal activity. We are a target of that influence we are also a facilitator of that influence by allowing that practice.
Norman Eisen, Brookings Governance Studies fellow and “ethics czar” under the Obama administration, shared an anecdote from a conversation he had with a local group during his time serving as U.S. ambassador to the Czech Republic that underscores this issue in the U.S.
[The group] said they were having a problem with beneficial ownership of this; we can’t get through to who the owners are because they’ve set up a shell corporation and they’ve hidden their identity in this very bad jurisdiction and I thought they were going to describe this Eastern European country or perhaps somewhere off in the Caribbean harboring shell corporations or elsewhere in the world and I say tell me where it is? Delaware.
WHAT IS THE PROPER POLICY RESPONSE?
The panel of experts and regulators discussed strategies to help eliminate shell corporations in the U.S. and abroad, stressing that the countries hosting financial institutions must demand accountability and transparency. In his keynote remarks, Sen. Whitehouse stressed that the U.S. should be a global leader in these anti-corruption efforts, and offered a national strategy to stop the creation of anonymous corporations.
The answer to the problem of shell corporations is simple: have each state track who actually owns companies that they charter and make that information available to federal state and local law enforcement agencies through proper processes.
Watch the full event and learn more about America’s role in stopping anonymously held corporations.