Disclosure in the Caymans: Global walls of financial secrecy are falling

In 1998, the Nigerian oil minister, Dan Etete, awarded the concession to oil block OPL245 to Malabu Oil and Gas – for $2 million, five days after the company was set up. It was later found that Mr. Etete was the real owner of Malabu, and that he had awarded himself the concession for a pittance: When it was sold 13 years later, he reportedly made $1.1 billion.

He is now facing corruption charges in Nigeria and in Italy.

In late 2007 and early 2008, a company in the British Virgin Islands (BVI) linked to Russian mobsters wired at least $900,000 to another BVI company owned by a Russian businessman who was later sanctioned by the United States for his ties to Syria's chemical weapons program.

These examples are just a hint of the the $8 trillion to $36 trillion estimated to be hidden away in the world’s financial system. Using shell companies and banks that keep their identities hidden, corrupt politicians, drug kingpins, tax evaders, and money launderers secretly park their money in countries far away from the prying eyes of law enforcement and tax officials. But an international push to make their identity public is gaining traction.

From Switzerland to the United States to Britain and the European Union, the shields of secrecy that have protected criminal transactions are beginning to fall like dominoes. While these moves don’t represent the beginning of the end of hiding assets overseas, they may represent the end of the beginning in a global movement toward new standards of transparency.

The latest domino that’s wobbling: BVI, the Cayman Islands, and other British overseas territories. The British Parliament Tuesday amended a bill on money laundering to oblige the territories to introduce public ownership registers revealing the true owners of companies incorporated in their jurisdictions.

The US is considering similar legislation. Behind the gathering momentum for the anti-secrecy movement is the growing realization of how corrosive financial secrecy can be.

“There are so many examples of shell companies being misused,” says Elise Bean, former staff director of the US Senate Permanent Subcommittee on Investigations and aide to former Sen. Carl Levin (D) of Michigan, who began investigating shell companies in 2000. “You can look at North Korea. You can look at drugs. You can look at opiates. You can look at sex trafficking. Everyone knows this is one of the big scourges in the world today.”

Anti-corruption activists are hailing the British Parliament’s decision, due to come into force in 2020, as a major victory. “This is the key step to making it very much harder for kleptocrats and others to loot their countries” and hide the proceeds, says John Christensen, a veteran campaigner and director of the Tax Justice Network, a lobbying and research group.

Impetus from a crisis

The global financial crisis provided the key impetus for the movement to crack down on offshore tax havens and financial secrecy, says Nicholas Shaxson, author of “Treasure Islands,” an exploration of the offshore world.

“Governments were short of revenue and seeking new sources; there was huge public anger at bailouts and banking is at the center of the offshore system; and there were rising concerns about inequality when offshore is an inequality machine,” Mr. Shaxson says. “NGOs played an absolutely crucial part, but the big beast was the financial crisis.”

In 2009, leaked documents on about 52,000 Americans as well as other foreign nationals with secret Swiss bank accounts, led to the US pressuring Switzerland to release the names of its non-Swiss account holders. Concerns about terror financing and tax evasion led the US in 2010 to pass laws requiring foreign banks to alert the US when Americans open foreign bank accounts. The move convinced the Organization for Economic Co-operation and Development, which represents the developed nations, to embrace a common reporting standard for all its members.

In 2012, the world’s leading countries, represented by the Group of Twenty, agreed on new international reporting standards requiring multinational companies to publish the accounts of their subsidiaries in all the countries where they operate, making it harder to shift profits to low-tax jurisdictions. Last year, G20 member states introduced a system of automatic information exchange among national tax authorities.

“Bit by bit, international standards are being created,” says Mr. Christensen. “This is all being extended in the direction” of secretive jurisdictions such as Switzerland. But activists and journalists investigating fraud, kleptocracy, embezzlement and other financial crimes “hit a brick wall when we can’t establish the ownership of a company,” he adds.

New pressure on 'shell companies'

That’s why anti-secrecy activists say the parallel move – to maintain public registers of the “beneficial” or real owners of a corporation – is so important.

Under the leadership of then Prime Minister David Cameron, Britain in 2016 became the first nation to require a public register of its corporations. Others have followed suit, including the European Union late last year. A new EU directive on money laundering means all 27 EU countries will have to introduce public registers by 2020. Britain’s move this week extends that same requirement to its overseas territories.

The biggest impact of Tuesday’s decision in the British Parliament will be felt in the US, says Maggie Murphy, senior global advocacy manager at Transparency International, an anti-corruption campaigning group.

“States such as Wyoming used to say they are not as bad as the British overseas territories," she says. “Now ... they have lost that argument.”

And, for the first time, activists in the US say they have a shot at passing legislation that would also require a public register for corporations.

Possible steps in US

“Interest in this issue has just skyrocketed,” says Gary Kalman, executive director of the Financial Accountability and Corporate Transparency Coalition, a policy group focused on combating offshore tax abuse. The most action is centered on the House, where legislation has not only broad bipartisan support, but has attracted support from banks, multinational corporations, and realtors, among others.

“2018 is, in fact, the first year that we have the kind of interest and support that could move legislation,” Mr. Kalman says.

The Trump administration, meanwhile, has made moves to increase transparency in high-end real estate deals. The Obama administration got the ball rolling in 2016, with a pilot program by the federal Financial Crimes Enforcement Network requiring that title companies identify the real owners behind shell companies used to buy pricey residences in Manhattan and Miami. The Trump administration has twice extended the program and has expanded it to include five other US metro areas.

So far, FinCEN has found that about 30 percent of the transactions have involved people who have been flagged in prior bank reports for suspected money laundering or fraud.

The BVI and the Caymans both criticized Britain’s move, with the former calling for a private registry and the latter talking of options including a potential legal challenge.

Both have moved to modernize and diversify their financial industries beyond setting up secret corporations. “Back in the ’50s and ’60s, people would fly in with briefcases full of cash,” says Craig Boise, a tax law professor and dean at Syracuse University who has spent years studying both tax havens. Still, the latest change “is likely to cause a pretty seismic shift in their business model.”