Analysis 04-07-2016


The Panama Papers and US Tax Policy

The sudden release of the “Panama Papers,” a list of the world’s wealthy that have banking accounts in the tax haven of Panama, has raised the suspicions of many in the media.  The fact that it lists close associates of people like Presidents Putin and Assad have led many to conclude that it was orchestrated by the US in an attempt to embarrass some of its political enemies.  That might very well explain the suspicious lack of American names on the list.

In many ways, the Panama Papers seem to reinforce the administration’s Syrian policy to install a new government. Papers suggested that Syrian President Bashar al-Assad’s government used Mossack Fonseca to create shell companies in the Seychelles to buy aviation fuel and avoid international sanctions.

The official Chinese reaction in the Global Times said that it was the US government that stood to gain the most by the release.

One theory pushed was that the Panama Papers helped justify additional surveillance powers by the NSA.  The National Review said on Wednesday, “The NSA is recovering validation in another area, thanks to the “Panama Papers” reports on vast corruption in business and political elites around the world. Those reports have shown in public what U.S. policymakers — via the NSA — have long known: that many politicians around the world — elected and autocratic alike — are deeply corrupt.”

Others think the papers’ was timed to coincide with a push by Obama to tighten tax laws on people and companies trying to leave the US.  In a perfectly timed speech Tuesday, following the Treasury’s crack down on corporate tax inversions, Obama blamed “poorly designed” laws for allowing illicit money transfers worldwide.   In touching on the Panama Papers, Obama said “Tax avoidance is a big, global problem…a lot of it is legal, but that’s exactly the problem because a lot of it is also illegal.”

The irony is that of all the countries in the world, the United States, which has become the world’s favorite offshore “tax haven” destination.

As Bloomberg, which first broke the story about Nevada’s use as a prominent tax haven early this year, writes, “Panama and the U.S. have at least one thing in common: Neither has agreed to new international standards to make it harder for tax evaders and money launderers to hide their money.”

“Over the past several years, amid increased scrutiny by journalists, regulators and law enforcers, the global tax-haven landscape has shifted. In an effort to catch tax dodgers, almost 100 countries and other jurisdictions have agreed since 2014 to impose new disclosure requirements for bank accounts, trusts and some other investments held by international customers — standards issued by the Organization for Economic Cooperation and Development (OECD), a government-funded international policy group.”

While nations like Switzerland and Bermuda are agreeing to share bank account information with tax authorities in other countries, only a handful of nations have declined to sign on. The most prominent is the US. The other one is Panama.

The latest reporting “underscores the secrecy in Panama,” said Stefanie Ostfeld, the acting head of the U.S. office of the anti-corruption group Global Witness. “What’s lesser known, is the U.S. is just as big a secrecy jurisdiction as so many of these Caribbean countries and Panama. We should not want to be the playground for the world’s dirty money, which is what we are right now.”

While the US has taken steps to keep track of US assets abroad, it ignores foreign assets in the US.

In 2010, Congress passed the Foreign Account Tax Compliance Act (FATCA), as the U.S. Justice Department began prosecuting Swiss banks for enabling tax evasion.  FATCA forces certain financial firms to disclose to the Internal Revenue Service any foreign accounts held by U.S. citizens.

FATCA doesn’t, however, bind banks to provide information on foreigners with U.S. accounts to regulators abroad. The U.S. has entered into agreements with some other countries requiring such exchange with foreign regulators, but tax planners say they are considered relatively easy to avoid.

That’s where the OECD came in, with its own international take on FATCA that the U.S. declined to sign.

How can the US get away with this blatant disregard of international standards?

“The U.S. doesn’t follow a lot of the international standards, and because of its political power, it’s able to continue,” said Bruce Zagaris an attorney at Berliner Corcoran & Rowe LLP who specializes in international tax and money laundering regulations.  “It’s basically the only country that can continue to do that. Others like Panama have tried, but Panama can’t punch as high as the U.S.”

