In this article, Chris Hamblin, the editor of Offshore Red and Compliance Matters, sister news services to this one, looks at the behaviour of the US and likely future developments.

In recent weeks the world has heard, after many months of suspecting, that US authorities have been failing to send account information about high net worth taxpayers to the finance ministries in countries with which they have signed reciprocal FATCA “inter-governmental agreements”. Even though information has started flowing to the US Internal Revenue Service from many countries, the flow of “FATCA reporting” only goes one way. Indeed, the administration of Barack Obama has admitted that US law does not permit such reciprocity, belatedly raising the vague possibility of asking Congress to pass something.

This means that when the Americans signed all their 110-odd IGAs with other countries, they did so in bad faith with their fingers crossed behind their backs, in the full knowledge that they would not be honouring their promises at the agreed time or (if the new legislation does not go through) at all.

Betrayal 2.0
The US has been imposing more and more draconian anti-money-laundering controls on the rest of the world ever since the enactment of the USA PATRIOT Act 2001, if not before. It is, however, the world’s foremost “country of money-laundering concern” alongside the UK, according to year after year of International Narcotics Control Strategy Reports (INCSR) published by its State Department.

Its main stumbling block in this area is Delaware, a state where corporations are so opaque in their beneficial ownership that even its law enforcers cannot demand to see the records. This is one reason why most US companies – and 60 per cent of the world’s Fortune 500 companies – are incorporated there. America’s refusal to change this, coupled with its insistence on all other countries doing so, has caused resentment all over the offshore world.

It was in the wake of the Loch Erne meeting of the “Group of Eight” industrialised nations in 2013 that the world’s great powers began to insist on all countries making registries of beneficial owners available to their police forces and regulators. The offshore world erupted, with all UK Overseas Territories resolving not to comply until the US did. The Americans, of course, refused to make Delaware even slightly less opaque and seem to have no intention of doing so. 

The same goes for other states that have trodden the path of secrecy for their corporations’ beneficial owners, notably Nevada (in the county where Las Vegas is) and Wyoming. Such is the discrepancy between the endless disclosures that companies in other countries have to make to the authorities and the "free pass" awarded to Delaware and the other US states that money is now leaving the offshore world for the US at a rapid rate. This is, no doubt, intentional.

A constitutional inability to tell the truth
US officials give various excuses for the status quo, the chief one being that the US Constitution allows states to make their own rules up about incorporation and internal corporate rules and that it would be impossible to change this as a change in the Constitution demands a vote of three-quarters of Congress in favour. This is nonsense.

The US Supreme Court, which rules on matters to do with the Constitution, has indeed made some pronouncements on corporate law. In Paul v Virginia it ruled that states ought to let corporations incorporated in their fellow-states do business without let or hindrance, even if the corporate laws of those other states are worse in some way. The “Supremes” have also ruled that a corporation may be chartered in any state and if someone sues it for breaking corporate law, no matter which state the court case is in, the court will use the law of the state where it was chartered.

This puts Delaware at a massive advantage. If someone sues a company in Hawaii but that company has its headquarters in Minnesota and is incorporated in Delaware, its corporate dealings/internal affairs must be judged according to the law of Delaware.

None of this makes it illegal for the federal government to pass a law that forces Delaware companies to disclose the identities of their beneficial owners. Indeed, US federal law is fairly cluttered with statutes that have a bearing on trade in company shares and governance rights. Most provisions of this kind are to be found in the Securities Act 1933 and the Securities and Exchange Act 1934. These were amended by the Sarbanes-Oxley Act 2002, which was a reaction to the Enron scandal and separated auditors from consultancy work.

Another amendment came with the Dodd-Frank Act 2010, which responded to the financial meltdown of 2008 by placing restrictions on derivatives and the soft regulation of pay. It is true that these are relatively minor additions to federal corporate law, which has not really changed since the 1980s.

This, however, owes nothing to any federal constitutional rule that bans the US government from interfering in companies and instead owes everything to the fact that it chooses not to. A fresh piece of federal legislation could easily create registries of beneficial ownership throughout the US, and then for the first time the little nations of the world would believe that the US Government was acting in good faith in its global financial policy.

Betrayal 3.0
If the US government really believes that people should be stopped from suffering from harmful tax competition all over the globe, what is it doing to make sure that this is not happening within its borders? At the moment, California and Texas are competing directly for HNW residents and entrepreneurs. California has a lightly socialistic regime which imposes high income and corporate taxes; Texas does not tax personal income and its corporate tax is low. The economy of Texas, possibly as a consequence of this, is growing and that of California is not. The US government, however, is showing no signs of stepping in to sort the mess out. Its outrage against harmful tax competition is for export only.

Tyrannosaurus Rex
We have already mentioned INCSR, the one internationally famous survey of countries that, despite its many errors and omissions, dares to take a more or less candid look at patterns of money-laundering in countries around the world. It used to place the US and UK at the top of the illicit activity, but ever since the Obama administration came into being in 2008 it has left the US off its list of countries of “primary concern”.

What happened to the US economy in 2008 to warrant that, and how has it stayed off the list since? A disinterested bystander might conclude that the gulf between what the US government preaches and what it practises is widening.