Exposing Secret Offshore Bank Accounts: American Law

Kleptocrats, drug traffickers, and other big-time crooks face a common problem: How to hide their money from the authorities while retaining easy access to it.  Yesterday former Senate staffer Elise Bean described one common, low-cost, easy solution and how a recent U.S. law has made it far more difficult for American criminals to turn to it. The solution, create a corporation in another country and then open a bank account in that country in the corporation’s name, is now widely known thanks to the Panama Papers.  What Bean offered in her April 26 testimony before a Congressional committee was a step-by-step explanation of how the scheme works and the U.S. law’s success in making it far harder for Americans to take advantage of it.

Committee members peppered her with questions about the law, its effect, and ways to improve its operation.  About the only question they didn’t ask is why more countries don’t have a similar law.  That would be one for anticorruption advocates to put to legislators in countries lacking one.

The shell company/bank account scheme.  Ms. Bean used the example of Guardian Bank & Trust, a now defunct Cayman Islands bank, to illustrate how the scheme works. In the case of American tax cheats, the bank would form a Cayman Islands shell corporation, so-called because the company conducted no business, serving simply as a vehicle, or “shell,” for the owner’s nefarious activities, for the tax-dodging client.  The bank would then open an account in the corporation’s name, being careful “never to link the company’s name to the client’s name outside the walls of the bank.”  To make it easy for the client to spend the money in the United States, the bank would issue a credit card in the company’s name that could be used to pay for goods and services.  To make it virtually impossible to link the client to the account, bank officials instructed clients “to sign their names illegibly on the back of the credit card and any charge slips.”

Recent U.S. law.  Ms. Bean was for many years the staff director the Senate Permanent Subcommittee on Investigations, the group perhaps most responsible for publicizing the shell company/bank account dodge through extensive hearings and investigations stretching back to 2001, which, among other revelations, showed how Americans were evading billions of dollars in taxes.  The outrage that finding sparked prompted enactment of the Foreign Account Tax Compliance Act, which requires that foreign banks, other foreign financial Institutions, and certain non-financial foreign entities report to the U.S. Internal Revenue Service the foreign assets held by their American account holders.  Any bank or other entity failing to disclose their U.S. clients’ accounts is hit with a 30 percent tax on any funds generated from activities in the U.S., what Ms. Bean dryly termed in her testimony “a powerful enforcement tool.”

What effect has the law had since its full implementation in 2015? A March 2017 working paper by a quartet of scholars and an IRS staffer that Ms. Bean cited in her testimony reports that FATCA together with related enforcement actions has increased the number of Americans reporting a foreign account by as much as 20 percent, revealing $75 billion in heretofore undisclosed assets.  The biggest increase has come from the rich.  Those holding accounts of $1 million or more account for $68 billion of the undisclosed wealth.

In 2009 as many as 41,000 individuals began disclosing they had accounts in foreign jurisdictions and began paying taxes on their holdings.  Significantly, the working paper authors report, the newly disclosed accounts were mainly located in tax havens.  The number of American taxpayers living in the U.S. who reported holding an account in the Cayman Islands increased by almost six-fold from 2008 to 2009 whereas the increase for accounts in Germany was only seven percent.

FATCA does not provide a complete solution to the shell company/bank account scheme.  Tempted by lucrative fees, some bankers are likely to lie about whether Americans have accounts in their bank, and not all banks earn money from U.S. activities and thus are not at risk of suffering the 30 percent penalty if they do lie.  And, as Ms. Bean and other witnesses told Congress yesterday, there have been some growing pains associated with implementing the law that are only now being worked out.

But FATCA is surely one element of any solution aimed at curbing the abuse of offshore corporations and bank accounts to hide ill-gotten wealth.  And one that any country wanting to crack down on such abuses would be well-advised to consider.

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