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The Treasury Department's next target? Shell companies. (+video)

Building on earlier actions to address corporate tax evasion, the Treasury Department released new rules Wednesday targeting shell companies, which enable owners to hide their money from government view.

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    U.S. Treasury Secretary Jacob Lew speaks with journalists in Hong Kong (March 1, 2016). Having gone after tax inversions in the now-defunct Pfizer-Allergan deal, the Treasury Department is now targeting shell companies, which are currently able to hide their owners from government view.
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The Obama administration took another step this week to make it more difficult for corporations to evade their tax liabilities.

On Monday, the Treasury Department announced a new set of regulations targeting companies looking to buy up foreign corporations move their company headquarters abroad. Now the Treasury is going after a different, but related, form of corporate tax evasion: shell companies. Unlike regular firms, shell companies are husks. They do not have active business operations or major resources. And under current US law, shell companies are not obligated to reveal the identities of people who set up bank accounts on their behalf, which enables all kinds of illicit financial maneuvering. 

The Treasury wants to change that. On Wednesday, Deputy Assistant Secretary of the Treasury Jennifer Fowler spoke at the SIFMA Anti-Money Laundering & Financial Crimes Conference, where she introduced the regulations addressing shell companies. 

“With reliable beneficial ownership information in hand, financial institutions—including broker-dealers and mutual funds—will all benefit from knowing who the ultimate owners of companies holding accounts with them are, and our financial system will be safer for it,” she said in a press release.

Ms. Fowler added that the Treasury has been working on ways to crack down on shell companies for at least four years, bringing together the viewpoints and expertise of those in government and the financial sector.  

Under the Treasury’s new rules, financial institutions will be obligated to search out and understand paths of ownership at shell companies, focusing specifically on individuals who own 25 percent or more of corporate entities and open or control their bank accounts. Customer due diligence requirements will also be strengthened. A current loophole that enables shell companies to create and operate bank accounts without having to reveal their owners’ identities will be closed. 

Earlier this week, the Treasury announced new regulations to address  “tax inversion,” which has become popular practice among big corporations that want to avoid tax rules in the United States. Shortly after, US drugmaker Pfizer walked away from a planned $160 billion merger with Dublin-headquartered pharmaceutical firm Allergan, one of the largest inversion deals in history. Had the deal gone through, Pfizer would have managed to successfully lower its annual tax bill by an estimated $1 billion.

Combined with the Treasury’s actions on shell corporations, the Department now has a comprehensive suite of rules targeting corporate tax evasion at its disposal. Financial transparency has gained new urgency in the wake of the Panama Papers, a massive leak of more than 11.5 million records from Panama-based law firm Mossack Fonseca. The papers linked high-ranking government officials, soccer stars, and others to financial activity in offshore accounts, revealing a staggering use of tax havens to shield money from government hands and prying eyes.

At stake in the Treasury’s shell company regulations will be their effectiveness. To build on that point, the Department is now working with Congress and other stakeholders to create new legislation, which would require ownership information to be declared when legal entities like shell companies are created. It's another step towards building transparency in the process from start to finish.

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