To Protect U.S. National Security Interests, More Should Be Done to Combat International Financial Crime

By Naomi M. McMillen
Contributing Writer
August 30th, 2016

Global financial crime—including international tax evasion, money laundering, and grand corruption—poses an existential threat to U.S. national security. It stymies economic growth, pushing out business and damaging American investment opportunities. It leads to income inequality and the misallocation of public goods, causing political instability and disorder. It bolsters support for violent non-state organizations, providing an avenue for criminals and terrorists to fund their activities.

Following revelations of widespread financial crime revealed by the leaks of the Panama Papers, the Obama Administration and the Treasury Department announced a new “Customer Due Diligence” rule aimed at combating offshore tax havens. This rule requires financial institutions to report owners of foreign companies. The Treasury Department also proposed “Beneficial Ownership” legislation that would make it mandatory for some foreign-owned companies to acquire a tax identification number (TIN) from the Internal Revenue Service. While these policies are a step in the right direction, they are ultimately inadequate to deter corrupt financial practices at home or abroad.

Despite the Administration’s best intentions, criminals can still exploit significant loopholes in the law. For example, the “Customer Due Diligence” rule excludes the accounts of lawyers’ holding company funds. Criminal enterprises could simply hire sham attorneys to act as account holders, thus allowing them to continue sheltering their finances. This rule also only mandates that financial institutions report individuals who own 25 percent or more of a company. If no one owns more than 25 percent, criminals can easily avoid detection.

With regards to the “Beneficial Ownership” legislation, critics claim that the rule contains a weak definition of ownership that undermines the rule’s intended purpose. The legislation defines a “beneficial owner” as someone who exercises managerial oversight of an account and not necessarily the individual who exercises ultimate control of an account. Thus, the proposed rule would allow an individual or overseas firm to claim beneficial ownership even if they were hired by an entity to shelter offshore wealth or taxable income. The vague definition of beneficial ownership could allow entities and individuals to continue to hide their true connections to shell companies.

If the United States is serious about protecting its vital national security interests, more needs to be done to fight international financial crime, including creating an international body that can prosecute financial crimes, ratifying key tax treaties, and enshrining anti-corruption into sustainable development and human rights agendas.
Domestically, the U.S. government can take several actions to more effectively combat tax evasion, corruption, and money laundering. For one, Congress should immediately move to adopt the “Beneficial Ownership” legislation proposed by the Treasury Department. While the legislation still contains loopholes, the new rule is a strong first step towards financial transparency.

Congress should also move to ratify treaties to stop tax evasion and corruption. Several important international tax treaties, including one with Switzerland, remain unratified in Congress. The United States should ratify the proposed taxation treaty with Switzerland because such an agreement would significantly reduce the ability of companies and individuals to avoid taxes, launder money, and shelter corrupt financial practices in foreign accounts.

Further, the United States should work to improve international law in partnership with allies across the globe. Because international tax evasion, corruption, and money laundering are systemic problems, impacting every region of the world, they require systemic solutions at the international level. To fight financial crime at the systemic level, the United States should support the creation of an international body that is able to prosecute corrupt financial practices, like an International Anti-Corruption Court (IACC). The United States should also enshrine financial crime in high-level discussions. For example, by including anti-financial crime stipulations in the Sustainable Development Goals and by supporting freedom from corruption as a human right, the U.S. can contribute to new international norms of behavior as they relate to financial crime.

Widespread financial crime poses not just a threat to international peace and stability but also to U.S. national security interests around the globe. While the revelations exposed by the Panama Papers leaks have ignited a renewed effort in the United States to combat illicit finance in the international market, the new rules announced and legislation proposed are inadequate to sufficiently address the rampant economic deviancy of the modern era. The global anti-corruption movement is a good opportunity for the U.S. to demonstrate its leadership on this important issue.

Naomi McMillen is a Master's candidate in the International Security program at the Josef Korbel School of International Studies at the University of Denver. She has previously worked at some of the country's leading think tanks, including the National Bureau of Asian Research and the Brookings Institution. Ms. McMillen received her Bachelor of Arts and certificate in international security from the University of Washington.

Picture was taken from Forbes and is licensed under CC-BY-2.5.

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