US Is Now A Premier Haven For Foreign Tax Evasion And Money Laundering

Way back in 2005, a UBS banker named Bradley Birkenfeld discovered that his compatriots at the secretive Swiss bank were actively subverting a prior agreement between the bank and the IRS. He was particularly concerned about a memo from the legal department that outline prohibited practices in cross-border banking activities, practices that the bank itself directed its wealth managers to use. Birkenfeld saw the memo for what it was, an attempt to absolve the bank of any blame should a wealth manager be accused of ignoring the IRS agreement and laying responsibility at the feet of the individual wealth manager. His internal complaints of "unfair and deceptive practices" at the bank were ignored by management. Eventually, in 2007, he went to the US Department of Justice and outlined how UBS was avoiding its earlier agreement with the IRS.

Birkenfeld's whistleblowing began a long process of slowly whittling away at Swiss bank secrecy laws and began a global push to crack down on bank secrecy, tax evasion, and money laundering. That effort resulted in thousands of Americans, Europeans, and others to pay back taxes on earnings that flowed into accounts in those Swiss banks that were hidden from tax authorities. It culminated in an agreement by the members of the Organisation for Economic Co-operation and Development (OECD) called the Common Reporting Standards (CRS) that required the reporting of foreign accounts back to the owner's tax authorities. Under that agreement, banks would have to report foreign-owned accounts back to the tax authority that regulated the owner.

The US was one of the main drivers in getting the CRS finally adopted in 2014 by the 34 members of the OECD and, as of this year, 97 tax jurisdictions have signed on to the CRS. Much of the CRS was based on an already existing US standard that was adopted in 2010 called the Foreign Account Tax Compliance Act (FATCA). But, instead of joining the CRS in 2014, the US continued to stick to its own FATCA standard, even when the OECD requested that it join. Of all the nations that the OECD has asked to adopt CRS, only the US, Bahrain, Nauru, and Vanuatu have refused to sign on.

The adoption of CRS put a big crimp in the Swiss banks and the other secretive banking systems in Europe. But the failure of the US to adopt CRS and "the continued discrepancies between FATCA and CRS – and Washington’s willingness to join the likes of Bahrain and Vanuatu in failing to sign on to OECD standards – has swept the U.S. to the fore for foreign funds", according to the Kleptocracy Initiative. In an ironic twist, as the Swiss bank secrecy has faded, secretive monies have started flowing into the US. As one Swiss lawyer noted, "How ironic – no, how perverse – that the USA, which has been so sanctimonious in its condemnation of Swiss banks, has become the banking secrecy jurisdiction du jour."

The rise of the US as a haven for secretive foreign money is the result of actions taken on both the federal and state levels. On the federal level, the US insistence on using FATCA instead of the CRS "risks tearing a giant hole in international efforts" at financial transparency, according to the Tax Justice Network. But changes at the state level are even more important. States like Delaware, Wyoming, and Nevada have become havens because of the ease in which shell companies like LLCs or asset protection trusts can be set up which protect the real owner's anonymity. This has led to a surge in monetary flows out the tax havens of Europe and into these states. The states have come to rely on the money generated by the accounts set up in their state. In Wyoming, for example, there is one business entity for every 4.5 persons and Nevada relies on the over $100 million it receives from fees on these accounts to pay its teachers. According to the Tax Justice Network, Delaware, Wyoming, and Nevada show "clear characteristics of financially ‘captured states,’ where decisions about relevant legislation are taken between lawmakers and financial services interests behind closed doors, ring-fenced from complex democratic processes."

Needless to say, US financial services firms are ready and willing to service this offshore money. According to a Powerpoint presentation by Andrew Penney at Rothschild & Co., the US “is effectively the biggest tax haven in the world...and lacks the resources to enforce foreign tax laws and has little appetite to do so." The Bloomberg article gives a couple of examples of how these states can abet foreign account holders. "A wealthy Mexican opens a US bank account using a company in the British Virgin Islands. As a result, only the company’s name would be sent to the BVI government, while the identity of the person owning the account would not be shared with Mexican authorities". Penney himself provided this example about how a Chinese national could hide his wealth by
"[p]utting his assets into a Nevada LLC, in turn owned by a Nevada trust, [that] would generate no US tax returns...Any forms the IRS would receive would result in 'no meaningful information to exchange under' agreements between Hong Kong and the US."

It is not against U.S. law, per se, to offer secrecy to financial clients. But it does open up a significant avenue for foreigners to avoid taxes in their home countries as well as engage in criminal money-laundering. An investigation showed that companies in Delaware were used to divert millions of dollars earmarked to improve safety at nuclear facilities in post-Soviet Russia to individual Russian nationals. Arms dealers and corrupt heads of foreign nations have also used the secret US state accounts.

It is, however, against the law for US financial firms to actively market these secret accounts as a way to avoid home country taxes. Of course, most of the financial firms declare that they are very careful to not do so. A spokesman for Rothschild declared that the bank "adheres to the legal, regulatory, and tax rules wherever we operate...We do not offer legal structures to clients unless we are absolutely certain that their tax affairs are in order; both clients themselves and independent tax lawyers must actively confirm to us that this is the case."

That kind of statement is very reminiscent of the stand that UBS took before Bradley Birkenfeld exposed it for the lie that it was. And the bank doesn't really have to advertise the tax evasion and money laundering advantages anyway. The rich foreign elites who are looking to hide or launder their money either know how to play the "game" of not declaring their illicit purposes or advisers who do. Even less convincing was a financial adviser in South Dakota, which has became a similar state haven, who said, "I do not hear anybody saying, 'I want to avoid taxes'. These are people who are legitimately concerned with their own health and welfare."

I don't think many of us would think of the US as the "biggest tax haven in the world". But that is effectively what we've become in the last decade. And one of the easiest and safest ways to hide or launder money is through U.S. real estate. It is probably how Donald Trump recovered from his bankruptcy in the late 1990s, but that requires a whole other post.

Today, however, we do know that the Trump companies have sold at least 58 units in the US for over $90 million. In Las Vegas, an unknown buyer has purchased 11 units in a Trump co-owned tower for $3.1 million in just four months. The paper owner is a company called Milan Investment incorporated in Nevada, but the address and contact information given for that firm is a financial service firm office in a strip mall that apparently has no knowledge of Milan Investment. USA Today possibly tracked the owners as potential Chinese nationals but, because of the secrecy that Nevada provides, could not confirm that. Milan Investment is now the third largest owner of condos in that Las Vegas tower.

As the Tax Justice Network noted, states that offer the real beneficial owners secrecy can easily be captured by those interests. With the US now acknowledged as a premier safe-have for tax evasion and money-laundering via real estate and a President who has massive conflicts of interests and may be engaged in outright corruption, we may never know when US policy is actually directed by foreign moneyed-interests or powers.