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U.S. Treasury Takes a Stand for Transparency

Neil Barofsky, the former special inspector general for the Troubled Asset Relief Program, is a partner at Jenner & Block.
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In the aftermath of the “Panama Papers” scandal, the U.S. Treasury announced that it would put forward a long-shelved draft rule to compel U.S. banks to identify the people who use shell companies and similar corporate structures when they try to open accounts.

This identification requirement -- a “customer due diligence rule” -- is a practice common in most of the developed world. The Treasury version would require individuals who own or control 25 percent or more of a corporate entity to disclose their identities to a bank before opening accounts. Doing so would help banks peek behind these complex structures to make sure that they’re not doing business with tax evaders, terrorists, money launderers, drug traffickers or corrupt government officials.

The proposed reform is far from perfect. It doesn’t apply to accounts currently on the banks’ books. Nor does it address other flaws in our system, such as state incorporation rules that make it easy to set up anonymized shell companies in the first place. There are still too many states that require scant information to set up legal entities that can be cloaked in confidentiality.

What’s more, although the United States uses the Foreign Account Tax Compliance Act (FATCA) to demand detailed information from banks across the world that service U.S. customers, it has declined to sign on to the Organization for Economic Cooperation and Development’s tax transparency initiative. Nearly 100 countries and jurisdictions have joined the effort to help other countries detect tax cheats; the U.S. and Panama remain notable holdouts.

The banking industry has argued that the proposed changes would be too expensive to put in place and would threaten legitimate uses of these companies. The American Bankers Association and BAFT, for instance, have claimed that the reform is tantamount to “government imposed financial surveillance through executive fiat” and that it would treat legitimate enterprises “as criminal shell companies until certified to the contrary.” 

It is true that the new rule would create costs, financial and otherwise. Banks that do not already collect details on the true owners of shell corporations would have to add a level of compliance. They would need to upgrade their technology in order to track and store this information. And they would need to ensure that the new rules are embraced internally.

But it’s a position with significant limitations. Banks around the world have integrated similar types of rules with little ill effect. Indeed, virtually every sophisticated financial center in the world has surpassed the United States by imposing similar requirements -- including countries that were once considered synonymous with tax evasion, such as Switzerland, Luxembourg and the Cayman Islands.

Compliance with the rule will help support regulatory efforts to better shape the culture of U.S. banks, by forcing them to take responsibility for truly knowing their customers. More importantly, when you balance the benefits of more effective policing of criminal activities with the costs of an additional compliance burden, the trade-off seems modest.

It’s important to understand that there are legal, legitimate and constructive uses for shell corporations. They can’t be tarred with a single brush. At the same time, it would be a mistake to fail to recognize that criminals frequently exploit these opaque structures to amass and hide illicit money -- and that U.S. banks haven’t done enough to stop them. The Treasury’s rule would go a long way toward making it harder for scoundrels to find safe haven in U.S. banks.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Neil M Barofsky at nbarofsky@jenner.com

To contact the editor responsible for this story:
David Shipley at davidshipley@bloomberg.net