The US government spends a lot of time bullying smaller countries into becoming more financially transparent to reduce tax evasion and money laundering. According to a recent Freakonomics Podcasthowever, the United States has a double standard:
The first global anti-money laundering organization is called the Financial Action Task Force. It has 39 members, including the United States. Its mission is to[set] international standards to ensure that national authorities can effectively seek out illicit funds linked to…serious crimes.
NIELSON: Those are the Financial Action Task Force Recommendations. They are not laws. This is what is called in international relations”soft law.” So there’s no enforcement mechanism, is there? It’s not like there’s a world police that can arrest you and put you in handcuffs and take you to a world prison – that doesn’t happen. But what they do have is the ability to set expectations. And there are a lot of international standards — they’re voluminous. One of the main things we’re focusing on is that you need to know who controls the companies moving that money around. Who is ultimately responsible for this company and this bank account? It’s called the beneficial owner. And in order to make sure you can track that person, international standards require you to obtain photo ID from the beneficial owner. And so we just started with that. Just, like, to what extent is this practice followed?
Nielsen, along with fellow researchers Michael Findley and Jason Sharman, conducted a massive experiment to find out where this recommendation was and wasn’t being followed.
NIELSON: We thought the best way to learn was to ask directly. We just created a bunch of fake names from around the world asking for shell companies, saying privacy is important. I think it was around 7,500 emails that we sent out. We kind of gave them a hint – if we can get away with anything here, we want it. We said, “What does it take? What documents do you need from us? And then they told us whether or not they needed photo ID
Nielsen and his co-authors compiled their findings in a 2014 book titled World Seashell Games.
NIELSON: We reported that the United States was the easiest place in the world to obtain an anonymous front company, and the easiest place in usa was Delaware.
They replicated the experiment in 2019, and the results suggest it’s still fairly easy to get a shell company in the US. Nielsen is not the only researcher to find a result like this. In 2022, the UK-based Tax Justice Network published a financial secrecy indexWho ranked the US no. 1 in the worldlike, quote, “[the] most complicit in helping individuals hide their finances from the rule of law.
Note: Statements not in italics are by Stephen Dubner. The part in italics is Daniel Nielson. The podcast focuses on Delaware, which allows people to set up corporations without any verifiable ownership information. Most of America’s Fortune 500 companies are incorporated in this tiny state. The entire podcast is worth reading (or listening to).
And it’s not just Delaware; the United States also has a double standard in banking:
Essentially, FATCA turns foreign banks and other financial institutions into enforcement arms of the US Internal Revenue Service (IRS). They have to choose between passing information on customers who are “American people” or handing over 30% of all payments they receive from America to Uncle Sam. . .
As more countries are pushed to systematically share tax information, attention will turn to America’s willingness (or lack thereof) to reciprocate. Latin Americans, for example, are heavy users of banks in Florida, but America remains picky about which governments it will share data with and to what extent.
I have no great objection to the Delaware system, rather I would like the US government to allow other countries to behave like us.