Financial Transparency Coalition

The Summit for Democracy held last week and attended virtually by dozens of world leaders is a key initiative by Joe Biden’s Presidency which identified corruptionas a threat to “United States national security, economic equity, global anti-poverty and development efforts, and democracy itself.” In a similar vein, US Treasury Secretary Janet Yellen in her summit speech admitted that the US has a lot to do to clean up its own act, as “right now the best place to hide and launder ill-gotten gains is actually the United States,” but added that this was about to change.

This focus and recognition was long due. In the past years, the US has become a global tax haven of choice, attracting illicit financial flows and serving as a platform for foreign corrupt officials to hide their money and wealth, along with murky businesspeople who rig markets and evade taxes often in countries of the global South. This also erodes democracy at home with dark money finding its way into the US economy – laundered in real estate, art and collectables, hidden in trusts and sham foundations, or private equity funds owning big companies among other channels.

The US has risen on the Tax Justice Network’s Financial Secrecy Index to second place in 2020 due to a high secrecy score (63/100) and large cross-border flows, with many US States creating ever more secretive and opaque company, trust and foundation laws that allow hiding assets without reporting or international information sharing requirements. The latest case is New Hampshire where a new law has allowed establishing non-charitable private foundations without the need for any disclosure.  There is no federal law or US supreme court ruling to prevent this flagrant abuse of the rule of law and shared values from taking place.

Fortunately, some of the announcements made during the Summit for Democracy appear to spell the start of the end of ‘Tax Haven USA’, or so it seems.

First of all, a White House memorandum (fact sheet and the full report) highlighted financial secrecy as a core concern, providing the rationale for greater regulation of the real estate sector. It specifically cites the Acres of Money Laundering report by FTC’s coalition member Global Financial Integrity (GFI) which revealed that $2.3 billion was laundered through US real estate between 2015-2020, of which 30% was in commercial real estate which currently has no disclosure obligations.

Tom Cardamone, President & CEO of the Global Financial Integrity, says: “For too long the US government focused on just half the problem in the real estate sector by limiting reporting requirements to residential real estate. Now it seems that the great loophole will likely be closed when the Treasury Department begins implementing reporting on all-cash commercial property purchases as well.”

Additionally, the US Treasury Department’s key financial crime fighting unit (FinCEN) released its Advance Notice of Proposed Rulemaking (ANPR) on real estate transparency, citing GFI’s findings on corrupt actors in the sector. The ANPR cited that approximately $463 billion in US residential real estate transactions “likely proceeded without any anti-money laundering reporting obligations,”, paving the way for new rules to stop this practice.

All this is welcome news, but a lot remains to be done.

The Biden Administration, for example, should close down the US state of South Dakota tax haven, which the recently released Pandora Papers suggest now rivals Switzerland, Panama and the Cayman Islands as the preferred venue for the rich and powerful to hide their assets and evade taxes. Several foreign political leaders, including Ecuador president Guillermo Lasso, have been able to hide their assets in this midwestern state with impunity. This is because only when US courts open a case on the basis of suspected foreign corruption or money laundering, in which tax evasion is now a predicate crime, may wrongdoings be found, as GFI also highlighted in its report.

Implementing a Beneficial Ownership (BO) registry specifically, as envisaged in the Corporate Transparency Act (CTA) of 2019, is crucial to shut down South Dakota’s secrecy industry and end the US being used as a tax haven of choice by powerful individuals around the world.  Last week, the US Treasury issued the draft CTA rule to implement the BO registry which also includes trusts, the vehicle of choice in South Dakota for shell companies.  Future steps are expected to include verification of data sent to BO registries, and access to this registry by competent authorities, including international information-sharing.

However, there is a wide gap in terms of the registry not being made public and open to journalists, parliamentarians and civil society actors, among others. To make the registry public would require opening up the CTA which at the moment would be outside of the scope of the current rule.  The US also said it would join the Extractive Industry Transparency Initiative (EITI) but failed to mention the strong implementation of extractive industry transparency in the Dodd-Frank Act (Section 1504 on resource extraction payments). The implementation of this section was invalidated by the previous Trump administration in 2017.

Al these steps are necessary to maintain appropriate momentum.

Only by moving towards a public BO registry would the US join the group of leading countries in terms of BO transparency. For example, the United Kingdom, Denmark and Luxembourg already have public BO registries. Argentina, on the other hand, recently announced the establishment of a public BO registry that goes beyond the UK one by lowering the threshold of publicly available data to 10 percent of ownership, while Ghana’s upcoming BO registry establishes no threshold at all for public officials, and a 10 percent threshold for high-risk sectors such as extractives.  Canada as part of its Summit for Democracy commitments also pledged to make its BO registry public by 2025.

As Matti Kohonen, Executive Director of the Financial Transparency Coalition says: “No country or jurisdiction should be a safe haven for secretive shell companies. This is undermining the capacity of countries to raise urgently needed funds to support their citizens, provide social protection and recover from the Covid-19 pandemic. For this to happen, public beneficial ownership registries and regulating key enablers of illicit financial flows is needed, as well as enhancing information exchange between authorities that go beyond the current publicly available data.  The US has taken steps in that direction, but much more remains to be done.”

The Biden Administration announced a second summit next year to evaluate the implementation of the summit’s transparency commitments.  Too often economic interests of powerful lobbies mean that implementation is lagging.  The second summit should overcome this obstacle align the work more closely to what is being done at the United Nations, specifically the UN Financial Accountability, Transparency, and Integrity (FACTI) panel’s final recommendations, along with the implementation of Financing for Development and UN Sustainable Development Goals (SDG) Goal 16. We also hope that the US will now endorse BO registries in the update of the Financial Action Task Force (FATF) recommendation due to be discussed next year. The international success of the Summit for Democracy will be seen in how much these international norm-setting processes advance during 2022 and deliver urgently needed change.