Panama Papers expose regulation farce: David Cay Johnston
David Cay Johnston
3:20 a.m. EDT April 15, 2016
More transparency and more prosecutions are needed to slow the flow of cash hidden to avoid taxes.
(Photo: Ed Grimaldo, AFP/Getty Images)
The Panama Papers show that billions of illicit dollars secretly flow through some of the largest banks licensed in America. But how can that be, considering all the regulations that banks complain are an excessive burden on them?
The answer is that Congress has mastered the political art of erecting Potemkin villages that create the appearance of regulation, especially when it comes to large global banks and other international financial institutions.
The story of facades along the Dnieper River that tricked Catherine the Great into thinking that her Russian subjects lived well is one that endures even though it was fiction — not unlike the fiction that bank regulations effectively inhibit the flow of ill-gotten gains to shelters designed to hide wealth and evade taxes.
Banks must comply with know-your-customer requirements, be on the lookout for money laundering, report suspicious cash transactions, and follow many other rules that date to the 1970 Bank Secrecy Act. And they don’t much like it. “Bankers must spend too much time and commit too many resources to regulatory compliance,” the American Bankers Association says.
Regulations, however, are ineffective and riddled with loopholes — one of them so big that trillions of dollars in hidden cash have passed through it.
You can get an idea of how well bank regulations work in the world of high finance from Bernie Madoff’s Ponzi scheme. The JPMorgan Chase banker on the Madoff business account testified that he didn’t know it was his duty to report suspicious transactions.
The 11.5 million leaked documents detail nearly 40 years of the Mossack Fonseca law firm in Panama helping clients shelter their wealth. It’s one of hundreds of law firms specializing in hiding assets that amount to $22 trillion worldwide, according to James Henry, a former McKinsey & Co. chief economist who has been exposing illicit cash flows for decades.
The main way to move illicit money is through a giant loophole involving shell corporations, which exist only on paper. Hundreds of banks and their subsidiaries and branches registered nearly 15,600 shell companies with Mossack Fonseca, according to the Panama Papers. The 10 banks requesting the most offshore companies for clients included four with American operations — Credit Suisse, HSBC, Societe Generale and UBS.
There are untold thousands of these companies in Delaware, Nevada and Wyoming. That’s because these states let the owners of shell companies hide their identities by hiring fronts, known as nominees, to lawfully pose as owners. Banks are required to verify the existence of all shell companies, but not to determine their real owners — even if a firm is named, say, White Powder LLC, which might be a cocaine trafficker or a ski lodge.
Mossack Fonseca maintains a Nevada office that creates shell corporations for its clients. The Panama Papers reveal that the law firm wiped its Nevada computer files and moved papers to Panama to conceal some of its conduct from U.S. authorities trying to recover money hidden in shell companies.
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Those sheltering secret money pay big fees to the banks they rely on, and they often don’t ask for interest. If corrupt officials want more money, as Henry notes, they can just take it. That’s a great deal for banks, which loan the money out and collect interest from borrowers.
The regulatory problem is that there's too much focus on banks rather than bankers, and on fines as the primary means of punishing banks. Bank fines are often tax-deductible. That means that you, the taxpayer, share in the cost of those fines. Banks can even use charitable donations to offset some penalties, as the Justice Department allowed Bank of America and Citibank to do in mortgage fraud cases. That has the perverse effect of burnishing the image of bankers as charitable rather than inflicting punishment to deter future wrongdoing.
Last week, President Obama said of the behavior revealed in the Panama Papers that “a lot of it is legal, but that’s exactly the problem. It’s not that they’re breaking the laws; it’s that the laws are so poorly designed."
Only two steps are needed for effective enforcement that would reduce the rivers of illicit cash flowing through American banks to a manageable trickle.
First, Congress should require disclosure of real owners of shell companies, using powers granted by our Constitution’s commerce clause. Second, the Justice Department should shift from fining bankers, which puts the burden on shareholders and taxpayers, to prosecuting bankers. Long prison sentences for just a few will deter others.
When penalties are only “about money, the company can at the end of the day take care of me,” a corporate executive told the Justice Department, “but once you begin talking about taking away my liberty, there is nothing that the company can do for me.”
Let’s cast aside our regulatory Potemkin villages for effective law enforcement by ending secrecy and then prosecuting bankers who break the law.
David Cay Johnston, a Pulitzer Prize-winning investigative reporter, is the author of Perfectly Legal, Free Lunch, The Fine Print and other books.
In addition to its own editorials, USA TODAY publishes diverse opinions from outside writers, including our Board of Contributors. To read more columns like this, go to the Opinion front page.
READ MORE: http://www.usatoday.com/story/opinion/2016/04/15/panama-papers-expose-regulation-farce-david-cay-johnston/82994348/
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