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'Panama Papers' Reveal Global Network of Secret Accounts

Apr 07, 2016
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SMITH BRAIN TRUST — A Smith School expert, David P. Weber, helped journalists analyze financial records of Vladimir Putin and others, after one of the biggest document leaks in history. Results already are landing like a bombshell. This week the International Consortium of Investigative Journalists began publishing articles drawing on more than 11 million documents from a Panamanian law firm that show the extent to which the global elite has set up secret bank accounts and shell companies, to stash their assets.

The consortium makes clear that there can be legitimate reasons for shielding assets or seeking privacy.  But the leaks shed light on how Putin, for example, has orchestrated the extraction of at least $2 billion from his country, storing it in a complex series of accounts and companies. The President of Argentina, the former prime minister of Ukraine, the former president of Sudan, and the King of Saudi Arabia are among those whose financial arrangements are exposed in the leaked trove.

The papers also show how much help the wealthy investors received: 500 banks and their subsidiaries registered nearly 15,600 shell companies with the Panamanian firm in question, including banks with links to the United States.

The exposé claimed its first victim when the prime minister of Iceland offered his resignation after the revelation of his and his wife's ownership of an offshore company. Britain's prime minister, David Cameron, is facing tough questions about a fund based in Panama (and, later, Ireland), overseen by his father until his death in 2010. The fund paid no British taxes.

The journalists also showed how blacklisted corporations use shell companies to avoid international sanctions. "People are getting killed by this," says Weber, academic director of the Robert H. Smith School of Business’ graduate certificate programs in fraud management and anti-money-laundering compliance management, and lecturer in the accounting and information assurance department. "People think this is a victimless issue, but there are real victims — whether through Russian sex-trafficking rings, or money that circumvents economic sanctions to purchase barrel bombs then dropped in Syria."

Weber, a former assistant inspector general of the Securities and Exchange Commission, chief of enforcement at the FDIC and special counsel for enforcement for the U.S. Office of the Comptroller of the Currency, helped the consortium of journalists interpret the massive, and massively complex, documents they were fed by an anonymous source. (Weber notes that the consortium did not, at the time of his review of a subset of the documents, disclose their source.) He was sworn to secrecy about his participation in the Panama Papers project until publication began. 

There have been efforts in recent years to make the international financial system more transparent. Under the Foreign Account Tax Compliance Act, the United States requires that banks located abroad send detailed information about the accounts owned by American citizens. In turn, some of those countries have created similar, reciprocal agreements with other countries, a movement that has nudged many banks toward transparency. "FACTA is creating a dearth of places to hide money," says Samuel Handwerger, a Smith School full-time lecturer in accounting and information assurance. As a result, Switzerland, for instance, is no longer the haven it used to be.

But there are plenty of nations that have not yet signed on to such agreements, including Panama, the Cook Islands and the Seychelles. What's more, FACTA-like rules hardly solve all problems, Weber points out. "There's nothing to prevent you from creating a shell company first, and then opening an account in Switzerland, in the name of that LLC," Weber says. "Robust-looking but false documentation, provided by professionals, would conceal the beneficial ownership information from the Swiss bank." ("Beneficial ownership" refers to the person who actually gets the money, as opposed to a middleman or front.)

Both Weber and Handwerger point out that the U.S. is open to the charge of hypocrisy on the issue of financial transparency. The U.S. punishes financial institutions that do not comply with FACTA reporting requirements. But it has declined requests from European governments to provide similar information to European governments about European citizens' accounts in the United States. "This opens up a door for wealthy individuals worldwide to put money into the U.S. banking system through such vehicles as Nevada trusts, which precludes the sharing of bank account holder information," says Handwerger, who teaches international tax law. "And since these U.S. bank accounts are not subject to U.S. tax on their foreign account holders, tax haven possibilities exist if the foreign account holder does not report the income in their home country."

In fact, Nevada, Wyoming and South Dakota shroud accounts in such security, and shield them from creditors to such an extent that "their behavior is in some ways even more outrageous than what goes on in the Cook Islands or the Seychelles," Weber says. "I have heard Nevada described as the new Switzerland," Weber adds. "We, the United States, are effectively the biggest tax haven in the world."

Weber suggests that several reforms could help to limit abuse of the banking system. First, changes are needed at the federal level to end a race to the bottom among U.S. states on the documentation required to charter a corporate entity.  Additionally, Weber says, due diligence requirements should include making sure the people listed as the beneficial owners are in fact the beneficial owners. (U.S. banks are not currently mandated to investigate who the beneficial owner of an account is, although the Department of Treasury proposed a new regulation to require this level of due diligence in 2014. It has not been finalized.)

Finally, Weber suggests that serious consideration must be given by state bar and accounting authorities to cracking down on professionals who assist clients in misconduct. Weber concedes that banks cannot be expected to know or investigate items that clients intentionally hide from them, but the recent leaks suggest that the Panamanian law firm actively solicited front men or women to "own" entities that were actually controlled by others. And such activity is hardly limited to Panama.

Some analysts in the U.S. wonder why more U.S. citizens have not been exposed so far in the Panama Papers. Weber says that will change. "There are U.S. addresses and names, and hundreds of U.S. passports, in the information leaked," he says. "I believe that future stories have yet to be written on the Americans involved — and there will be stories to come." (Indeed, such stories have started to appear.)

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