Forget Panama, the US has become the world’s favorite place to stash cash
Money from foreign tax avoiders has filled US war coffers
While the world’s attention is trained on a Panamanian law firm that helped politicians, sports stars and crooks stash billions in offshore accounts across the globe, the spotlight could soon turn elsewhere — to the piles of cash secreted in the US.
For the past 48 hours, the media has pored over a massive leak of 11 million financial records from the firm Mossack Fonseca, which were first investigated, then released over the weekend, by an international consortium of journalists. The Panama Papers, as they’ve been dubbed, reveal that the British Virgin Islands and Panama, the firm’s home base, are the tax havens where most of the firm’s clients park their assets.
But the Panama Papers uncover the workings of just one firm (albeit one of the biggies in offshore banking). In fact, The US has become the favored harbor for secret lucre, a trend rooted in policies enacted to foot the bill for the Vietnam War.
This year the Tax Justice Network (TJN), an advocacy group that studies tax havens, said the US had one of the worst secrecy ratings in the world — third after Switzerland, the perennial No. 1, and Hong Kong, the consistent runner-up. And recently overseas bankers have started to view the US as the biggest tax haven in the world, despite its aggressive and somewhat hypocritical policies attacking tax havens on other shores.
“While the focus is currently on Panama, one of the world’s sleaziest tax havens, it is important not to forget that it is just part of a bigger global system,” said Nicholas Shaxson, an author and expert on tax havens, in a statement on the TJN’s website. “The United States is a big player in the game, hosting vast sums in foreign-owned assets in conditions of strong secrecy.”
In January, Bloomberg published a sweeping report following the network’s release of its Financial Secrecy Index, concluding that the US has become “effectively the biggest tax haven in the world,” according to one source the publication quoted.
“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,” wrote Peter A. Cotorceanu, a lawyer at Anaford AG, a Zurich law firm. “That ‘giant sucking sound’ you hear? It is the sound of money rushing to the USA.”
After World War II, global leaders hammered out financial agreements (as they formed the World Bank and International Monetary Fund), with the intention of creating greater transparency in global banking.
The thinking at the time, at least for American economists, was that European countries couldn’t afford tax cheats after the war. If too much money got stashed in offshore accounts, fragile postwar European economies would get even more wobbly — and become vulnerable to Soviet takeover. But, thanks to the US banking lobby, when the final agreements were inked, a loophole allowed European cash to flow to US accounts anyway.
That loophole has only gotten bigger. In the 1970s Congress made sure it stayed on the books because the country’s finances had dipped into negative territory — for the first time in decades — after the Vietnam War, and the US needed overseas-backed cash.
“The US increasingly needed foreign loans to finance these deficits and it did so, in significant part, by attracting tax-evading and other illicit foreign money,” TJN wrote in its most recent Financial Secrecy Index report. “Foreigners invested in the US for many reasons, not least the fact of the US dollar being the global reserve currency, but secrecy and tax-free treatment were also key attractions.”
In 1976 Congress passed the Tax Reform Act, which basically solidified the US as a tax haven, and Congress has since reauthorized similar, subsequent tax laws — even as it has forced foreign banks to cough up details about their depositors.
In 2014 a new law took effect, requiring non-US banks to reveal details about American accounts and depositors or get hit with penalties and run the risk of getting cut off from lucrative US financial markets. More than 100 nations have agreed to deliver the information to the US.
But critics have noted one particular flaw in the controversial law: The US doesn’t have to reveal similar information about accounts here — yet another loophole that could boost the country’s status as the world’s best place to hide cash.
