President Obama's Efforts on Financial Transparency and Anti-Corruption: What You Need to Know

.@POTUS just took a series of steps to combat money laundering, corruption, and tax evasion: https://t.co/vzff5yGpjT https://t.co/dyT4hEa4LV

— The White House (@WhiteHouse) May 6, 2016

In recent weeks, you may have heard people talking about the “Panama Papers”— millions of reportedly leaked documents from a Panamanian law firm that have shed light into an illicit world of offshore anonymous shell companies. For too long, corrupt officials, tax cheats, and other criminals have used these kinds of shady practices to hide assets, engage in money laundering, or avoid taxes in their home countries. 

Since taking office, President Obama has been working to address corrupt practices that undermine our international financial system and enhance the transparency needed to ensure that everyone – including the wealthiest few – pay the taxes they owe. 

Today, his Administration took another set of important steps to combat money laundering, corruption, and tax evasion. Here are a few answers to some questions Americans may have about this issue:

What did the Panama Papers reveal exactly? 

The Panama Papers appear to show that people around the globe have been using anonymous, offshore shell companies and other entities in order to hide their business and assets from authorities. Some bad actors – like drug cartels, terrorist cells, or some wealthy individuals – have used shell companies and offshore accounts to evade taxes, launder money, or finance terrorist activity.  

What is a shell company and how does it work? 

A shell company is a company with anonymous or hidden ownership.

Establishing companies like this is actually a normal practice around the world. In fact, the regulations for registering a company in most countries enable it. Shell companies are empty fronts that can hold assets, wire money, and open bank accounts like any company without revealing the name of their actual owners who benefit from the shell company’s legal or illegal transactions. For instance, developers can use a shell company for legal reasons, like purchasing real estate to thwart speculative price gouging. And that’s perfectly legal.

However, shell companies can also be used to launder money, evade taxes, facilitate corruption, or finance terrorism.    

The owner of a shell company is known as a “beneficial owner,” and by using shell companies, the beneficial owner can control the shell company’s transactions without revealing his or her identity. That often means that beneficial owners can often conduct illegal activities without financial authorities and law enforcement being able to detect those activities or the people behind them. 

What do today’s actions do to help address this kind of financial abuse? 

Today, the Treasury Department took several steps to increase transparency and disclosure requirements.

First, the Treasury Department finalized its “customer due diligence” rule, which requires financial institutions – such as banks , mutual funds, and other financial institutions – to find out and verify who actually owns and profits from the companies that make use of their services, i.e, the “beneficial owner.” Under this rule, if an entity (like a shell company) opens an account at a financial institution, that institution will be required to identify and verify the real people actually behind that entity. And law enforcement can then seek out that information from those institutions.

By requiring disclosure of beneficial ownership information, we will increase financial transparency and give financial institutions and law enforcement the ability to identify the assets and accounts of criminals and national security threats.

Now, while the beneficial owners of shell companies often exploit weak rules in offshore tax havens, gaps also exist in U.S. tax rules that foreigners can currently exploit to set up and hide their assets or financial activity in an anonymous shell company in the United States.

So the second step Treasury took today is to propose a rule that would plug this gap by requiring certain foreign-owned companies to obtain a tax identification number from the IRS, thereby requiring these entities to report ownership and transaction information to the IRS.

Taken together, these steps go a long way in helping to combat money laundering and tax evasion, but additional tools are needed to promote transparency and strengthen law enforcement. And only Congress can help on that front. 

What role does Congress have to play to combat illegal financial activity? 

The truth is that bad actors will continue to seek new ways to exploit the financial system for illicit purposes – be it financing terrorism, laundering proceeds from illegal activity such as corruption, evading international sanctions, or evading taxes – and the Administration cannot address these actions through executive steps alone. 

That is why President Obama is calling on Congress to take four critical actions to strengthen what the U.S. can do: 

1. Pass legislation to require “beneficial ownership” transparency: On behalf of the Administration, the U.S. Department of the Treasury is sending a new legislative proposal to Congress that would require all companies formed in the U.S. report information about their beneficial owners to the Department of the Treasury. That step would make information about beneficial owners readily available to law enforcement.

2. Pass legislation to give law enforcement better anti-corruption tools: We are also seeking legislation to advance our ability to fight corruption both here in the United States and abroad. The new legislative proposals would enhance the ability of our law enforcement officials to obtain information from domestic and foreign banks so they can investigate and prosecute money laundering. This will also allow the Justice Department to prosecute money laundering linked to a broader set of crimes, including ones that involve corrupt public officials.

3. Approve eight tax treaties:  Eight tax treaties have been awaiting Senate approval for several years. Without those treaties, U.S. officials don’t have a complete set of tools to fully investigate and crack down on tax evasion by Americans with offshore accounts, including secret Swiss bank accounts.

4. Strengthen existing law to improve reciprocal transparency: In 2010, President Obama signed legislation that established the global standard for financial reporting by requiring foreign financial institutions to automatically report to the IRS information about financial accounts held by U.S. persons. But right now, the U.S. doesn’t provide the same information to its partners under this law that they provide to the United States. Congress can strengthen this law by requiring U.S. financial institutions to provide that information to our partners.  

Are these the first steps President Obama has taken to strengthen financial transparency and to address corruption and money laundering around the globe? 

Actually, no. President Obama has been focused on this issue since he took office, and today’s steps build on the progress this Administration has made to combat tax evasion, corruption, and illicit finance. 

From pushing for and passing the Foreign Account Tax Compliance Act to cracking down on offshore tax evasion through criminal investigations and prosecutions, the President and his Administration have taken important steps on many fronts that have helped increase transparency in the international financial system and both prevent and punish financial corruption. 

Here’s a look at the results of the Administration’s efforts, by the numbers. 

Under President Obama:  

• The Department of Justice has charged more than 100 U.S. accountholders that evaded U.S. tax laws using hidden offshore accounts, and nearly 50 individuals who assisted them.
• Due to aggressive law enforcement actions, 80 Swiss banks have admitted to engaging in criminal conduct and paid more than $1.3 billion in penalties.
• Under threat of prosecution, more than 54,000 individuals have come forward to disclose their offshore accounts, paying more than $8 billion in tax, penalties, and interest.
• Under a law the President signed in 2010, more than 150,000 foreign financial institutions have agreed to report information to the U.S., in an effort to ensure that tax cheats cannot hide assets offshore. 

There’s a lot more to digest here, so if you’re looking for a deep dive, see what the Treasury Department and the Department of Justice have to say about today's announcement. And check out what Secretary Jack Lew said to Members of Congress today about next steps.