Global Financial Integrity

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Tax Haven Menace Must Be Addressed by Congress

Raymond Baker
Clark Gascoigne

This article was originally published by The Hill.

This month’s leak of data on the use of offshore tax havens and anonymous shell companies from the International Consortium of Investigative Journalists emphasizes how massive and truly global the tax haven menace really is.

The files released by the ICIJ, analyzed in collaboration with nearly forty news outlets around the globe, implicate the families of foreign dictators in Nigeria and the Philippines, embroil international arms dealers, entangle conduits of the Iranian nuclear program, incriminate close associates of the current French President, and expose scores of other tax evaders and swindlers in the U.S. and around the world.

At Global Financial Integrity, we estimate that offshore tax haven secrecy and anonymous shell companies facilitate the illicit outflow of nearly $1 trillion per year from developing countries. They drained hundreds of billions of dollars from the Greek economy in the lead-up to the Eurocrisis in 2010, and they have facilitated the illicit outflow of $212 billion in dirty money from Russia since the fall of the Soviet Union, much of which ended up in places like Cyprus.

As taxpayers in the United States file their tax returns this week, offshore tax haven abuse costs the Treasury Department an estimated $150 billion in lost tax revenue each year, at a time when many government employees and contractors are being laid-off or furloughed. What often gets lost in the story is that, while the U.S. loses out from this system of offshore tax haven secrecy, we also facilitate much of it.

The U.S. is currently the easiest place in the world to establish an anonymous shell company, next to Kenya. Nearly two million companies are formed in the United States each year, and almost none of them are required to disclose the firm’s true, human owners. This poses a massive problem for law enforcement and tax authorities — who routinely encounter shell companies—crippling many investigations when investigators cannot follow the money trail.

“Shells are the No. 1 vehicle for laundering illicit money and criminal proceeds,” then-Assistant U.S. Attorney General Lanny Breuer told The New York Times in June.  “It’s an enormous criminal justice problem. It’s ridiculously easy for a criminal to set up a shell corporation and use the banking system, and we have to stop it.”

The U.S. should stop shooting itself in the foot and eliminate anonymous shell companies. Bipartisan legislation, the Incorporation Transparency and Law Enforcement Assistance Act — which has yet to be introduced into the current Congress — would require information on the true, human, “beneficial owner” of each company formed in the United States be made available to law enforcement. It’s a no-brainer piece of legislation that hopefully will garner widespread support from Members of Congress this session. We’re not going to be able to effectively curtail this problem until we get our own house in order.

The Cut Unjustified Tax (CUT) Loopholes Act (S. 268), introduced by Senator Carl Levin (D-Mich.) and Sheldon Whitehouse (D-R.I.) earlier this year, as well as the Stop Tax Haven Abuse Act, introduced by Rep. Lloyd Doggett (D-Texas) Monday, would go a long way towards clawing back much of this lost tax revenue by preventing companies and individuals from exploiting offshore tax haven secrecy. Congress is looking for common sense solutions to our budget problems, and curtailing offshore tax haven abuse is one of the fairest and most logical approaches.

The ultimate solution to the problem is a truly global one, involving world leaders taking coordinated action to crack down on the shadow financial system of tax havens and shell companies. British Prime Minister David Cameron has taken a huge step forward in placing the issue of tax dodging and illicit financial flows on the G-8’s agenda in June. The Obama administration has been engaged in international progress as well, endorsing the elimination of anonymous U.S. shell companies. Still, Congress must do its part to ensure that U.S. tax payers are no longer swindled or endangered by the murky offshore world.

Baker is director of Global Financial Integrity, a Washington-based research and advocacy organization, and author of “Capitalism’s Achilles Heel: Dirty Money and How to Renew the Free-Market System.” Gascoigne is GFI’s communications director.