The U.S. government should respond to the Pandora Papers – an investigation by a group of news media outlets based on 11.9 million private financial records – with sweeping and forceful policy reforms, just as it did after past leaks about offshore secrecy practices of wealthy elites, such as the Panama Papers. The latest jarring revelations expose how the U.S. financial system plays a central role in hiding the dubious wealth of corrupt officials. It suggests that the policy response, too, must be made in America. That means regulating the U.S.-based professional enablers of corruption through swift action by the Treasury Department and Congress, with the centerpiece of the initiative being ambitious legislation that a bipartisan group of lawmakers announced on Wednesday.
In 2016, just a few weeks after the revelation of the Panama Papers, a trove of confidential documents from a law firm that set up secret shell companies, the Treasury Department rolled out new financial transparency rules and sent Congress legislation that President Barack Obama immediately called for outlawing anonymous shell companies. A year ago, another leak of financial documents dubbed the FinCEN Files helped push that shell company legislation over the finish line on Capitol Hill.
But prohibiting shell companies is only half the battle. When the International Monetary Fund or the Financial Action Task Force, the international body that sets policy standards to fight financial crime, have assessed how well – or how badly – the United States combats dirty money, they have warned that U.S.-based financial professionals enjoy just as many problematic regulatory gaps as do the financial products they provide. The Pandora Papers detail how these human intermediaries help hundreds of corrupt officials and billionaires from more than 90 countries hide their riches around the world, often in the United States.
Trust and corporate service providers in South Dakota – the industry has quadrupled in size there over the past decade – now rival or surpass the financial secrecy offerings in better-known offshore centers such as the Cayman Islands and the British Virgin Islands. The Pandora Papers identify nearly 30 U.S.-based trusts that hold assets tied to “people or companies accused of fraud, bribery, and human rights abuses,” according to the Washington Post, one of the media partners in the investigative project. Examples include a sugar magnate pilloried for bulldozing homes in the Dominican Republic, a Colombian clothing tycoon named in the U.S. prosecution of a vast drug trafficking and money laundering enterprise, a family alleged to have violated labor laws in Guatemala, and a Brazilian orange juice executive accused of underpaying farmers.
`You Know Who’
King Abdullah of Jordan, who was already embattled with public concerns about corruption in his own country, secretly spent $106 million on lavish properties held by shell companies registered to him alone, the Post reported. It is not clear where the money came from – he says it’s from “personal sources” – but it is clear where it ended up: buying luxury homes from Malibu to Georgetown. Instead of keeping proper internal records of the king’s ownership – let alone making external disclosures – his financial advisor and law firm sometimes recorded the owner in spreadsheets as “you know who.” And while the ownership of the properties has been a longstanding mystery subject to local speculation, some U.S. real estate professionals were in on the secret. A renovation company in Southern California once let it slip on Facebook that it was working on “the King of Jordan’s place in Malibu,” according to the Post.
Three months after U.S. investigators in 2011 started linking notorious art dealer Douglas Latchford to looted Cambodian artifacts – their probe prevented some relics from being auctioned at Sotheby’s – Latchford and his family began setting up trusts to hide their money in secrecy havens. It turns out that a dozen of the antiquities that Latchford once owned or brokered are on display in the Metropolitan Museum of Art in New York. His family’s hedge fund holdings, high-end properties, and potentially looted artifacts are still owned by trusts that are difficult for law enforcement to reach.
The Pandora Papers also highlight how the largest law firm in the United States, Baker McKenzie, serves as a mainstay of offshore finance, according to the International Consortium of Investigative Journalists, which received the leaked documents and organized the project. The law firm did work for sanctioned Russian banks and arms makers, as well as the kingpins behind some of the world’s largest alleged heists, including Ukrainian oligarch Ihor Kolomoisky and Malaysian kleptocrat Jho Low. Baker McKenzie also reportedly dedicated its lobbying and legislation-drafting expertise toward shaping permissive financial laws around the world.
The United States is among the less than 10 percent of countries that do not require these professional enablers to establish anti-money laundering programs, which are mandatory in the United States mostly only for banks. Unlike financial intermediaries in more than 90 percent of the world, U.S. non-bank enablers do not need to have compliance officers, trainings, audits, and controls meant to spot money laundering by identifying customers, scrutinizing transactions, keeping records, and reporting suspicious activity to the government.
Best Practices
Catching up with international best practices by making U.S. professional enablers establish anti-money laundering programs would require a pincer movement by the executive and legislative branches.
At the Summit for Democracy that President Joe Biden will host in December, his administration should launch a major regulatory campaign dedicated to making enablers watch out for dirty money. At that time, the Treasury Department should announce that it will be issuing rules for the three lowest-hanging fruit, which are investment advisors, real estate title insurers, and art dealers.
But congressional action is also needed for this reform initiative to meet the challenge laid bare by the Pandora Papers. The Treasury Department would have a hard time regulating the worst enablers at the center of the investigation without new legislation.
Fortunately, a bipartisan group of House members announced a bill on Wednesday called the ENABLERS Act, which would require seven professions to establish anti-money laundering programs: investment advisors, art dealers, lawyers, trust and company service providers, accountants, public relations operatives, and third-party payment companies. The bill also mandates that Treasury repeal regulatory exemptions, including those for real estate agents and sellers of yachts and jets. Thirdly, the legislation expands and makes permanent an important disclosure obligation that title insurers currently face on a limited and temporary basis. With that, it would cover all the major U.S.-based financial intermediaries highlighted by the Pandora Papers.
Regulating the enablers is the way for the United States to stop being the world’s largest offshore financial haven. It would start treating the handlers of dirty money as public enemy No. 1, and begin showing how democracies can deliver against corrupt foreign adversaries and powerful special interests.