America is a hotbed of tax evasion, fraud and hypocrisy – Investigation
The United States champions itself as a nation policing the rest of the world, preventing money laundering, tax evasion and foreign corrupt practices. Yet there is hypocrisy afoot, reports Martin Kenney, Managing Partner of Martin Kenney & Co., Solicitors, a specialist investigative and asset recovery practice based in the British Virgin Islands (BVI) and focused on multi-jurisdictional fraud and grand corruption cases
When news of the Panama Papers scandal broke, my place of residence — the British Virgin Islands (BVI) — came under extreme pressure and scrutiny. It seemed like the rest of the world, America included, wanted to close down the BVI’s offshore company facilities for good.
The man in the street cannot be pleased when reading that multinational companies and the very rich are avoiding paying taxes by placing them offshore, while everyone else has to pay their fair share of tax. As tax avoidance is legal, this is a public policy issue that needs to be addressed onshore. Onshore countries need to change their tax laws to prevent tax avoidance: if they so wish. But they won’t.
Why? Because they understand that companies and individuals affected may move elsewhere, taking their jobs and assets with them.
Tax evasion (which is illegal) is another matter: it unlawfully bleeds the financial lifeblood away from countries and the ordinary people who need it. The best way to counter tax evasion is by ensuring that the administrators of offshore companies and trusts are regulated and required to collect and house the identities of the ultimate beneficial owners (UBOs) of the asset-holding vehicles that they form.
The BVI, for example, has tightened up this process to ensure that UBO identification documentation is available when required. It is available to foreign tax and law enforcement agencies. Cross-border taxpayer information sharing mechanisms are in place. It is also available to professionals such as me, as long as we can show an element of wrongdoing to the court on the part of a BVI company when making a disclosure application on behalf of clients. By June 2017, a new 24-hour electronic UBO disclosure system will be in place to accommodate requests from UK officials to the BVI government.
This brings me back to my point about hypocrisy being afoot. The European Parliament released a report on March 7 concluding that the United States is now a major “tax haven,” due to its refusal to adopt the global standards signed up to by most OECD countries in the developed world.
The report explains that: in 14 states in the U.S. companies may be formed without the need to identify or disclose the names of shareholders, directors, officers or UBOs
- The United States has refused to join the trend for the multi-lateral automatic exchange of bank account information
- The United States holds 20 percent of the global market for financial services for non-residents with foreign assets held in the U.S., to the sum of $16.75 trillion (2013), and foreign direct investment of $3 trillion (2014).
And yet the United States’ “transparency legal framework is not consistent with the responsibility involved in being a major financial hub,” according to this EU report.
The United States posits many righteous opinions about, and upon, the rest of the world. There’s an old saying that when America sneezes, Britain catches a cold. So it is unsurprising that the British and Europeans, in general, are dismayed by the report’s conclusion — namely that America needs to sort out its own backyard before complaining about anybody else.
I have experience in obtaining court disclosure orders and presenting them to company formation agents in Delaware, Nevada and Wyoming. They don’t collect UBO identification documentation in those states. This often renders a disclosure order effectively pointless. (I usually do get to know who has paid $300 to form a Delaware company — oftentimes a law firm in Manhattan which acts on behalf of an anonymous client as a “cut-out” — but this usually entails a $100,000 fight in legal fees over the allegedly “privileged” nature of the law firm’s client identification information.)
So imagine how the tiny BVI feels when getting a self-righteous “shoeing” from America.
I have seen quotes in response to the EU report such as “how ironic” and “how perverse”. Yet some U.S. states are deliberately turning a blind eye. Their shadowy offshore company facilities are the worst kept secret in global economic regulation and enforcement. The sanctimonious position of the U.S. Treasury and the Department of Justice towards smaller and much better regulated jurisdictions, therefore, is a disgrace.
Many offshore entities are now migrating from the BVI and Cayman Islands to America, partly as a result of this compliance pressure brought by the United States (and others). The U.S. is thus effectively forcing offshore business out of the Caribbean (where it is the main income stream for these small islands), and transplanting it into America where UBO data falls into a black hole. You couldn’t make this stuff up!
Academics researched the U.S. offshore services, looking at their compliance regime for a 2014 book called Global Shell Games: Experiments in Transnational Relations, Crime, and Terrorism. Pretending to be investors, they approached various formation agents across the globe, recording what Know Your Customer (KYC) information they were asked in order to set up their offshore company.
The results, as far as the United States was concerned, were damning. Only 25 percent of company formation agents in the United States asked for KYC/UBO proof. Worst of all was Delaware, where only 6 percent of prospective clients were asked for KYC identification documentation. The authors of the academic study concluded that: “Obtaining an anonymous shell company is therefore easier in the U.S. than the rest of the world.”
Around the globe, countries have jumped through hoops to appease the American demand for information and financial intelligence on organized crime and terrorism. Much of the rest of the world has a vested interest in complying with regulatory edicts from the United States. Many are now concerned by the march of extremism and resultant terror attacks. But given that the U.S. is apparently slow to regulate its own offshore company formation agents, it’s not entirely beyond the realms of possibility that ISIS could be operating companies and trust funds domiciled in Delaware.
The Victorian English author Arnold Bennett said: “Falsehood often lurks upon the tongue of him, who, by self-praise, seeks to enhance his value in the eyes of others.” This sums up America’s two-faced stance to the rest of the world where anti-money laundering compliance is concerned.
America needs to put its own house in order before raining pressure down onto little Caribbean islands — especially when the likes of Delaware and Nevada are benefiting commercially from the very issues they are purporting to address.
Martin Kenney is Managing Partner of Martin Kenney & Co., Solicitors, a specialist investigative and asset recovery practice based in the BVI and focused on multi-jurisdictional fraud and grand corruption cases www.martinkenney.com |@MKSolicitors. He was selected as one of the Top 40 Thought Leaders of the Legal Profession in 2017 by Who’s Who Legal International. He’s the only fraud and asset recovery lawyer included in this list of Thought Leaders drawn from 16 different practice areas.