The latest leak to the International Consortium of Investigative Journalists (ICIJ), referred to as the Panama Papers, reveals that a single law firm, Mossack Fonseca, facilitated the creation of more than 200,000 offshore entities.
A shocking study by the Tax Justice Network revealed that the law firms in United States play the same role as Mossack Fonseca, possibly on a larger scale, and they do so blatantly under the noses of America’s loose financial secrecy laws.
In fact, according to the study, the United States is the third-biggest offender in the world when it comes to facilitating financial secrecy and tax evasion. Lax requirements in Delaware, Nevada and a few other states, for example, make it far easier to set up an anonymous shell company in the United States than it is in well-known tax havens such as the Cayman Islands or the British Virgin Islands.
According to the Financial Transparency Coalition, in Delaware, for example “You need to provide more information to obtain a library card than to start a company."
Shell corporations are used worldwide to conceal tax dodging or even outright fraud. The Enron Corporation scandalously used shell corporations to conceal its mounting debt and make the company appear more profitable than it actually was -- a deception that ultimately proved costly to the company¹s investors and put a series of financial crisis into motion.
Obama and Clinton
Barack Obama addressed the international scandal caused by the Panama Papers and disclosed that the US Treasury and Internal Revenue Service have stepped up their efforts to limit “corporate inversions” whereby large companies set up their headquarters abroad to save taxes, a common measure among Fortune 500 companies.
What adds intrigue to the situation is the fact that it was Hillary Clinton, current Democratic frontrunner to the Presidential nomination, pushed through the Panama Free Trade Deal at the same time that Bernie Sanders, the underdog presidential nominee, vocally opposed it, signaling warnings that it would strictly limit the government’s ability to clamp down on questionable or even illegal activity.
….according to the United States is the third-biggest offender in the world when it comes to facilitating financial secrecy and tax evasion
Although Clinton has not been linked to any malfeasance in the leak which exposes governments across the globe that willfully ignore tax avoidance by the rich, there is a perception that she is among this elite group, some of whose members have benefited from such schemes. And even if the Clintons remain unmentioned in future tax surprises, Sanders can continue to exploit the narrative that Clinton is part of the demographic responsible for brazen abuses of the system through certain trade deals.
As such, Sanders vowed on Tuesday to end the Panama Free Trade Agreement, tying Hillary Clinton to the same policies that he claimed fostered the practice. Promising to use his authority as president to "terminate the Panama Free Trade Agreement within six months," Sanders said his administration would "conduct an immediate investigation into U.S. banks, corporations and wealthy individuals who have been stashing their cash in Panama to avoid taxes."
There has been no formal response from either Clinton or Donald Trump to the Panama Papers allegations.
According to tax experts, there are several straightforward policy solutions that can put into place by the U.S. government in order to increase tax transparency while limiting the extensive use of shell corporations. The United States could copy the United Kingdom and France and create a public registry of the owners of every corporation, a move would allow anyone, from members of Congress to the voting public, to know exactly who owns every shell corporation in America, and would make it much harder for monies hoarded from illicit activities to be stashed anywhere in the 50 states.
Alternatively, Congress could pass the bipartisan Incorporation Transparency and Law Enforcement Assistance Act, which requires information on shell corporation ownership to be made available to tax administrators and law enforcement personnel.
Countries and entities that allow financial secrecy should be worrying about the long term effects of shell companies as they undermine public confidence in both federal and local government authorities. In the United States as well as elsewhere, laidback laws which permit tax evasion serve to emphasize the discrepancy between those elite citizens who can afford to use costly attorneys when necessary and the majority of working families that dutifully pay their taxes as required by law.