Blog

Transparency is the Prize in Post-Pandora Papers Scramble

The past week’s revelations through the “Pandora Papers” – the largest exposé to-date of how global politicians, business leaders, celebrities, and multinational companies use and abuse the “offshore” financial system – are both shocking and surprisingly familiar. While the leaks have caught a jaw-dropping more than 300 politicians from 90 countries and others using secrecy jurisdictions to hide assets from creditors, tax enforcers, and criminal investigators, the leaks more squarely point the finger at systemic flaws the global financial system, and in no small part, at the laws in place in the United States.

Though Congress has taken major steps to reduce U.S. complicity in driving illicit financial flows by passing the Corporate Transparency Act, there are still a number of changes the Biden Administration and Congress must pursue to change course and reduce the U.S. role in global corruption and tax avoidance.

It’s no secret that the US has become a favored destination for the rich and powerful to hide their dollars. The Tax Justice Network’s Financial Secrecy Index lists the U.S. as the second most secretive jurisdiction in the world, only behind the Cayman Islands.

Reading the Pandora Papers, it’s not hard to see why.

What the Pandora Papers Demonstrate about U.S. Financial Secrecy

Despite existing U.S. anti-money laundering laws, the Pandora Papers reveal that there is still a startling amount of secrecy – especially around trusts, in real estate, and among “enabler” professions – that empower tax evaders, corrupt officials, and sanctions evaders to exploit the U.S. financial systemto avoid accountability, maximize wealth, and minimize taxes.

Trusts

First, U.S. trusts feature prominently in the leaks, underscoring the susceptibility of trusts as a vehicle for illicit activity. Trusts rose to infamy as states with otherwise lagging economies like South Dakota, Wyoming, New Hampshire, Alaska, and Nevada – lured by the siren’s song of attracting out-of-state income – shrouded their entire financial sectors in secrecy. At face value, it worked: South Dakota, for instance, quadrupled the assets held in its trusts over the past ten years to $360 billion. Total U.S. trust assets now amount to about $1 trillion, and have grown as other jurisdictions bring online stronger disclosure measures, including the OECD’s Common Reporting Standard to which the United States is not a party. What hasn’t been lived up to its promise, however, is the impact the loosened trust laws have had on the local economy: in New Hampshire, for instance, a peer reviewed journal analysis showed that the trust industry in-state only employs up to 275 individuals, far short of the 4,000 industry associations promised. It likewise has done little for New Hampshire state tax revenues. Moreover, the clientele consequently attracted to these secrecy jurisdictions draw cause for concern.

Take Carlos Morales Troncoso, the former vice president and later U.S. ambassador of the Dominican Republic, who transferred his vast wealth into a South Dakota trust after the Bahamas, where he previously had holdings, implemented financial transparency laws. In addition to several million dollars, Troncoso’s holdings included controlling shares in the country’s largest sugar company, mired in accusations of labor and human rights abuses. Similarly, the Pandora Papers tied South Dakota trust companies to Douglas Latchford, who put at least $10 million worth of looted Khmer antiquities, supposedly chiseled and stripped from historic sites by his own hand, into a trust, complicating efforts to repatriate the pieces back to Cambodia. Most notably, Colombian clothing businessman José “Pepe” Douer Ambar, who U.S. investigators suspected of laundering millions of dollars for drug traffickers through the Black Market Peso Exchange (BMPE), was the proud owner of a South Dakota trust. The secrecy of U.S. trusts shelters unscrupulous actors from accountability by law enforcement and other authorities.

Real Estate

Second, the Pandora Papers reveal how U.S. real estate can be manipulated for secrecy purposes, especially when combined with the use of other financial secrecy vehicles like trusts. As a recent Global Financial Integrity report points out, real estate is a valuable tool in a money launderer’s arsenal: not only does it bring legitimacy to money of questionable origin, but it can help grow that wealth through a stable asset class that generally appreciates with time. Further, right now, if one is purchasing a real estate property with a trust, corporation, LLC, or other legal entity, there is next to no scrutiny in the real estate industry, making it easier to move money beyond the watchful eye of law enforcement or tax authorities.

Consider the following examples from the Pandora Papers, which point to potential misuse of the U.S. real estate market:

  • King Abdullah II of Jordan is documented using several dozen shell companies, some of them circumventing the higher scrutiny required for politically exposed persons (PEPs), to purchase at least $106 million in luxury homes in Washington, DC and Malibu, California. There is nothing inherently illegal about the purchases, and after the publication of the Papers, his office claimed that the King had used his personal wealth and was never obliged to pay Jordanian taxes. Still, the point is an uncomfortable one to make when the King faced protests in 2018 over taxes and his country is a top recipient of U.S. aid dollars to help stabilize the economy.
  • Daniel Birmann, banker and shareholder in Brazil’s largest ammunition company, had previously evaded a $90 million fine by Brazil’s securities officials by declaring bankruptcy. The papers show that – with the help of a lawyer – he dumped his money into several shell companies, which he used to buy a $20 million yacht and a nearly $2 million home in Miami Beach. While securities investigators ultimately found, seized, and sold Birmann’s assets, he delayed the process by a decade using financial secrecy vehicles.
  • Guillermo Lasso, Ecuador’s current president, who was implicated in the Pandora Papers for his two South Dakota trusts, also had hid behind limited liability companies to purchase 130 real estate properties in South Florida. The purpose of these numerous purchases is unknown.
  • Julio Iglesias, the Spanish singer who sets the record for owning the most offshore entities of any person named in the Pandora Papers, used five of his numerous LLCs registered in the British Virgin Islands to buy $110 million worth of property in Miami, a structure which Iglesias’ real estate lawyer said could help foreign U.S. residents avoid U.S. taxes with respect to foreign estates.

