Globalist Perspective

Biden’s Delaware: Making Swiss Banking Look Hyper-Clean

How can the United States of America pretend to lead the fight against global money laundering given the “business” of Delaware?

Takeaways


  • As long as the United States doesn't force change in Delaware, there will be no level playing field in global offshore finance.
  • In Switzerland, banks are required to ascertain the identity of anybody with even the remotest beneficial interest in these accounts.
  • Delaware is a glass house the United States can't afford to sit in forever if it wants to maintain global credibility as a leader of financial transparency.
  • The U.S. Senate's quest against the Swiss only managed to mask the deficiencies of the United States' own system.

On November 1, 2009, the London-based "Tax Justice Network" (TJN) released its "Financial Secrecy Index" listing jurisdictions globally according to the rating they received in a dozen categories relating to transparency and disclosure requirements governing financial affairs.

One would expect to find Switzerland and Luxembourg in the Top Ten of this index. So, it is hardly a surprise that Luxembourg came in second, followed by Switzerland.

The big surprise in this involuntary contest, though, is who won the gold medal. The top of the podium was not awarded to one of the usual suspects. It went to the U.S. state of Delaware, home of U.S. Vice President Joe Biden and thousands of registered corporations.

That should be a heavy source of embarrassment for the Obama Administration and the United States of America. They can't be too happy about this dishonorable mention of Delaware. But the rest of the world has skin in this game as well.

After all, the U.S. Senate and the U.S. Department of Justice are busily focusing on Switzerland and Liechtenstein in an effort to single out these two European nations in the fight against capital flight and tax evasion.

However, given the methodology used by the TJN, the ranking of Delaware as the global leader in financial secrecy is hard to argue with. Delaware corporations can be used to hold assets in the United States with an effective tax rate of zero, as long as the majority of directors (not shareholders) are non-U.S. persons.

This makes the state of Delaware a de-facto tax haven on U.S. soil. But more importantly, the tiny state on the Eastern Seaboard allows the registration of limited liability companies (LLCs) without disclosure of their actual owners.

Combined with the lack of disclosure requirements, the “Delaware Gap” — tax gap, that is — has attracted thousands of U.S. and internationally owned corporations to Wilmington. That is somewhat ironic, considering that the state is just a short 1.5 hour car or train ride from the headquarters of the U.S. Department of Justice and the Internal Revenue Service on Pennsylvania Avenue in Washington, D.C.

For all of the United States' prosecutorial vigor, owners of Delaware corporations can hide in plain sight — and better yet, avail themselves of the U.S. legal system with impunity.

This is relevant not only in tax matters where the existing loopholes allow for legal tax avoidance. It is disturbingly relevant in the fight against money laundering committed by organized crime and international terrorist organizations.

How can the United States of America pretend to lead the fight against global money laundering and terrorist financing? How can it even remotely claim the moral high ground under the Patriot Act if one of its state’s laws enable the anonymous use of registered corporate entities to conduct financial transactions of all sorts?

Senator Carl Levin, the pugnacious chair of the U.S. Senate Banking Committee, has made a sport of investigating UBS, the Swiss banking giant. To his credit, he has long realized the capacity that Delaware has to embarrass the United States.

In March of 2009, he introduced the "Incorporation Transparency and Law Enforcement Assistance Act" together with Senators Grassley and McCaskill to stem the abuse of U.S. registered corporations by criminals operating within and from outside the United States.

Since the introduction of tough identification requirements under global Anti-Money-Laundering rules over a decade ago, virtually all major offshore jurisdictions require full disclosure of beneficial ownership information.

Delaware apparently never considered itself to be part of this effort. Senator Levin may have been gloating when his Banking Committee had gotten the Swiss banking giant UBS on its knees for questionable practices assisting clients in tax evasion schemes.

However, his quest against the Swiss only managed to mask the deficiencies of the United States' own system until the TJN released its surprising report.

Senator Levin and other politicians in Washington do recognize that it is time for the United States to catch up with best practices and introduce disclosure rules. Delaware is a glass house the United States can't afford to sit in forever if it wants to maintain global credibility as a leader of financial transparency.

Yes, there are numbered accounts in Switzerland, but the banks in Zurich and Geneva are actually required to ascertain the identity of anybody with even the remotest beneficial interest in these accounts. They also need to keep records on their due diligence efforts under threat of criminal persecution if they don't.

In contrast, in Delaware, there may not be numbered accounts — but individuals and corporations hiding behind a Delaware LLC can bank anonymously.

The question has to be asked why a country so obsessed with fighting a war on terror and organized crime can tolerate one of its federal states maintaining a legal framework that lends itself to the very practices it is otherwise on a mission to eradicate around the globe.

As long as the United States doesn't force change in Delaware, there will be no level playing field in global offshore finance. While the usual offshore centers have long come clean, the United States will become the new target for organizations like the FATF who seek to enforce global standards.

In light of the aggressive stance that the United States have taken lately against UBS and Switzerland, it is hard not to see the irony.

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About Beat Guldimann

Beat Guldimann is president of Tribeca Consulting Group and the author of "Inside Swiss Banking."

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