U.S. Remains Fertile Breeding Ground for Tax Evasion

Last week, the Obama administration unveiled measures to help stop the use of anonymous shell companies engaged in tax evasion, money laundering, and other nefarious schemes by requiring disclosure of actual company owners. According to critics, however, Washington has screwed up these disclosure rules to such a degree as to render them totally ineffective. Unfortunately it looks like the critics are right. The release of the Panama Papers last month highlighted the global use of shell companies to evade taxes and launder money. The world is still reacting to the abuses highlighted in the 11-million page document dump, the largest in history. The administration’s measures intend to curb these abuses by requiring banks to confirm the beneficial owner of any company when opening an account. In addition, banks will be required to identify any individual that exercises “significant managerial control” over the legal entity. This is known as the “customer due diligence” rule.

Requiring full disclosure of the individuals that actually 1) own the company, and 2) control the company are sound measures that would help defeat tax evasion and prevent money laundering.  Unfortunately, the measure appears to be all bark and no bite.

The final rule released by FinCEN, the Treasury’s Financial Crimes Enforcement Network, only requires that banks determine the identity of an individual that owns at least 25% of a legal entity.

Prepare to see a slate of new entities that are owned by four individuals who each hold a 24.25% interest. Obviously, a company’s ownership can be allocated innumerable ways to defeat this disclosure requirement.

Thankfully, the banks will still be required to identify all persons who control the company, regardless of their ownership percentage. No way to avoid that. Except…

Hire a third party.

Those wishing to avoid disclosing their identities could simply identify an existing company as the person “exercising significant managerial control.” In fact, in most states a person who holds no beneficial interest in a corporation is free to manage all aspects of that corporation. For example, a law firm could be appointed to manage the entity. It’s not hard to see this provision’s glaring flaw.

It certainly was not difficult for former Michigan Democrat, Sen. Carl Levin, to see the flaw.  He put it succinctly when he said:

“By allowing managers instead of the real owners to be named, the new rule will enable terrorists, money launderers, tax evaders and other wrongdoers to hide their identities while misusing U.S. financial institutions.”

Unfortunately, well said.

At the end of the day, the U.S. has become a prime destination for the world's elite to set up anonymous shell companies. Their motivation comes from the state level, not federal. Several states allow the creation of entities without requiring any detailed information about its beneficial owners. As a result, the state has no idea who actually owns or controls the entity. This permitted secrecy is the pillar of tax evasion and money laundering.  Sadly, without more, the “customer due diligence” measures do nothing to fix the problem.



By Michael S. Cooper, Esq., Barnes Law

Michael Cooper is an associate attorney with Barnes Law, and is licensed to practice law in California.

The opinions expressed are those of the author and do not necessarily reflect the views of the firm, its clients, or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.