Revealing the Ultimate True Corporate Owner: Planned Ineffectiveness
“Here in the United States, there are loopholes that only wealthy individuals and powerful corporations have access to. They have access to offshore accounts, and they are gaming the system. …that lost revenue has to be made up somewhere.”
— President Obama on the date of the release of the Panama Papers.
This is the third in the series on tax evasion that begins here.
- Whenever we see legislation that could impede the wealthy from increasing their fortunes, we have to be alert to planned ineffectiveness.
From time to time, we see headlines of celebrities like Shakira and Messi and political wonks like Paul Manafort convicted of crimes. These activities are mainly revealed by a whistleblower who is always unnamed lest they be given credit for their sacrifice. In those cases, it was Dr. May Edwards, a former senior officer in the Financial Crimes Enforcement Network of the U.S. Treasury. Edwards became appalled at the amount of information her department had about wealthy people who were cheating on their taxes, illegally lobbying for pro Russia interests (Manafort), or money laundering and such, but refused to act upon it. So, she leaked that information to BuzzFeed News.
The leaked data was analysed by the International Consortium of Investigative Journalists (ICIJ). It was dubbed with the mind-numbing name of the FinCen Files (Financial Crimes Enforcement Network).
The ICIJ has
● a network of over 100 journalists with expertise in cracking complicated tax schemes.
● developed highly sophisticated software to connect the dots and reveal the human beings behind layers of shell corporations.
The better known of their reports, the Panama Papers and the Paradise Papers, the ICIJ has revealed hundreds of wealthy tax cheats.
These revelations are rarely the discoveries of tax departments because they don’t have the funding for the staff, nor the software. And to ensure this inability, politicians in the service of the elite, constantly pressure Congress to cut the IRS budget so it will not have the resources to penetrate complex tax evasion schemes — and the cuts are popularised as helping the average citizen escape the vigilance of the hated taxman.
So, it’s absolutely essential that any new government corporate ownership register requiring disclosure of ultimate beneficial ownership be available to investigative journalists and academics. In the agelessly insightful words of Louis Brandeis. “ “Publicity is justly commended as a remedy for social and industrial diseases. Sunlight is said to be the best of disinfectants; electric light the most efficient policeman.”
How Ineffectiveness is Planned
As a result of Edward’s FinCen leaks, Congress passed the federal Corporate Transparency Act in 2021 obligating corporations to disclose their beneficial owners, to be implemented in 2024.
Let’s look at the terms of the legislation. Here we will see examples of planning to make legislation ineffective.
The first provision in the Corporate Transparency Act that will protect the wealth hiders is that the registration database will be kept confidential on an encrypted Treasury Department website. Safe from even a single ray of sunlight and the prying eyes of investigative journalists and academics.
The justification for this privacy is often given that a public registration would expose these wealthy people to kidnappers and extortionists. But there are droves of extremely wealthy people who flaunt their wealth. They live in mansions and ride in chauffeur driven high-end cars. There’s no dearth of the conspicuously superrich that a kidnapper would have to search a database to find a vulnerable victim.
We find a second planned ineffectiveness that provides an additional line of protection to wealth hiders in the wording of the legislation. If the politicians truly wanted to disclose beneficial ownership, the legislation could be simply worded that every corporation had to reveal the ultimate beneficial shareholders. But the reform doesn’t do that. Instead, it relies on complexity to give the illusion of effectiveness. This is how it defines a beneficial owner:
“beneficial owner” is defined as a person who: “directly or indirectly, either
(1) exercises substantial control over a reporting company or
(2) owns or controls at least 25 percent of the ownership interests of a reporting company”.
As the Tax Justice Network points out, it’s easy to avoid the 25% qualification in (2). A parent could have a spouse, a child, a brother or sister holding shares, so it appears that no one has greater than 25%.
Then qualification (1), “substantial control” would kick in. It would take an accountant or a lawyer several hours to review all the documents in one of these schemes to give an opinion that the person named in the register is the person who has control. Here is the advice a Canadian accountant association gave to its members in applying substantially similar legislation:
“You need to trace through a tiered corporate structure to identify which individuals ultimately hold interests and rights in shares. You then need to determine whether the holdings are significant. You also need to review the impact of a shareholders’ agreement or other similar agreements.”
If the shareholders’ names were required, that would be a simple copy and paste operation by a clerical level staff working at $20 an hour for far less than an hour in most cases. If the taxpayers can afford to pay wealth management advisors to arrange a complicated corporate structure, they can afford to pay clerical staff to fill in the form showing who the shareholder or shareholders are and the identity of the UBO.
As former Swiss Bank auditor Rudolph Elmer suggested to me in a private conversation, the legislation could have the wealth management advisor who set up any complex structure certify who the beneficial owner is, under pain of a serious penalty. “These guys know who that is,” Elmer said, “They don’t just hand out checks for millions of dollars to just anybody.”
The solution, as Occam would approve, have simple, straightforward requirements:
- every beneficial owner of the shares must be disclosed
- the advisor who set up any scheme must certify the information is correct
Planned ineffectiveness is not new or limited to tax evasion solutions as the experienced journalist Glenn Greenwald commented to The Guardian News:
“The crux of this tactic is that US political leaders pretend to validate and even channel public anger by acknowledging that there are “serious questions that have been raised”. They vow changes to fix the system and ensure these problems never happen again.[See the Obama quote above] And they then set out, with their actions, to do exactly the opposite: to make the system prettier and more politically palatable with empty, cosmetic “reforms” so as to placate public anger while leaving the system fundamentally unchanged, even more immune than before to serious challenge.”
The Truth Will Not Set You Free
The FBI cracked BuzzFeed’s website and identified Edwards.
Sarah Ellison of The Washington Post has called Edwards “one of the most important whistleblowers of our era.”
Notwithstanding that the Edward leaks revealed:
- Many celebrities, persons of power hiding assets
- Russian attempts to influence U.S. policies
- Russian oligarchs, terrorists, kleptocrats, and drug kingpins money laundering
- Reputable financial institutions blatantly facilitating all this
- That her revelations caused the passing of the Corporate Transparency Act,
she was fired from the government, blacklisted, and sentenced to jail.
According to Jane Turner writing for the Whistleblower Network News, Edwards put her concerns in writing to her superiors, to Congress and the SEC. But she did not fill out a formal application for whistleblower status under The Whistleblower Protection Act. The trial judge rejected her claim to be a whistleblower because she did no follow proper channels.
The courthouse news reported the trial judge’s reasons as follows:
“I understand she viewed herself as a whistleblower,” U.S. District Judge Gregory Woods said at the hearing this afternoon in Manhattan. “But I’m not focused on that because blowing the whistle through proper channels is important. But we are not here because Dr. Edwards blew the whistle about areas of concern through the proper channels.”
According to BuzzFeed, “Mounting a legal defense cost Edwards and her husband, Dave, their home, their car, their health insurance, and most of their savings.”
And that is one of the major reasons that the departments of justice in many countries aggressively prosecute whistleblowers who harm the wealthy. Even if they can’t get significant jail time for the whistleblower, they can use the superior resources of the government to drive them to the verge of bankruptcy.
NEXT post: we will look at the further prosecution of whistleblowers in the financial system led by the US Department of Justice.