Meanwhile, advisers around the world are increasingly using the US resistance to the OECD’s standards as a marketing tool – attracting overseas money to U.S. state-level tax and secrecy havens like Nevada and South Dakota, potentially keeping it hidden from their home governments.

One of the reasons for this is purely economic.  The US runs a trade deficit and by allowing “no questions asked” banking, it allows the US to repatriate dollars from overseas.

According to Bloomberg, Rothschild, the centuries-old European financial institution, has opened a trust company in Reno, Nev., a few blocks from the Harrah’s and Eldorado casinos. It is now moving the fortunes of wealthy foreign clients out of offshore havens such as Bermuda, subject to the new international disclosure requirements, and into Rothschild-run trusts in Nevada, which are exempt.

For financial advisers, the current situation is simply a good business opportunity.  Geneva-based Cisa Trust Co. SA, which advises wealthy Latin Americans, is applying to open in Pierre, South Dakota, to “serve the needs of our foreign clients,” said John J. Ryan Jr., Cisa’s president.

Trident Trust Co., one of the world’s biggest providers of offshore trusts, moved dozens of accounts out of Switzerland, Grand Cayman, and other locales and into Sioux Falls, South Dakota, in December, ahead of a Jan. 1, 2016 disclosure deadline.

The result is that money is welcome in the U.S., no questions asked, to be shielded by the most impenetrable tax secrecy available anywhere on the planet.

The irony hasn’t been lost on others.  Peter A. Cotorceanu, a lawyer at Anaford AG, a Zurich law firm, wrote in a recent legal journal, “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…That ‘giant sucking sound’ you hear? It is the sound of money rushing to the USA.”

Ignoring International Standards – Who is Guilty?

Ironically, it is the Obama administration and the former Secretary of State Clinton that are responsible for this situation.  Obama pushed the trade deal with Panama which allowed the tax evasion revealed by the Panama Papers to flourish.  The Huffington Post reported in 2011:

“Obama is also urging Congress to approve a trade agreement that would cement a key tax avoidance tactic deployed by some of the richest Americans.  Obama urged Congress approve three trade deals, including one with Panama that would permit Americans to easily stash assets in the Central American country, a notorious tax haven for the wealthy and American corporations.”

Since trade deal negotiations with other countries are overseen by the Department of State, the current presidential candidate Hillary Clinton is closely tied to the current situation.  The International Business Times reported, “Soon after taking office in 2009, Obama and his secretary of state [Hillary Clinton] — who is currently the Democratic presidential front-runner — began pushing for the passage of stalled free trade agreements (FTAs) with Panama, Colombia and South Korea that opponents said would make it more difficult to crack down on Panama’s very low income tax rate, banking secrecy laws and history of noncooperation with foreign partners.”

Upon Congress ratifying the pact, Clinton issued a statement lauding the agreement, saying it “will make it easier for American companies to sell their products.”  She added: “The Obama administration is constantly working to deepen our economic engagement throughout the world, and these agreements are an example of that commitment.”

In what may very well become a campaign issue in the next few weeks,  Bernie Sanders opposed the tax evasion deal with Panama, and prophetically warned in 2011, “Panama’s entire annual economic output is only $26.7 billion a year, or about two-tenths of 1 percent of the U.S. economy. No one can legitimately make the claim that approving this free trade agreement will significantly increase American jobs. Then, why would we be considering a stand-alone free trade agreement with Panama, tiny little country?”

Sanders continued, “Panama is a world leader when it comes to allowing wealthy Americans and large corporations to evade U.S. taxes by stashing their cash in offshore tax havens. And the Panama free trade agreement will make this bad situation much worse. Each and every year, the wealthiest people in our country and the largest corporations evade about $100 billion in U.S. taxes through abusive and illegal offshore tax havens in Panama and in other countries.”

This raises the troubling question of which Americans are avoiding taxes in Panama and why aren’t they mentioned in the leaked documents?  Some think that there may be rich political contributors on the list, or even administration officials.

