April and May brought some of the most important movement on the anticorruption front of any two-month period in the past decade. Recapitulating briefly:
– In April, the International Consortium of Investigative Journalists (ICIJ) began release of the Panama Papers, roughly 11 million leaked documents from the Mossack Fonseca law firm detailing the creation of more than 15,000 shell companies and providing information on more than 200,000 offshore entities. The lists touched on a variety of presumably legal uses of offshore firms, but also sprayed egg on a number of prominent faces, including in Russia, Ukraine, China, the United Kingdom (UK), Spain, Chile, Argentina, Iceland, and within the International Federation of Association Football (FIFA), among others. A follow-up manifesto by John Doe, the whistleblower at the heart of the leak, noted the extensive use of offshore accounts as part of a system of “massive, pervasive corruption” in the global economy. If nothing else, the Panama Papers have introduced the concept of “beneficial ownership” to a broader public, and fomented a larger discussion of how the West enables corrupt practices through loose monitoring of offshoring and financial disclosure.
– The reports were followed in May by measures by the Obama administration to “combat money laundering, corruption, and tax evasion…,” stimulated in part by the Panama Papers, as well as the impending UK Anti-Corruption Summit (below). Among the administration measures were proposals to strengthen anticorruption efforts by requiring greater due diligence and disclosure regarding corporate ownership, and requiring foreigners setting up shop in the United States to obtain a tax identification number. Critics have noted (for example, here and here) that many of the measures will require legislative approval, which will be slow in coming, and many of the proposals do not go far enough in involving important gatekeepers in due diligence. But the Obama administration’s moves are at least a recognition of the problem, and perhaps may set the stage for future change. They also come in the wake of the announcement of much-needed increases in the human resources devoted to anticorruption efforts at both the Federal Bureau of Investigation (FBI) and the U.S. Department of Justice.
– Finally, on May 12, at the Anti-Corruption Summit in the UK moved forward, millimetrically, on a proposal for public registries and an international information-sharing center on beneficial ownership. Only six countries are fully committed to the registries project, and the United States remains aloof, but at least the idea is on the table. If nothing else, governments will need to explain what they find problematic about the idea, even if they ultimately refuse to join up.
These three developments highlight the stop-and-start nature of anticorruption efforts: as so often happens in the public policy world, a small group of anticorruption campaigners have kept the issue on the table during times of relative inattention to corruption. The shock generated by the Panama Papers created a small window of opportunity for policy change, when campaigners’ ideas and proposals could be placed before policymakers briefly focused on the problem and eager to hear about ready solutions.
Whether these proposals move forward will depend significantly on the support they receive against a barrage of likely opposition. Five years ago, author Nicholas Shaxson noted that the biggest tax havens in the world are islands. Islands, he concluded tongue-in-cheek, such as Manhattan and the City of London. Tax havens are estimated to hold as much as $20 trillion, more than all U.S. banks. Furthermore, the Tax Justice Network ranks the U.S. as the world’s third-easiest place, after Switzerland and Hong Kong, to set up offshore companies that can be used for everything from tax evasion to hiding beneficial ownership (more here). As Daniel Kaufmann and Alexandra Gillies and Shruti Shah have noted separately, less background information is needed to set up a shell corporation in Delaware than to get a driver’s license or a library card. Beneficial ownership rules thus may face an uphill battle against opposition from the representatives of states dominated by the financial services industry or from lawyers and business groups concerned by increased regulatory costs.
Ultimately, success in moving forward in fighting the corruption that disproportionally milks many of the world’s poor will require a sustained campaign that makes it clear to voters and policymakers that it is in the best interest of the United States to staunch the flow of illicit funds around the world. The experience of the past forty years suggests a way forward. The Foreign Corrupt Practices Act (FCPA) of 1977, for example, could never have moved forward without recognition that the offshore corruption of U.S. firms was circling back home in the form of highly damaging illegal campaign finance contributions. Following the FCPA’s passage, business complained—rightly—about the FCPA’s anticompetitive effects, and pressure from business and anti-corruption groups eventually led to passage of international agreements, such as the 1997 Organisation for Economic Co-operation and Development (OECD) Convention on Corruption, that imposed similar corruption-busting regulations on other countries, generating improved conditions for clean global business.
There may be costs, in other words, to being a first mover. But there is significant and clear damage to the U.S. national interest when other countries’ corporations compete with ours on an uneven playing field, when corruption weakens and destabilizes our allies, when our treasury is depleted by offshore maneuvering, and worst of all, when our reputation is sullied because we are seen as part of the problem rather than the solution. Everything should be done to reduce the regulatory burden and lessen the costs of compliance. But if there is one lesson from the Panama Papers, it is that the days of ethical neutrality about the tangible costs of undisclosed and unidentifiable offshore financial movements are coming to an end.