In wake of Panama Papers revelations, US Treasury is re-examining its policies on shell companies but experts say rule is too broad to discourage tax avoidance

The US Treasury is re-examining its policies regarding shell companies, which can serve as tax havens for the rich, in the wake of the leak of 11.5m documents from the Panama-based law firm Mossack Fonseca. Experts, however, are worried that instead of limiting the ability to hide wealth, one rule under review could actually enhance it.

At the moment, firms like Mossack Fonseca can provide their clients with officers and shareholders for their shell companies. These officers – while serving as owners in name only – are likely to appear on the paperwork collected by US financial institutions, hiding the true owners who benefit from the company’s existence.

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The beneficial ownership portion of the rule, as proposed by the US Treasury in 2014, is too broad and is easy to circumnavigate, say critics including the International Monetary Fund.

On Tuesday, two days after the first batch of Panama Papers revelations had been published, Obama took the stage in the White House briefing room and described tax avoidance as a “big global problem” that is “not unique to other countries”.

“A lot of it’s legal but that’s exactly the problem,” he said. “It’s not that they are breaking the law, it’s that the laws are so poorly designed that they allow people – if they’ve got enough lawyers and accountants – to wiggle out of responsibilities that ordinary citizens have to abide by.”

By Wednesday, the Treasury let it be known it would soon release a rule that would require banks to obtain the names of people at the helm of shell companies seeking to open accounts with them.

The problem? Experts say it’s another one of those “poorly designed” laws that Obama spoke of. And this time it’s being implemented by the Obama administration itself.

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Last summer, after evaluators from the International Monetary Fund reviewed the proposed rule, they said it did not comply with recommendations laid out by the Financial Action Task Force, of which the US is a member.

“The evaluators found that the United States’ compliance with the two recommendations dealing with the transparency of legal persons and arrangements was very weak and rated both as non-compliant,” according to the IMF report.

The rule, which is years in the making, would require companies to disclose c-suite officers such as CEOs, chief financial officers and presidents. (Such officers have in the past been provided by firms such as Mossack Fonseca.) The rule would also require companies to disclose shareholders who have 25% or more equity interest in the company, which critics say is too high a threshold.

“Specifying a disclosure threshold is generally an ineffective approach, since it simply invites wrongdoers to arrange their affairs to come in below the specific threshold,” former Michigan senator Carl Levin, at the time chairman of the Senate’s permanent subcommittee on investigations, wrote in a letter to the Treasury in December 2014. He recommended that if the Treasury were set on having a threshold, it ought to consider one closer to 10% than 25%.

“Wrongdoers can simply issue more shares of stock or identify more trust beneficiaries, using nominees, to avoid triggering financial institution oversight. Under the proposed rule as currently drafted, a criminal would have to find only five people to agree to serve as ‘equity’ owners of the relevant legal entity in order to avoid having the names of any beneficial owners included in financial institutions records.”

If the rule is implemented as proposed, it could actually make it easier for shell corporations to hide who the real beneficiary is, according to Elise Bean, former staff director and chief counsel of the permanent subcommittee on investigations of the US Senate’s homeland security and governmental affairs committee. Bean was appointed by Levin in 2004 and left the post in 2014, the same year Levin retired from the Senate.

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“The Panama Papers scandal is another wake-up call on the need to eliminate corporations with hidden owners. These days, US banks do a pretty good job of identifying the true owners – the ‘beneficial owners’ – of shell corporations seeking to open accounts with them, but that could change if a badly drafted Treasury rule is finalized,” she said.



“The proposed Treasury rule would allow banks to treat a Mossack Fonseca employee named president of a shell corporation as the ‘beneficial owner’ of that corporation, when that employee has no ownership role at all. If Treasury fails to fix that badly flawed provision, it will weaken current US banking practice, while helping the Mossack Fonsecas of the world to continue concealing the owners of the corporations they manage.”

The Treasury did not respond to Guardian’s request for comment about whether the rule will be adjusted before it is issued.

Under the rule, banks and brokerage firms will not be required to verify the information provided to them by the companies.

There is no way for banks to verify such information, Rob Rowe, lawyer and expert in regulatory compliance at American Bankers Association, told Reuters. For now, the ABA is “watching to see what happens with the Panama Papers”.