It’s a complicated issue.  There are at least 200 scanned individual U.S. passports. Some appear to be American retirees purchasing real estate in places like Costa Rica and Panama. Also in the database, about 3,500 shareholders of offshore companies who list U.S. addresses. And almost 3,100 companies are tied to offshore professionals based in Miami, New York, and other parts of the United States.

Further complicating matters, some U.S. citizens enjoy dual citizenship and open accounts under foreign passports.

There is also a Clinton connection.  Among those companies is the Russian Sberbank, whose U.S. investment banking branch recently enlisted the services of the Podesta Group. According to its lobbying registration form, the firm will work on banking, trade, and foreign relations issues.  One of the three lobbyists working on the account is Tony Podesta, a bundler for the Clinton campaign and the brother of campaign chairman John Podesta, who co-founded the firm.

However, it is clear that some criminals were actively using Panama.  Among the people that the news group McClatchy found:

Robert Miracle. He was indicted for a $65-million Seattle-area Ponzi scheme involving investment in Indonesian oilfields.

Benjamin Wey, who is president of New York Global Group. He was indicted last year, along with his Swiss banker, Seref Dogan Erbek, on securities fraud charges.

Some managed to avoid more serious charges by paying serious fines.  Anthony J. Gumbiner, chairman of Hallwood Group Inc.  He settled an insider trading case in 1996 with the Securities and Exchange Commission, paying $1.7 million in penalties at the time.

There was also Florida billionaire Igor Olenicoff, who raised a national stir in 2007 after being sentenced to just two years of probation for tax evasion. He paid a $52 million fine after not declaring more than $200 million in offshore shell companies.

Given the willingness of federal prosecutors to settle for fines, there is reason to believe that some of these people have considerable political pull.  That being the case, it’s easy to understand why some of the names have been left out.




The Nagorno–Karabakh Conflict: U.S. Vigilance Required
By Luke Coffey
Heritage Foundation
April 7, 2016

The recent outbreak of fighting between Azerbaijan and Armenian military and Armenian-backed militia forces in Azerbaijan’s Nagorno–Karabakh region threatens to destabilize an already fragile region even further. According to media reports, dozens of soldiers from both sides have been killed, and Azerbaijani forces have recaptured some of the territory lost to Armenia in the early 1990s.  Despite its physical distance from the United States, events in the South Caucasus can affect regional security and, by extension, transatlantic security. It is in America’s national interest to monitor developments in the region and ensure that the conflict is resolved peacefully.

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Syria and Iraq: How Should These Wars End?
By Anthony H. Cordesman
Center for Strategic and International Studies
April 4, 2016

Grand strategy seems to be a forgotten concept in the wars in Iraq and Syria — and in the conflicts in Libya and Yemen as well. The tactical military focus of these wars is usually on finding some way to strengthen allied ground forces from day-to-day, or on defeating ISIL in the next battle or in reaching an objective.  Strategy, in the narrow military sense, focuses on defeating each party’s primary threat regardless of overall and lasting security. The campaigns in Iraq and Syria are often treated separately, as if their common border, the fact that ISIL is a common threat, and the links between Arab Shi’ites and Kurds did not really matter.

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Helping the Kurds in the Recapture of Mosul
By Mark F. Cancian
Center for Strategic and International Studies
April 5, 2016

The Iraqi Kurds have been the most effective fighters against ISIS and are moving into position to support the Iraqi Army’s unfolding assault on Mosul. How can the United States help the Kurds and sustain the assault on Mosul without inadvertently laying the groundwork for an Iraqi civil war or a Turkish invasion?  The plan of attack. Mosul is the largest city in Iraq controlled by ISIS. The Iraqi Army (IA) was supposed to recapture it last year but was diverted to the successful recapture of Ramadi in the Sunni-dominated western province of Anbar. Now the IA is focusing on Mosul, and the campaign to recapture it has begun with much fanfare. Mosul is not a Kurdish city, so the Kurdish forces (called peshmerga and controlled by the Kurdish Regional Government [KRG]) have a supporting role. The plan is for the Kurds to establish blocking positions on the east side of Mosul while the IA assaults the city. To keep ISIS from reinforcing the city, the Kurds may also need to put pressure on ISIS in other sections of the front.

