In U.S., efforts to fight offshore secrecy hit snags

2013 was a year of broad reforms in the global battle against offshore tax evasion. Tax havens from Switzerland to the Caribbean agreed to stricter disclosure rules, while industrialized nations pledged a new regime for automatic exchange of tax data.

But as ICIJ reported in November, there’s been little change in one critical area: the disclosure of what’s known as “beneficial ownership,” which reveals the flesh-and-blood individuals who control and profit from offshore companies and trusts.

Financial crime sleuths ask a simple question when they encounter a company involved in shady activities: “Who benefits?” But given the layers of secrecy built into the offshore world, it’s often a hard question to answer.

The United States, as the world’s largest economy and home of leading secrecy jurisdictions such as Delaware and Nevada, is a central battleground in the struggle over ownership transparency. Despite promises by the Obama Administration to crack down on financial secrecy, it has made few commitments toward revealing the true owners of secretive U.S. companies, and delayed for years in carrying out the pledges that it did make.

The most concrete measure that the U.S. has promised is a rule that will require American banks and other financial institutions to collect accurate ownership information from their clients. In March 2012, the Treasury Department issued a notice that it would propose a regulation to “establish a categorical requirement for financial institutions to identify beneficial ownership of their accountholders.”

Since the notice went out in 2012, the Treasury has yet to draft a rule.

“That rule-making has been ongoing for two years now,” said Josh Simmons, policy counsel at Global Financial Integrity, an advocacy group that campaigns against financial secrecy. “It’s a good first step, but we’re not holding our breath.”

Last month, the White House released an Open Government National Action Plan that pledged that the Treasury Department would “work to enact” the beneficial ownership rule in 2014. Jamal El-Hindi, the associate director of regulatory policy at the Financial Crimes Enforcement Network (FinCEN), the Treasury office that is writing the rule, said he expected that the rule would be issued in 2014 but that he could not guarantee it.

“I can’t commit to a specific timeframe, but I am fairly confident that we should be able to get that out” in 2014, El-Hindi said.

El-Hindi said that his office has been meeting with the financial industry to discuss the rule, a process that has occupied much of the time that elapsed since the notice was issued in 2012. He said banks and other financial firms support the rule in principle, but want to make sure that compliance obligations aren’t too burdensome.

“I think industry has an appetite for this rule, they want to make sure that it is appropriately balanced,” El-Hindi said.

Even if the rule is enacted, its impact on financial secrecy will be limited. The requirement would not affect state-level requirements for incorporation, and an individual wishing to form a shell company in Delaware or Nevada would not have to disclose any more information than under current rules. Owners would simply have to work to with foreign banks and money managers with more lenient disclosure requirements if they did not wish to reveal their identities to their financial institution. 

Legislation that would require U.S. states to disclose the real owners of companies within their borders has repeatedly been shot down in Congress in recent years, as powerful lobby groups such as the U.S. Chamber of Commerce and American Bankers Association have spoken out against it. 

In addition, the information that American financial institutions collect under the proposed rule will not be open to the public and Treasury has not decided whether it will gather the information in a central registry. By contrast, the United Kingdom recently announced a beneficial ownership registry that will create a government database of the flesh-and-blood owners of all U.K. companies that will be accessible to journalists, researchers and other members of the public.

The U.S. is still the norm rather than the exception among developed nations for its lack of a beneficial ownership disclosure rule.  A report last month by the rich-country association Organization of Economic Cooperation and Development found that 27 of its 34 members “store or require insufficient beneficial ownership information for legal persons.”

Simmons of Global Financial Integrity said the rule under discussion was less likely to have a substantial impact on U.S. secrecy jurisdictions than it was to begin setting a new tone for the global banking and financial systems.

“The U.S. is still the financial center of the world,” Simmons said. “If U.S. banks moved on this issue, and started taking a decent level of responsibility for who they’re doing business with, I think it would be a huge statement globally.”


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