Mimesis Law
24 June 2019

The Secret Shell Companies of the Rich and Famous

Apr. 8, 2016 (Mimesis Law) — Stories revealing the secrets of the rich and powerful are gold. They provoke strong emotions, like curiosity, envy, and hatred. And the elites can be brought to heel through public shaming, forcing them to quit their office, groveling for forgiveness, or through disavowing each other. Even more, the common person can delight in this spectacular downfall because the fat cats are getting their just deserts. The Panama Papers are proving to be one of those news stories.

The Panama Papers are 11.5 million financial documents that were ultimately received by the International Consortium of Investigative Journalists. These documents were almost certainly stolen from a Panamanian law firm called Mossack Fonseca. The law firm specializes in creating shell companies. In turn, these shell companies are used to hide the assets of the very, very wealthy and powerful. Among those linked include Vladimir Putin, to the tune of two billion dollars, China’s ruling families, Iceland’s Prime Minister, and David Cameron’s father. And there are many others.

At this point, the story is interesting because the secrets of rich and powerful people have been exposed. While this might prove embarrassing to people like David Cameron, whose father availed himself of the very tax avoidance schemes the British Prime Minister decried, accusations of overt criminal conduct appear limited at this point. Though there certainly are hints of political graft.

Though there are legitimate reasons for some of these shell companies:

Contrary to popular belief, shell entities serve many legitimate purposes. Many fully tax-compliant individuals and firms use shell entities for honorable purposes. In many countries, the super wealthy and their families run very real risks of kidnapping, blackmail and extortion. They rightly seek privacy and confidentiality. Privacy is, after all, a fundamental human right. It is recognized as such by the Universal Declaration of Human Rights and the European Union’s Convention of Human Rights. It has also been recognized for many decades as a U.S. constitutional right by the Supreme Court.

But because a good crisis should not be let to waste, the Panama Papers have led to calls for additional regulation—domestic and international:

It should impose clear sanctions on the territories that allow rogue financial institutions to operate. Promoting financial opacity pays off for places like the British Virgin Islands, Panama and the Cayman Islands where hundreds of thousands of shell companies are domiciled. Concrete sanctions, such as trade tariffs, would change the incentives of these havens, and ultimately reduce evasion and create greater accountability. Sanctions should only be lifted once these territories have proved that they have correctly identified the owners who benefit from the companies incorporated on their territory — the “beneficial owners.” Why do we even enable an outsized financial industry to exist in the British Virgin Islands if there’s evidence that it is used to facilitate crimes of all sorts?

Stop enabling havens that facilitate crime, and create comprehensive registries of the real owners of U.S. property and security to undermine corruption.

The United States should also do much more to promote financial transparency at home. The wealth of the world’s shell companies is not in Panama or in the British Virgin Islands: it’s invested in New York real estate, in U.S. bonds and equities, and in Europe too. The main way to fight the abusive use of shell companies would be to find who owns this wealth, by creating comprehensive registries recording the beneficial owners of U.S. real estate and financial securities. This would be a powerful way to promote financial transparency, fight money laundering, the financing of terrorism and tax evasion.

Yes, the solution to the problem of powerful and rich government officials using the laws to hide their conduct is to demand those same sorts of people write laws to stop themselves from doing it. No doubt foxes everywhere would be glad to guard the hen houses. Further, we should blunder into other countries, imposing sanctions and other legal regimes on them because we know what’s best for them. It works every time it’s tried, just ask Donald Rumsfeld.

Even narrowing our focus to the US, there are already attempts to use this to push some pet legislation forward:

We are starting to see progress, but there’s a long way to go. The bipartisan Incorporation Transparency and Law Enforcement Assistance Act, now before Congress, would require almost all American companies to disclose the people who actually own or control them, and to keep that information updated.

Or writers making calls for more RICO prosecutions:

The key lever which the Unites States has, and this goes back to FIFA, is the fear factor of laws like RICO and the U.S. reputation for rigorous pursuit of wrongdoing, even in other countries. The problem in some financial centers is that anti-money-laundering rules, which are designed to keep out corrupt funds, tax evaders and proceeds of crime, are simply not being enforced strictly. This is also being shown to be the case with some major onshore banks that hold accounts for offshore companies.

What is curiously missing in most of these discussions is whether the hidden money is indeed the proceeds of unlawful activity. If it is, then what was done was probably already criminal. And if it’s not criminal, then the complaints are largely about rich people keeping their financial transactions secret.

Currently, we’re all allowed to keep most of our financial lives private. Mortgages and real property are recorded, along with a few other secured instruments, and at least once a year we kneel before the IRS and kiss the ring. But most of the public can choose to keep things like a list of their assets and debtors private. Moreover, there are laws preventing third-parties from disclosing that kind of information.

The undercurrent of the proposed reform appears to be mandating some sort of public disclosure of many, if not all, financial transactions. Of course if you’re government official, then you’re probably already subject to that sort of disclosure. So, what’s really being discussed is demanding that private people surrender their privacy in the name of accountability.

It’s akin to the old saw if you’ve done nothing wrong, then you have no reason to hide anything. But it’s quite likely that the failure to file a report or omitting a particular disclosure will be a federal crime, adding to your diet of daily felonies. Plus, mandatory financial disclosure means additional bureaucracy, with necessarily additional bureaucrats to comb through the forms, each deciding who gets additional scrutiny and who receives mercy. Though we can rest assured that our private information will never, ever be misused by those bureaucrats.

Ultimately, more data does not mean better results. Just ask the NSA. At best, it we will have a system where it’s easier to prosecute wrongdoers after the fact because the government will have most, if not all, the information it needs. But it will do so at the expense of the extremely lax definition of wrongdoer. A robust disclosure regime would quickly become a trap for the unwary, forcing the technical law-breaker to prove an innocent mistake occurred. Otherwise, it will be federal prison time.

In the meantime, the fox is still in charge of the hen house. When the rich and powerful get caught breaking the law, they can fail upward, hoping to be too big to bring down, such as running for President. And organized crime would continue to break the law to hide their money. If the people identified in the Panama Papers indeed laundered criminal proceeds, then by all means, we should prosecute the law breaking Americans. But more laws will likely only make the haystack bigger and create more opportunities to game the system.

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