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The Panama Papers leak has already rocked the financial and the offshore legal services industry. On Monday, May 9, 2016 the release of a comprehensive and searchable database of the shell companies and other entities implicated in the scandal shed further light on the lengths that some individuals will go to conceal their income and assets for tax and other purposes. The Panama papers leak has implicated wealthy individuals ranging from politicians and world leaders to celebrities.
However, prior to the latest release of information, regulators and tax enforcement authorities had already indicated a willingness to take steps to combat tax fraud and take steps to make that vision a reality. In April, the Department of Justice opened a criminal probe related to the Panama Papers leak. While details are scant regarding the criminal probe, the White House and U.S. Treasury have taken additional action in response to the revelations contained within the Panama Papers.
On May 5, 2016 the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) identified and designated the Waked Money Laundering Organization. Furthermore, it also designated and blacklisted 68 entities with ties to the drug money laundering network. These blacklisted businesses and entities include GrupoWisa, S.A., Vida Panama (Zona Libre) S.A., and Balboa Bank & Trust.In particular, Balboa Bank & Trust has $44.1 million in capital and more than 150 employees. The actions against these and other organizations mean that their assets are frozen and that U.S. persons are prohibited from engaging in transactions with blacklisted organizations and entities.
While it is not frequently discussed, the United States itself is often a destination for foreign money laundering and individuals who wish to open anonymous shell companies. In fact, a 2012 study conducted at Griffith University found that the United States was the one of the easiest nations in the world for an individual to set up an anonymous shell company. While efforts to make it more difficult for individuals to make use of U.S. based anonymous shell companies had previously gained little traction, the Panama Papers leak has spurred the executive branch to take unilateral action to address the problem. These efforts should provide important new tools for prosecutors and enforcement authorities to identify and pursue tax evasion and other types of fraud.
The executive acting through the Treasury Department has taken several steps to crack down on money laundering and tax fraud including the finalization of a customer due diligence rule. Under the rule covered financial institutions are required to perform due diligence regarding the owners and beneficiaries of companies making use of their services. Covered institutions such as banks, mutual funds, and other financial institutions are required to identify and keep records of the identities of those linked to the shell company or other entity. The institution must turn over this information when required by law enforcement agencies.
A second step to close the various loopholes in U.S. law regarding shell companies is more likely to impact foreign individuals who conceal assets and income in anonymous U.S. shell companies. This additional measure requires foreign owned companies and entities to obtain a U.S. tax identification number (TIN). The process of obtaining a TIN requires a party or entity to reveal information including transactions and the identity of owners.
These measures are the latest steps in the continuing efforts to increase transparency in the financial system to crack down on abuses including tax evasion and money laundering. The Foreign Account Tax Compliance Act (FATCA) was one of the first steps made toward increasing transparency by requiring the disclosure of foreign accounts. While FATCA targeted secret accounts in foreign jurisdictions, the latest action targets individuals with secret U.S. entities. It is yet another sign that reliance on secret accounts and secret entities is no longer viable and the practice is likely to lead to identification and prosecution. If identified as engaging in tax evasion, money laundering, or other criminal acts through secret accounts the penalties are severe. If the accounts were covered by FATCA, FBAR, or other reporting obligations merely having secret accounts can be punsihed with severe consequences.