Is The US The World's Biggest Tax Haven?

by Leroy Baker, Tax-News.com, New York

16 November 2006

Senator Carl Levin told a Senate committee on Tuesday that if the United States is serious about cracking down on money laundering, terror financing and tax evasion, it could do worse than look to its own backyard, as states compete with each other to set up companies with greater anonymity for the company owners.

In testimony at the Permanent Subcommittee on Investigations Hearing: 'Failure to Identify Company Owners Impedes Law Enforcement', Levin, the senior Democrat on the committee, said that while the vast majority of US companies are set up for legitimate purposes, there are a small percentage that function instead as "conduits for organized crime, money laundering, securities fraud, tax evasion, and other misconduct".

However, the task of assessing to what extent this illegal activity is taking place within the US is hampered by the fact that states "have no idea who is behind the companies they have incorporated," Levin explained.

According to the Michigan Democrat, a person who wants to set up a US company typically provides less information than is required to open a bank account or get a driver’s license - a process that has become easier, quicker and faster as states seek to outdo one another.

The median fee for company formation is now said to be less than $100, while Delaware and Nevada allow applicants to set up a company in less than an hour for an extra $1,000. Colorado, which incorporates about 5,000 new companies each month, told the Subcommittee that it now sets up 99% of its companies by computer, without any human intervention or review of the information provided.

Levin went on to cite one firm in the business of forming shell companies as promoting the state of Delaware as "An Offshore Tax Haven for Non US Residents".

"That type of anonymity is exactly what we’ve been criticizing offshore tax havens for offering to their clients," said Levin.

"In fact, our last Subcommittee hearing lambasted offshore jurisdictions for setting up offshore corporations with secret US owners engaged in transactions designed to evade US taxes, leaving honest taxpayers to pick up the slack," he observed.

Levin went on to tell how Immigration and Customs Enforcement officials reported that a Nevada-based corporation received more than 3,700 suspicious wire transfers totaling $81 million over 2 years. However, the case was not pursued because the agency was unable to identify the corporation’s owners.

Meanwhile, the FBI recently told the Government Accountability Office that anonymously-held US shell companies are being used to launder as much as $36 billion from the former Soviet Union. The FBI also reported that they have 103 open cases investigating stock market manipulation, most of which involve anonymously-held US shell companies.

The US Treasury’s Financial Crimes Enforcement Network (FinCEN) and the Department of Justice have also reported more than $4 billion worth of suspicious transactions.

Ironically, Levin pointed out, the United States was actually rebuked by the Financial Action Task Force on Money Laundering (FATF) for its disclosure laws in a 2006 report, while offshore secrecy jurisdictions such as the Cayman Islands, Bahamas, Jersey, and Isle of Man are now largely praised by the FATF for complying with its recommendation to identify the owners of the companies they establish. The US was one of the driving forces behind the formation of the FATF.

"The United States has been a leading advocate for transparency and openness. We have criticized offshore tax havens for their secrecy and lack of transparency, and pressed them to change their ways. But look what’s going on in our own backyard," Levin remarked.

"It places us in the position of being in non-compliance with the guidelines of the very international organization promoting our message of openness and transparency," he added.

Levin said that possible solutions could involve new regulations requiring company formation agents to establish risk-based anti-money laundering programs, which would require careful evaluations of requests for new companies made by high-risk persons. These are currently being considered by FinCEN.

Another approach would be for Congress to set minimum standards, so that no state would be placed at a competitive disadvantage when asking for the name of a company’s true owners, ensuring US compliance with international anti-money laundering standards.

However, Levin said that these solutions will be possible "only if we are first willing to admit there is a problem".

Recommended