Five ways Biden could crack down on dirty money and financial secrecy

Riding a wave of anti-mon­ey laun­der­ing momen­tum, will the U.S. pres­i­dent from Delaware deliv­er on his pledges to tack­le tax havens and make the wealthy pay more?

CINCINNATI, OH — OCTOBER 12: Democratic pres­i­den­tial nom­i­nee Joe Biden makes remarks dur­ing a vot­er-mobi­liza­tion event at the Cincinnati Museum Center at Union Terminal October 12, 2020 in Cincinnati, Ohio. With 21 days until the elec­tion, Biden is cam­paign­ing in Toledo and Cincinnati. (Photo by Chip Somodevilla/Getty Images)

Early rhetoric from the Biden admin­is­tra­tion has encour­aged anti-cor­rup­tion advo­cates that the new president’s tenure in the White House may mark a turn­ing point in the fight against dirty mon­ey and tax haven abuse — two over­lap­ping prob­lems made worse by a veil of secre­cy that shields vast sums of mon­ey from tax col­lec­tors and law enforce­ment authorities.

We will crack down on tax havens and illic­it financ­ing that con­tribute to income inequal­i­ty, fund ter­ror­ism, and gen­er­ate per­ni­cious for­eign influ­ence,” the administration’s Interim National Security Strategic Guidance, released last month, says, iden­ti­fy­ing the fight against glob­al cor­rup­tion as a top secu­ri­ty pri­or­i­ty. The strat­e­gy mir­rors promis­es Joe Biden made dur­ing his candidacy.

The pledges come at a time when the U.S., like many oth­er coun­tries, is see­ing polit­i­cal momen­tum around pro­pos­als to ensure that wealthy indi­vid­u­als and high-earn­ing cor­po­ra­tions pay their fair share of tax­es to aid pan­dem­ic relief and eco­nom­ic recovery.

It’s time to “change the par­a­digm,” Biden said in his first press con­fer­ence, to “reward work, not just wealth” — a line that rein­forced his pledges to raise mar­gin­al tax rates for the rich and for cor­po­ra­tions. This week, Biden unveiled a pro­posed tax hike on com­pa­nies and for­eign prof­its to pay for his infra­struc­ture plan.

The International Consortium of Investigative Journalists has doc­u­ment­ed across many inves­ti­ga­tions how mil­lion­aires, includ­ing cor­rupt politi­cians, drug deal­ers, human rights abusers and tax evaders use the off­shore sys­tem to hide their wealth. Most recent­ly, in 2020, the FinCEN Files inves­ti­ga­tion revealed how banks allow bil­lions of dol­lars in sus­pect mon­ey to flow through their accounts.

So far, the Biden admin­is­tra­tion hasn’t pro­vid­ed specifics about how the promised fight against tax havens and dirty mon­ey might shake out. Taxation and mon­ey laun­der­ing experts say there are at least five reforms that the new pres­i­dent should put at the top of the list.

1. Crack down on tax havens at home and abroad

The United States has served as a finan­cial haven for klep­to­crats, tax evaders and crim­i­nals for decades, and has been con­sis­tent­ly ranked among the top juris­dic­tions that facil­i­tate finan­cial secre­cy by the Tax Justice Network. Biden him­self served 30 years rep­re­sent­ing Delaware — a state known as a secre­cy haven — in the U.S. Senate.

Recent esti­mates from a report by IRS researchers and aca­d­e­m­ic econ­o­mistsindi­cate that the top 1% of high-income Americans avoid report­ing more than 20% of their income, a sig­nif­i­cant­ly high­er pro­por­tion than pre­vi­ous­ly assumed. The wealthy employ sophis­ti­cat­ed strate­gies to dodge income tax, includ­ing off­shore tax avoidance.

Biden’s new plan promis­es to bol­ster the IRS’ enforce­ment capac­i­ty. “Large cor­po­ra­tions have at their dis­pos­al loop­holes they exploit to avoid or evade tax lia­bil­i­ties, and an army of high-paid tax advi­sors and accoun­tants who help them get away with this,” the pro­pos­al says. “An under-fund­ed IRS lacks the capac­i­ty to scru­ti­nize these sus­pect tax maneuvers.”

During tes­ti­mo­ny before the Senate finance com­mit­tee last week, Kimberly Clausing, deputy assis­tant sec­re­tary at the Department of the Treasury, stressed the need for reforms and mod­ern­iza­tion to build a tax sys­tem that is “fit for pur­pose, fair, and focused on the needs of all Americans.”

Clausing said that while eco­nom­ic inequal­i­ty increased in recent decades, gov­ern­ments around the world have shift­ed the tax bur­den away from wealth and cor­po­rate income to indi­vid­ual work­ers. “Instead of damp­en­ing eco­nom­ic inequal­i­ty, the tax sys­tem has too often exac­er­bat­ed it,” she said.

