August 20th, 2009

There is an ongoing saga of good versus evil.  Valiant governments, with proud leaders at their helms, are devoted to bringing down the wicked tax havens and the conniving men and women who hide money on their shores.  One day, we will tell the tale of how these governments reigned victorious, dismantled the shadow financial system, and restored the black money to the rightful people of their nations.

If only.

Banking secrecy is no fairy tale.  In the system of international tax evasion, the valiant heroes are just as guilty as the wicked witches.  In a report to the UN, for example, Nobel Laureate Joseph Stiglitz notes the worst offenders are not remote island states, but places like Nevada, Delaware, and London.

In Switzerland, bankers are often fully aware their clients are up to no good, but will vow to take their clients’ names to the grave and then exploit their secrecy laws and sovereignty to do so.  But promises can be broken.  Just this week, for example, Swiss bank UBS has agreed to release the names of 4,450 American clients thought to be sheltering as much as $18 billion from the IRS.   Which is why, if you are a shady bank depositor, it is more appealing to not give your name in the first place.  This is illegal in Switzerland and most tax havens.  It happens to be perfectly legitimate in many American states.

In Delaware, Nevada, and Wyoming, for example, clients can anonymously set up shell corporations (companies that are used exclusively for business transactions and do not have any real assets or operations).  Nevada, one of the worst offenders, does not require banks to even request the names of account or company shareholders, nor do they need to share that information with the federal government.  This means it’s easier to set up a corporation in Nevada than it is to get a library card.  Wicked.

This theory has been proved by Jason Sharman, a professor of political science, who used a small budget and Google to set up shell companies and open anonymous bank accounts in 22 countries – including tax havens and respectable OECD members.  Of his 45 attempts, 17 banks provided him with a shell company without checking his identity.  Four of these were in the U.S.  and seven were in the UK.

In Switzerland and Bermuda, the banks requested a notarized copy of Sharman’s birth certificate.  In Wyoming the professor opened a bank account without so much as a Blockbuster card.  In Great Britain, he formed an anonymous shell company in 45 minutes.  Flat.

This isn’t just about tax evasion. Shell companies are also used for terrorist financing, money laundering, drug trafficking, and to siphon off illicit funds. These entities can absorb, hide and transfer wealth outside the reach of any law enforcement agency.  Shell corporations were also the main tools used by executives at Enron to hide losses and fabricate earnings.  Enron executives, bloated with their own audacity, gave their subsidiaries  snazzy names like “Raptor” and “JEDI”.

The Financial Task Force has proposed that jurisdictions maintain a public list of the beneficial ownership and accounts of companies and trusts. Under this system, banks in Nevada would be required to disclose the information of clients who open corporations and of the persons and entities who are benefiting financially from those accounts.

Well, actually, they need to collect the information first.

Written by Ann Hollingshead

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