Sanctions for offshore tax havens, transparency at home

New York Times | 7 April 2016 | Gabriel Zucman

The United States needs to do much more to crack down on offshore tax evasion and financial opacity.

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?

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.

There are already registries for real estate and land. We should improve them by identifying the beneficial owners. Why do we allow a great chunk of Manhattan and Los Angeles real estate to be owned by faceless shells, potentially hiding criminals and money launderers? Those registries should also be expanded to cover financial assets — equities, bonds, mutual fund shares and derivatives. As a first step, U.S. banks must be forced to identify the beneficial owner of the wealth they manage, even when it is held through shell companies. Fortunately, on Wednesday, there was a long overdue sign of progress in this area, with a report that banks would soon be asked to identify the persons who hide behind shell companies.

Some readers might be concerned that financial registries would threaten individual privacy. Yet countries have had property records for land and real estate for centuries; these records are public; and there seems to be little misuse. The notion that a register of financial wealth would be a radical departure from earlier practices concerning privacy is wrong.

Gabriel Zucman, an assistant professor of economics at the University of California, Berkeley, is the author of “The Hidden Wealth of Nations — The Scourge of Tax Havens.” He is on Twitter.