Panama Papers Drive New Rules, But Are They Enough?

Among government reactions to the incendiary Panama Papers, the U.S. Departments of Treasury and Justice rolled out new measures in an effort to fix gaps requirements to identify the beneficial owners of companies. Such owners are the main subjects of the Panama Papers, sheltering funds in overseas entities that are described, in many cases, as shell companies.

The problem, according to critics, is that the new measures don’t go far enough. According to Global Financial Integrity (GFI), a non-profit, Washington, DC-based research and advisory organization, the rules being implemented by Treasury and Justice “fail to ensure that beneficial owners are identified.”

As GFI asserts in a news release, one sticking point is that the final rule “requires banks to identify one individual who has significant responsibility to control or manage the company, defined to be a manager, as well as individuals — if any — who have a 25 percent or greater ownership interest in a company. Where no individual with a 25 percent interest is identified, the only person named will be the manager.” GFI’s Policy Counsel Liz Confalone notes:

“Treasury has muddled the concept of control in their definition of ‘beneficial owner.’ Managers — as persons who conduct the day-to-day operations of a company — are not beneficial owners. There is a difference between the control that someone exerts over a company despite not having an ownership interest, such as rights to veto board decisions and to appoint directors and the day-to-day management control of the company.

“When we talk about control in the beneficial owner context, we’re talking about the former. That is the distinction missing in Treasury’s definition. This means that banks can fulfill their due diligence requirement without identifying any actual beneficial owner. This is a problem for everyone, but Congress has the power to adopt new legislation to fix it and should not hesitate to do so.”

Discussion of the Panama Papers and resultant action is only going to heat up now that additional names were released this week. In fact, more than 30 U.S. citizens are now linked to the offshore companies exposed by the documents leak, a fact that has upped the pressure on the U.S. government to shore up vulnerabilities that make such skirting the law and regulations possible.

As guidance for governments goes, worldwide anti-corruption group Transparency International (TI) has proposed several courses of action:

1) All countries should require much higher levels of transparency around who owns and controls companies registered in their territories.

2) Professional enablers that are found to be complicit in corruption must be sanctioned.

3) ll countries should require any company bidding for public contracts or purchasing property to disclose on whose behalf they are operating.

TI expands on the above points on its website. One thing is for sure: the Panama Papers will continue to drive discussion and the need for new rules and legislation for the foreseeable future. Both governments and business leaders need to get on the right said of transparency – and help combat corruption – before a widening scandal worsens.