The opacity of U.S. real estate is not an abstract problem, but one that impacts whole communities: the general influx of offshore funds into Miami has, in some cases, left entire properties full of viable housing vacant, and, per at least one Miami Herald Reporter, has driven real estate prices in the city far above what the average person can afford. Likewise, anonymity can leave renters vulnerable in the hands of absentee landlords. Another Pandora Papers story pointed to the negligence of private equity firm Pensam, which used millions of dollars in investments from France’s disgraced Legion of Christ to buy an entire apartment building in Miami that Pensam, in turn, let fall into disrepair. During the COVID-19 pandemic, the firm evicted residents from the same building within three days of failing to pay rent, despite the orders of the national eviction moratorium. In short, real estate manipulation poses a great vulnerability to U.S. financial integrity and U.S. citizens.

Similarly shocking Pandora Papers revelations regarding U.K. real estate – including $700 million worth of purchases from Azerbaijan’s corrupt Aliyev family, and questionable arrangements between the former Bahraini minister of industry and former Prime Minister Tony Blair – have prompted lawmakers there to revive efforts to improve the transparency of UK property ownership. The U.S. would do well to follow suit.

The “Enablers”

The individuals identified by the Pandora Papers rarely act alone. So-called “enablers”, such as lawyers, accountants, PR firms, corporate service providers, investment advisers, and real estate agents, empower elites and corporations to navigate the legal but ethically dubious workings of the offshore financial system. These “enabler” professionals pose a third major vulnerability to the U.S. financial system.

The Pandora Papers especially reveal how the legal profession fuels activities that undermine both U.S. national security and tax justice objectives. One feature story from the International Consortium for Investigative Journalism, the lead organization coordinating the global investigation,  pulls back the veil on corporate law firm Baker McKenzie, which, for instance, allegedly helped a sanctioned Russian arms maker evade sanctions to execute a multimillion dollar sale of a Mongolian copper mine. Further, Baker McKenzie staff allegedly helped Jho Low – an adviser to the former prime minister of Malaysia and a leading force behind the 1MDB scandal that robbed Malaysia’s development bank of nearly $4.5 billion – move his stolen wealth through a network of shell companies, trusts, and private investment funds. The firm likewise, according to ICIJ, helped multinational corporations like Nike, Nabisco, Apple, and Facebook legally avoid presumably millions of dollars in taxes by setting up tax shelters in havens like Ireland and the Netherlands.

The implications of the Pandora Papers are clear: so long as policymakers allow these secrecy channels to persist, the U.S. will inadvertently undermine its own tax base, make more difficult the lives of ordinary Americans, jeopardize its own national security, and fan the flames of global corruption.

What We Can Do

The Biden Administration is preparing its first Summit for Democracy in December. The release of the Pandora Papers has only underscored the need for the Biden Administration to deliver on both domestic and foreign policy reforms as part of the Summit to eliminate some of the loopholes exposed through the Pandora Papers.

First, the U.S. Financial Crimes Enforcement Network (FinCEN) should include certain trusts in a forthcoming rulemaking on the Corporate Transparency Act. The Corporate Transparency Act enacted this year will help eliminate the abuse of anonymous U.S. shell companies by requiring LLCs, corporations, and “other similar entities” required to register with a state’s Secretary of State office to report four simple pieces of information to help identify the true, natural owner of a U.S. entity. While certain trusts – charitable trusts and “split interest” trusts – are expressly exempted by the law, other non-charitable trusts are not. FinCEN can close this loophole by requiring the owners of these trusts to file their information with a secure directory housed at FinCEN. The rulemaking is due by January 2022. FinCEN should likewise work with interagency partners and Congress to review the vulnerability posed by the existing exemptions for charitable, split interest trusts, and other entities not required to file with a state’s Secretary of State office.

Second, FinCEN should pursue a rulemaking to make permanent anti-money laundering safeguards on U.S. real estate. Since 2016, FinCEN has renewed a temporary, 6-month program that requires title agents to report to FinCEN the true, beneficial owner of a legal entity making a residential real estate purchase. These Geographic Targeting Orders (GTOs) are a helpful tool for law enforcement to identify links to individuals engaged in suspicious activity and, unlike the Corporate Transparency Act, offers insights into trusts, corporations, LLCs, and other entities set up in foreign jurisdictions. Yet the temporary, geographically limited nature of these orders is unsustainable. FinCEN should develop a disclosure regime based on the GTOs that is nationwide, permanent, without thresholds, and inclusive of commercial real estate.

Finally, Congress must take meaningful action to bring “enabler” professions under the requirements of the Bank Secrecy Act. The United States is in the last 10 percent of countries that have not taken the step of requiring non-financial business professionals to fulfill anti-money laundering obligations. Laws like the ENABLERs Act, recently introduced by Reps. Tom Malinowski (D-NJ) and John Curtis (R-UT) are helpful in moving the needle toward closing this long-standing loophole in the U.S. financial system. (Note: while ENABLERs Act does not necessarily speak to the question of multinational corporate tax avoidance aided in part by legal professionals, as raised above, there are other efforts under negotiation by Congress in the reconciliation package – including overhauls to the U.S. Global Intangible Low-Taxed Income, or GILTI – that could help reduce incentives for corporations to artificially shift profits abroad.)

Cynics of reform think that implementing new policies will just encourage the “bad guys” to find the next big thing in financial secrecy. But with enough doors closed and enough resources to enforce, we may actually draw closer to the real prizes of financial transparency, tax fairness, and good governance that are crucial for democratic societies and the rule of law.