The Real Scandal Behind the Panama Papers

The Panama Papers revealed how financial system opacity enables crime, corruption, and terrorism. The United States has an opportunity to lead in the global effort against corruption—after getting its own house in order.

Posted on 05/11/16
By Molly Elgin-Cossart and Trevor Sutton | Via Center for American Progress
Panama City skyline. (Photo by Ali Eminov, Creative Commons License)
Panama City skyline. (Photo by Ali Eminov, Creative Commons License)

The Panama Papers leak exposed to the world the offshore holdings of world leaders and their families. Iceland’s prime minister, Ukraine’s president, and the king of Saudi Arabia, as well as close associates of Hosni Mubarak, Bashar al-Assad, and Vladimir Putin, were among those exposed when names linked to the Panamanian law firm Mossack Fonseca were leaked to the German newspaper Süddeutsche Zeitung.


But, while big names captured the headlines, it wasn’t just the impunity of a powerful few that caused the scandal. The more disturbing revelation is the tangled web of financial flows—both licit and illicit—that made such impunity possible in the first place. Despite the rise of a global anti-corruption movement and technologically driven advances in transparency that have made privacy all but impossible in other spheres, hiding money for illicit purposes is nearly as easy today as it was 25 years ago. The real scandal of the Panama Papers is not that corruption continues to exist; it is that many of the methods that kleptocrats and criminals use to hide dirty money remain perfectly legal.


Until the international community adopts universal and transparent policies on beneficial ownership and asset disclosure, opportunistic actors will continue to exploit weaknesses in the international financial system for their own gain. This is not simply a matter of a few rich, powerful people escaping taxes. As discussed in a 2015 Center for American Progress report, criminals, terrorists, and international bad actors join tax avoiders in using these channels to move money. Mossack Fonseca allegedly worked with at least 33 individuals or companies that the U.S. Treasure Department has placed under sanctions, including companies based in Iran, Zimbabwe, and North Korea. The damage to national security goes even deeper: These loopholes enable corruption that eats away at economic development, starves treasuries of desperately needed revenue, destroys trust in government, and ultimately endangers political stability.


On May 12, U.K. Prime Minister David Cameron—whose father was among those named in the Panama Papers—will host international leaders at an anti-corruption summit in London to tackle these very issues. In the face of the Panama Papers’ revelations, the Obama administration has taken important steps to strengthen the international fight against corruption. But more needs to be done.


The most important steps the United States can take to fight corruption would require new legislation—difficult under ordinary circumstances, even harder during an election year. However, there are meaningful ways the United States can crack down on corrupt actors at home and abroad without congressional action.


First, the United States should finalize a proposed Securities and Exchange Commission rule requiring company-specific, project-level public disclosure of payment information in the opaque and corruption-ridden extractives industry. Increased transparency would enable citizens to hold their governments to account for payments received from international natural resource investors and ensure that the payments do not line the pockets of corrupt officials.


Second, the U.S. government should require beneficial ownership transparency for federal contractors. While it is hard to argue against anti-corruption measures, implementing them can be politically or logistically difficult. Instituting beneficial ownership transparency in federal procurement would send an important signal that it can be done—and that the United States is willing to lead by example. Despite high-level commitments that the United States endorsed at the G20 in 2014, according to the Open Contracting Partnership, more than 20 percent of 2016 U.S. federal contracts failed to properly identify the contractors providing services to the government. Requiring solicitation identification for all contracts would improve efficiency at home and bolster America’s case in fighting corruption worldwide.


Third, the United States should encourage and provide support to regional anti-corruption bodies and pursue meaningful enforcement of the Organization for Economic Cooperation and Development, or OECD, Anti-Bribery Convention—similar to the global commitment to counter terror financing after 9/11. In 2014, 20 of the 41 parties to the anti-bribery convention engaged in zero criminal enforcement actions under the agreement, while nine others brought fewer than five cases. By contrast, the United States brought actions against 154 persons or firms, or nearly one-third of the total actions globally, and added dedicated kleptocracy squads to the U.S. Department of Justice. Despite the United States’ zealous commitment to fighting foreign corruption through law enforcement, most of the graft that occurs in the world today remains beyond the grasp of U.S. authorities and requires meaningful cooperation with international partners to root out, including training, sharing information, and building relationships.


Finally, the United States, as well as overseas partners, should dedicate greater resources to support anti-corruption efforts because the fight against corruption is only as strong as its weakest link. In the United States, the independent inspectors general within more than 70 federal agencies are badly in need of funds and support. The United States should also proactively engage with law enforcement authorities and prosecutors among a broader range of partners and work through regional and multilateral bodies where possible. Strengthening other countries’ systems and enforcement capabilities must be a priority—especially at a time when nations such as Russia seek to use corruption as a geopolitical tool to coerce other nations at the expense of U.S. interests.


The business community can also play a useful role in advancing the anti-corruption agenda. More proactive engagement with businesses—including through the B20 Anti-Corruption Task Force, the World Economic Forum’s Partnering Against Corruption Initiative, and the U.N. Global Compact—can help strengthen norms and principles of anti-corruption and good governance.


While these steps could have a serious impact, they must ultimately be underpinned by broader reform. Above all, congressional action in needed to prevent anonymous shell companies through requiring mandatory beneficial ownership registration. The Obama administration has proposed legislation to this effect, and now it is up to Congress to act. Many Americans would be surprised to learn that the United States is one of the world’s biggest tax havens. The contrast between the nation’s aggressive enforcement of pro-transparency rules abroad and the lax standards at home has rightly been called out as hypocritical. Rather than continuing to approach global corruption from the parochial perspective of enforcing U.S. laws and collecting U.S. taxes, the United States should recognize that the problem can only be solved through broad-based cooperation among key stakeholders. As a first step toward greater global alignment in the fight against illicit finance, the United States should lead by example and join the OECD common reporting standard.


There is no single easy fix to corruption.  As with any crime, fighting corruption requires both the right tools and constant, effective enforcement. This week’s summit presents an important opportunity for the United States to lead in the global effort against corruption. The United States should lead the international community—but first, it must put its own house in order.


Molly Elgin-Cossart is a Senior Fellow at the Center for American Progress, where she works on issues involving foreign policy, international development, and global conflict. Trevor Sutton is a Nonresident Fellow with the National Security and International Policy team at the Center.


This article first appeared at Center for American Progress. Click here to go to the original.

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