United States of Anonymity

KleptoCast: Casey Michel talks to investigative economist James S. Henry about how the U.S. became a global leader in financial secrecy.

By Casey Michel (November 30, 2016)

In 1966, a memo from a former U.S. State Department official found its way to a staffer at Chase Manhattan Bank. “The U.S.,” the memo read, “is probably the second major flight money center in the world, but with little probability of rivaling Switzerland for the foreseeable future.” Five decades on, that relationship has continued, with Switzerland – as the most recent rankings from the Tax Justice Network’s Financial Secrecy Index indicate – remaining the only country outpacing the United States.

However, in the half-century following the memo, the gap between the two countries has shrunk significantly, and over the past few years the U.S. has begun a handful of policies that may well catapult Washington past Bern as the world’s leading destination for financial secrecy. Speared by both state- and federal-level policies, the United States, as a recent Washington Post analysis found, “is now becoming one of the world’s largest ‘offshore’ financial destinations.” Or as Bloomberg noted earlier this year, “Some are calling [the U.S.] the new Switzerland.”

The U.S.’s transition into one of the foremost offshore destinations stems, in no small part, from Washington’s 2014 decision not to join the OECD’s recent financial information-sharing agreement, known as the Common Reporting Standards (CRS). American officials instead opted to implement the Foreign Account Tax Compliance Act (FATCA), which came into force in July 2014. Even though much of text within FATCA’s provisions – which required international financial firms to notify the IRS of American accounts – mirrored CRS requirements, the two programs remain remarkably disjointed, such that, as the Tax Justice Network wrote, “Washington’s independent-minded approach risks tearing a giant hole in international efforts” at financial transparency.

The U.S. will occasionally furnish information in cases of specific requests, but the continued discrepancies between FATCA and CRS – and Washington’s willingness to join the likes of Bahrain and Vanuatu in failing to sign on to OECD standards – has swept the U.S. to the fore for foreign funds. As one executive noted, the U.S.’s decision to forego OECD standards has resulted in a surge in monies shifted from European banks, most especially from Switzerland, to the U.S. Wrote one Swiss lawyer, “How ironic – no, how perverse – that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour.”

Offshore Comes Onshore

However, it’s not simply blinkered federal policy that may jettison the U.S. past Switzerland as the global leader in financial secrecy. A concurrent trend, taking place among state legislatures, has effectively created a new class of “onshore-offshore” destinations in the U.S., led by Wyoming, Nevada, and Delaware. These three states – as well as Alaska, North Dakota, and South Dakota – have challenged heretofore popular offshore destinations like Jersey or the British Virgin Islands in provisions for anonymous shell corporations.

These three states, per the Tax Justice Network, “took an early lead in offshore secret incorporations, and remain leaders today,” offering their services as a “particularly sleazy add-on” to federal-level offshore innovation. Moreover, all three have displayed “clear characteristics of financially ‘captured states,’ where decisions about relevant legislation are taken between lawmakers and financial services interests behind closed doors, ring-fenced from complex democratic processes.”

This trio of states has essentially taken the broader thesis of American federalism – that is, improved national policy via state-level experimentation – and flipped it on itself, refining assorted policies to transfigure the U.S. into the world’s leading offshore destination. Delaware, Wyoming, and Nevada are “among the easiest places in the world to set up a company whose owners cannot be traced,” a 2014 Global Witness report said – and, as the Tax Justice Network report continued, are in a “race to the bottom … on standards of disclosure and transparency.”

Delaware is often cited as the original pioneer of such policy formulation, proffering offshore options as early as the 1970s. Indeed, researchers recently found that only 6 percent of those contacted asked for identification as simple as photo IDs, well below the national average. Soon, however, other smaller states – especially those, like Nevada and Wyoming, who may have missed out on the fruits of globalization – began swiping such methods wholesale. All three states began competing with one another to offer easier access to limited liability corporations and asset protection trusts, foregoing identification of either beneficial owners or even, in the case of Wyoming and Nevada until a few years ago, permitting companies to offer bearer shares, further obscuring final ownership. As a member of pro-transparency Global Financial Integrity group noted, “In some places [in the U.S.]” – this trio of states, most especially – “it’s easier to incorporate a company than it is to get a library card.”

Land of the Free-Ride

And these aren’t simple, anodyne actors taking advantage of such state-level services. Among those who’ve accessed financial secrecy mechanisms in these states are former Ukrainian Prime Minister Pavel Lazarenko and Russian arms dealer Viktor Bout. And per a report from the U.S. Department of Justice, Delaware provided anonymous shell corporations to divert millions of dollars in international aid earmarked for improving safety standards in post-Soviet nuclear facilities.

While all three states have shown certain susceptibility to federal pressures – dropping, for instance, bearer shares a few years ago, and tightening laws for registration agents’ records –these reforms have all appeared as little more than window dressing. These three states have also offered unified opposition to attempts to increase related federal regulations.

Moreover, these states have increasingly relied on such methods of secrecy to buttress creaky state finances. Wyoming, for instance, saw its economy contract in 2015, on account of cratering hydrocarbon prices – placing that much more pressure on state-level legislators to ease oversight over foreign funds wending their way through places like Cheyenne or Casper. To wit, as a recent investigation from NPR uncovered, out of the more than 450 commercial registered agents in Wyoming – those who would formalize the LLCs, asset protection trusts, and anonymous shell corporations – only 20 have been audited since 2009. As of a few months ago, according to McClatchy, Wyoming had “roughly one [business] entity per every 4.5 residents in a state.” Over half of these business entities were LLCs, which take only about $150 to set up. And in Nevada, the registration agent industry brings more than $110 million into the state economy annually, with agency fees supporting teachers’ salaries. Even trans-national organizations like Rothschild recently opened a trust company in Nevada, bringing foreign clients from spots like Bermuda to the state.

Still, the transmogrification of the U.S. into an international leader in shell corporations would have gone relatively unnoticed had it not been for the April 2016 Panama Papers leak. In addition to the foreign kleptocrats identified in the release, a USA Today analysis found that almost “all of the 1,000-plus corporations that USA Today has so far identified as being created by Mossack Fonseca in the United States are ‘based’ in two states: Nevada and Wyoming[.]” Indeed, Mossack Fonseca specifically advertised these two states for clients, highlighting the ease with which clients could access Wyoming’s and Nevada’s financial secrecy programs.

As it is, most of the pressure on these states to clamp down on financial secrecy services has been subsumed in the recent presidential election – and, with the coming administration of Donald Trump, the likelihood of the U.S. improving its financial secrecy regulations has taken significant hit. Where the Obama administration had, via its recent budget proposal, at least announced a desire for registered agents to identify beneficial owners, any executive pressure on financial reform will likely dissipate under a Trump administration. And the practices perfected by Wyoming, Nevada, and Delaware – and the means with which the U.S. now challenges Switzerland for financial secrecy hegemony – may well begin seeping into other eager, waiting states.

Casey Michel has worked as a journalist and researcher in both the U.S. and the former Soviet Union.