WHO NEEDS TAXES

Rich people love tax havens—and under Trump, the problem will only get worse

Buried beneath last week’s faltering health-care vote and revelations about the FBI’s investigation into the Trump campaign was a development that, for another administration, would have dominated news cycles. Documents unearthed in Ukraine by a journalist-turned-MP revealed that Paul Manafort, US president Donald Trump’s former campaign manager, was allegedly involved in an offshoring scheme involving hundreds of thousands of dollars, tied to at least one shell company and one post-Soviet bank.

To be sure, these allegations at the moment are just that: allegations. And barring a formal investigation—which, given current relations between Washington, Kiev, and Moscow may well be a non-starter—they should be taken with a grain of salt. However, the information squares with prior, offshore-related allegations involving Manafort. They were also brought forward by a respected anti-corruption advocate named Serhiy Leshchenko.

The allegations shed that much more light on the murky world of offshore financing, from regulators ignoring suspicious activity reports to jurisdictions foregoing registries that would help unmask shell companies.

Likewise, the allegations now facing Manafort are a reminder that in the US, very little has changed since the Panama Papers revelations were released a year ago, unveiling 40 years of documents from Panama law firm Mossack Fonseca. The Panamanian group was also an expert in providing offshore services—helping companies and individuals use financial secrecy tools, like shell companies and anonymous bank accounts, to hide their wealth from investigators and tax authorities.

For good measure, the shell company now tied to Manafort was used by Kyrgyzstan’s erstwhile autocracy—evidence of the sordid network Manafort was allegedly tapping into. It also shared the same office address in Belize with numerous other shell companies revealed in the Panama Papers scandal, connecting the Trump campaign at least tangentially to the international financial scandal.

While there was passing interest in the Panama Papers revelations in the US, the exposé had a far larger impact in Europe, where numerous officials and heads of state were immediately embroiled in allegations of shady financial dealings, even costing the Icelandic prime minister his job. In the ensuing months, jurisdictions such as the EU and the UK have moved to tighten financial transparency, especially when it comes to the shell companies that help sustain global offshoring.

For example, the UK last year instituted a beneficial ownership registry that attempts to publish the actual owners of UK-registered companies—an important step toward financial transparency. Traditional offshore jurisdictions like the Cayman Islands have moved closer to implementing similar registries. The EU has also begun pushing further transparency in trusts. As the Panama Papers revelations showed, Mossack Fonseca representatives were already recommending trusts as the next frontier in offshoring wealth.

The US, however, is no closer to any type of beneficial ownership registry—nor has Washington indicated it plans to reduce the country’s role as a global center of financial secrecy. Indeed, while Caribbean nations grab headlines, the US remains one of the biggest secrecy havens internationally, a sort of “onshore-offshore” jurisdiction writ large. Despite its reputation for battling kleptocracy elsewhere, the US actually ranks third in the most recent Financial Secrecy Index, published by the watchdog Tax Justice Network.

The reasons why predate the Panama Papers revelations, and stem mainly from two concurrent trends. Firstly, on the federal level, the Obama administration opted not to join the OECD’s Common Reporting Standard, which would have increased international cooperation and financial oversight. Washington instead patched together its own Foreign Account Tax Compliance Act (FATCA). While the US regulations looked fine on paper—and forced foreign banks to disclose business ties with American clients—the fact that the US opted for a solo tack “risk[ed] tearing a giant hole in international efforts” at financial transparency, wrote the Tax Justice Network. (It’s no coincidence that other nations that refused sign onto the OECD’s standards included offshore stalwarts like Bahrain and Vanuatu.) Said one Swiss lawyer, “That ‘giant sucking sound’ you hear? It is the sound of money rushing to the USA.”

But this isn’t simply a federal problem. A handful of states have also helped the US become an international leader in providing shell companies. Delaware, Nevada, and Wyoming currently lead a raft of states offering guarantees of privacy in return for expanding their anonymous clientele—a service accessed by leading arms dealers and foreign kleptocrats alike.

Indeed, in the largest shell company survey to date, conducted by trio of academics, US shell company providers were judged to be the least transparent of any jurisdiction surveyed. Said one analyst with Global Financial Integrity, “In some places [in the U.S.], it’s easier to incorporate a company than it is to get a library card.” Or as one of the authors of the shell company survey later wrote, there “is strong reason to think that the United States … is the worst in the world when it comes to regulating shell companies.”

Nevada and Wyoming in particular have aggressively resisted federal reforms that would provide financial oversight. (There’s a reason, after all, that Mossack Fonseca explicitly advertised Nevada and Wyoming to their own clients as good places to set up their shell companies.) These states see massive revenues from fees relating to forming companies in their states—enough to help finance things like teachers’ salaries in Nevada. Meanwhile, South Dakota has been so successful writing tax-friendly trust laws that in 2013 Bloomberg dubbed the state the “Bermuda of the prairie.”

America’s role in global offshoring isn’t a secret anymore, and yet it’s still impressively understudied. This is in part because the lack of transparency makes document leaks one of the only ways outsiders can view company records. From an optics level, however, the US’s hypocrisy at home dramatically undercuts its anti-kleptocratic efforts elsewhere. As Global Witness recently noted, it is “particularly crazy that our legal system offers a way for would-be con artists to submit fraudulent procurement bids and squirrel away the money they’ve stolen behind shell companies they set up in the US.”

And now, due to documents unearthed in Ukraine, it looks like the tentacles of the offshoring world are that much closer to the White House. Considering other documents have pointed to another $12 million Manafort allegedly received in Ukraine, the revelations about related offshoring may have only begun—with the US’s role as a global offshore haven looming in the background.

Follow Casey on Twitter at @cjcmichel. Learn how to write for Quartz Ideas. We welcome your comments at ideas@qz.com.

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