Despite mea­sures adopt­ed in 2017 aimed at reduc­ing “prof­it shift­ing” — the strate­gic move­ment of prof­it from juris­dic­tions with high­er tax­es to juris­dic­tion with low­er tax­es — Clausing said that “the use of tax havens to avoid tax con­tin­ues unabated.”

We need bet­ter pro­tec­tions to defend the U.S. cor­po­rate tax base from the tax-moti­vat­ed shift­ing of cor­po­rate prof­its to off­shore havens,” Clausing said. “We can do a lot more to ensure our tax sys­tem works for American workers.”

2. Close loopholes in the Corporate Transparency Act

Donald Trump’s pres­i­den­cy end­ed with leg­is­la­tors push­ing through the land­mark Corporate Transparency Act, a long-sought reform that requires U.S. com­pa­nies to report their true own­ers to the Treasury Department’s Financial Crimes Enforcement Network, known as FinCEN. But loop­holes may lim­it the law’s pow­er. Some Wall Street invest­ment vehi­cles cre­at­ed by hedge funds are exempt, for exam­ple, as are larg­er com­pa­nies, and pos­si­bly trusts. A reportreleased by Transparency International in February called for an expan­sion of due dili­gence rules to cov­er lawyers, accoun­tants, pri­vate equi­ty and hedge funds.

A spokesper­son for Sen. Sherrod Brown, chair­man of the Senate bank­ing com­mit­tee, said that the U.S. Government Accountability Office is required to look into whether cer­tain finan­cial groups should be cov­ered by the new trans­paren­cy rules.

While it exempts cer­tain enti­ties, gen­er­al­ly because they already pro­vide own­er­ship infor­ma­tion to oth­er gov­ern­men­tal actors like their reg­u­la­tors, oth­ers exempt enti­ties are required to be stud­ied by the GAO, in con­sul­ta­tion with law enforce­ment and nation­al secu­ri­ty offi­cials, with a report and rec­om­men­da­tion back to Congress on whether they also should be cov­ered by the new trans­paren­cy rules,” Brown’s office said in a state­ment to ICIJ. “Prompt, effec­tive imple­men­ta­tion of these new laws will be a huge advance for trans­paren­cy and is a high pri­or­i­ty for Chairman Brown.”

3. Reform FinCEN

Implementation and enforce­ment of the CTA falls to FinCEN, the gov­ern­ment agency tasked with com­bat­ing mon­ey laun­der­ing, financ­ing of ter­ror­ism and oth­er finan­cial crimes. But a recent crit­i­cal report by Global Financial Integrity says that FinCEN is under­fund­ed and over­stretched in its respon­si­bil­i­ties, and that the U.S. gov­ern­ment anti-mon­ey-laun­der­ing efforts “are wide­ly seen as inef­fi­cient and ineffective.”

Last year, ICIJ, BuzzFeed News and oth­er media part­ners world­wide, pub­lished the FinCEN Files inves­ti­ga­tion, based on more than 2,000 secret finan­cial records from inside FinCEN. The inves­ti­ga­tion revealed that major banks trans­act dirty mon­ey, some from crim­i­nal orga­ni­za­tions and klep­to­crats, in plain view of gov­ern­ment reg­u­la­tors.

FinCEN’s direc­tor Kenneth Blanco, said that the agency was focused on get­ting the nec­es­sary resources to imple­ment the CTA and oth­er anti mon­ey laun­der­ing reforms in a recent vir­tu­al con­fer­ence held by the International Institute of Bankers. FinCEN is solic­it­ing pub­lic com­ment on imple­ment­ing ben­e­fi­cial own­er­ship infor­ma­tion report­ing until May 5, 2021.

Meanwhile, some reforms pro­posed in the wake of FinCEN Files have been on pause after the Biden admin­is­tra­tion imposed a reg­u­la­to­ry freeze on pend­ing reg­u­la­tions from the Trump admin­is­tra­tion. One of them is a pro­pos­al to require banks and oth­ers to col­lect and share with author­i­ties infor­ma­tion on poten­tial­ly sus­pi­cious trans­ac­tions sent over­seas for more than $250, down from $3,000. A FinCEN spokesper­son told ICIJ that the so-called trav­el rule is still pend­ing and the agency couldn’t pro­vide an update. Some in the finan­cial indus­try warned that the change could cre­ate an addi­tion­al com­pli­ance load to banks.