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Iran’s missile happy ‘moderates’
By J. Matthew McInnis
American Enterprise Institute
April 6, 2016

Tehran’s long-range ballistic missile launch last month — and reported attempts to soon launch a satellite with its new Simorgh missile — triggered new unilateral sanctions from the United States and widespread condemnation from other world leaders. President Barack Obama, speaking at the Nuclear Security Summit in DC, noted that Iran’s “provocative” missile launches challenge the “spirit” of the JCPOA.  Iranian leaders, in turn, have been uniformly defiant about the missile program, with Supreme Leader Ayatollah Khamenei, Islamic Revolutionary Guard Corps Commander Mohammad Ali Jafari, and even President Hassan Rouhani and Foreign Minister Javad Zarif all issuing statements enthusiastically supporting the program. Iran is eager to escape international isolation following the nuclear deal, but clearly even its supposedly more moderate leaders are fully behind expanding its ballistic missile program.

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Great Expectations in Tunisia
By Maha Yahya
Carnegie Endowment
March 31, 2016

Tunisian society is in transition, but without a clear vision to guide it on this journey. The Tunisian political elite forged a new constitution that redefines state-citizen relations, but they have not translated this agreement into practice. Meanwhile, political life is in disarray, state legitimacy is in question, and Tunisians are increasingly worried about the future. Delivering on the great expectations of Tunisians means living up to the fundamental principles enshrined in the constitution and their promise of social justice.

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Is Armenia the Next Turkish-Russian Flashpoint?
By Can Kasapoglu
Washington Institute
April 4, 2016
PolicyWatch 2599

On April 2, border clashes broke out between Armenia and Azerbaijan, with some of the heaviest fighting since the two countries declared a ceasefire over the disputed Azerbaijani region of Nagorno-Karabakh in 1994. The clashes and related developments have increased the risk of their border becoming a dangerous flashpoint that draws in Turkey and Russia. In November, Turkey downed a Russian military jet near its southern border, sending bilateral relations on a downward spiral and leading many analysts to focus on Syria as the most likely flashpoint between the two historical rivals. Yet while Russian airstrikes against Turkey-backed rebels in Syria continue, the South Caucasus — namely Azerbaijan, Armenia, and Georgia — have traditionally been the main chessboard of their longstanding rivalry.

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The Next President’s Choices on ISIS
By James F. Jeffrey
Washington Institute
April 3, 2016

Despite some recent successes against ISIS, including military strikes against top leaders such as Hajji Imam and the Russian-backed Syrian victory against its forces in Palmyra, the group’s core control of a Britain-sized swath of Syria and Iraq is still solid.  Meanwhile, Iraq remains under military, terrorist and financial pressure with hundreds of thousands of troops mobilized to fight ISIS and 3 million people displaced by ISIS to care for. At the same time, ISIS continues to take hold in areas throughout the Middle East from Afghanistan to Nigeria, and can strike targets in Europe and possibly the U.S. With the Presidential elections only months away, there is little chance that the U.S.-led coalition against ISIS will ‘defeat’ the ISIS ‘state’ and ‘army’ before a new President is elected.  Under those circumstances the incoming President must focus on the reality of an as-yet unsuccessful policy against a dangerous foe at the center of the Middle East’s dysfunctionalities. So far the candidates have avoided serious commentary: Republicans serve up vague ‘bomb ’em’ slogans, and Secretary Clinton, challenged from the left and reluctant to break with Obama, has not provided specifics on how she would carry out her rhetorical ‘leadership’ against ISIS.

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