There are signs that the finan­cial indus­try wants bet­ter reg­u­la­tion, too. A recent sur­vey of 340 finan­cial com­pli­ance pro­fes­sion­als found that the vast major­i­ty of respon­dents would like to see more guid­ance from reg­u­la­tors and law enforce­ment offi­cials, includ­ing about report­ing sus­pi­cious finan­cial activ­i­ties and assess­ing risks.‑1&parentTitle=Five%20ways%20Biden%20could%20crack%20down%20on%20dirty%20money%20and%20financial%20secrecy%20-%20ICIJ&

4. Hold financial institutions accountable

Prosecution of finan­cial crimes and fines to cor­po­ra­tions hit a record low dur­ing the Trump years, and his admin­is­tra­tion over­saw the dis­man­tling of anti-cor­rup­tion reg­u­la­tions.

Now advo­cates say they hope account­abil­i­ty is pri­or­i­tized by the new admin­is­tra­tion and that the Justice Department goes after cor­rupt actors in the finan­cial sec­tor. The FinCEN Files inves­ti­ga­tion showed how big banks have con­tin­ued to prof­it from sus­pect trans­ac­tions, even after being fined for com­pli­ance fail­ures. Meanwhile, the gov­ern­ment agen­cies respon­si­ble for enforc­ing mon­ey laun­der­ing laws sel­dom pros­e­cute big banks that break the law.

What we hope to see from a Biden White House is high­er pri­or­i­ties on these issues and the ini­tial signs are encour­ag­ing, giv­en what Biden has said about these issues and the appointees that he has nom­i­nat­ed for key posi­tions,” said Ian Gary, exec­u­tive direc­tor of the FACT Coalition.

The Biden appointees who would play a role in finan­cial crime enforce­ment include Attorney General Merrick Garland, a for­mer fed­er­al appeals court judge. While Garland’s record with white col­lar crime isn’t exten­sive, his poten­tial Deputy Attorney General Lisa Monaco was part of the Enron Task Force, which inves­ti­gat­ed one of the biggest fraud cas­es in U.S. his­to­ry in 2001. Her nom­i­na­tion is pend­ing confirmation.

Gary Gensler, a for­mer Wall Street exec­u­tive who then became a finan­cial reg­u­la­tor, will lead the Securities and Exchange Commission. He is known for tak­ing on big banks after the 2008 finan­cial cri­sis, when he chaired the U.S. Commodity Futures Trading Commission. The Department of the Treasury is now head­ed by Janet Yellen, an econ­o­mist and for­mer chair of the Federal Reserve. In that role, she imposed growth restric­tions on Wells Fargo after the bank admit­ted employ­ees cre­at­ed fake accounts to meet unre­al­is­tic sales goals. Her nom­i­na­tion as Treasury Secretary was applaud­ed by finan­cial groups, while some pro­gres­sive groups raised con­cerns since she has received more than $5 mil­lion in speak­ing fees from the finan­cial insti­tu­tions she is now respon­si­ble for regulating.

5. Level the tax burden

Biden’s new­ly unveiled plan seeks to raise $2 tril­lion in 15 years to fund his infra­struc­ture agen­da by claw­ing back some of the cor­po­rate tax reduc­tions Republicans made in 2017. He is also propos­ing an increased tax rate on the for­eign prof­its of U.S. com­pa­nies, and a 15% min­i­mum tax on the “book income” of corporations.

Details on plans to increase tax­es on wealthy indi­vid­u­als are expect­ed in future releas­es of Biden’s agen­da, the Wall Street Journal report­ed.

Meanwhile, bills that seek to hike tax­es for America’s wealthy have been intro­duced in recent weeks by sen­a­tors Elizabeth Warren and Bernie Sanders.

Sanders, chair­man of the Senate Budget Committee, pro­posed a tax scheme for wealthy estates as well as for cor­po­ra­tions. Warren’s bill seeks to impose  a 2% annu­al tax on peo­ple with net worths above $50 mil­lion and 3% for bil­lion­aires. Both pro­pos­als include mea­sures aimed at deter­ring the flow of mon­ey offshore.

However, Yellen has not expressed sup­port for a wealth tax, telling the New York Times that she wasn’t plan­ning one because it is “some­thing that has very dif­fi­cult imple­men­ta­tion problems.”

Yellen does sup­port efforts to cre­ate an inter­na­tion­al agree­ment on a glob­al min­i­mum tax on multi­na­tion­al cor­po­ra­tions, accord­ing to the Washington Post. Those crit­i­cal of a high­er cor­po­rate tax say that an increase would hurt the United States glob­al com­pet­i­tive­ness. The change would go against an inter­na­tion­al trend in recent decades of coun­tries low­er­ing the amount of tax­es cor­po­ra­tions pay in order to attract new investment.

It will be a major sub­ject of nego­ti­a­tion for the Organisation for Economic Co-oper­a­tion and Development this year.

Update: This sto­ry has been updat­ed since pub­lish­ing with a link to sub­mit com­ment to FinCEN about imple­ment­ing pro­vi­sions in the Corporate Transparency Act. 

ICIJ, Brenda Medina

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