Jason Sharman
The comments below respond to and seek to rebut criticisms made of my above-mentioned paper. Unfortunately the criticisms strongly give the impression that the reviewer has no interest in genuinely engaging with the argument and evidence presented (and hence the willful misinterpretations and evasions), but only wants to present the impression of having an open mind on the matters discussed. Thus while I am sure my response below will make no impression at all on the reviewer, I am hopeful they might persuade an impartial reader who has some regard for logical arguments based on facts.
I begin by summarising the main criticisms made of my paper in italics, doing my best to faithfully reproduce the core of the reviewer’s argument (a standard courtesy not extended to my paper by the reviewer).
1. The ‘Level Playing Field’ argument is ‘old fashioned’, in that the paper avoids the question of whether Panama meets the standards by just saying Panama is better than others. The US and UK reports have been approved by the whole Global Forum, and thus meet the standards.
As discussed in the paper, equal treatment of all Global Forum participants is absolutely critical to the Global Forum exercise, for both reasons of fairness and efficacy. It is a basic principle of justice that like cases be treated in a like manner. Previously, however, the OECD has employed a double standard whereby both in terms of process and outcomes members were treated more favourably than non-members, as even the OECD admits in its more candid moments. Its current treatment of Panama relative to more powerful states raises similar worries of double standards. The ‘Level Playing Field’ argument was used prior to 2009 by some countries as an excuse for inaction until every other country had taken action. This is not at all the Panamanian position, given the practical action taken on beneficial ownership already, which in important respects is more effective than that of important OECD member states.
Leaving aside questions of fairness and justice, however, just in practical terms relative performance is fundamental. Both legitimate investors and criminals practice arbitrage between countries, the former for business advantage, the latter to exploit lax laws or implementation; both are making relative judgments between jurisdictions. These relative judgments are the whole point for taking a global approach to financial regulation. Hence it is precisely a question of ‘who is better than whom’, whether it is attracting legal business or combating tax evasion.
I respond to the points about the US and UK separately below.
2. Bearer shares have strict limits in other OECD countries, and where they exist this has been noted in the respective country reports.
In some OECD countries bearer shares are tightly regulated, as the reviewer notes, but in others, like Britain, they are not. The point here is that most OECD countries have bearer shares, these countries use a variety of means to regulate their use, while some leave them unregulated. This is very different from the choice offered to Panama of abolition or immobilisation. Why are other members of the Global Forum allowed options denied to Panama?
Furthermore, it is a major flaw in the logic to assume that just because countries have laws regulating bearer shares that these laws are necessarily effective. Laws on the books are simply meaningless if they are not implemented, an obvious point that often seems to escape the review process. I discuss this problem below.
3. The use of bearer shares in the UK is rare and does not pose a problem, British CSPs are in any case under an obligation to know beneficial owners’ identities. The Global Witness report is by implication unreliable, and does not deal with bearer shares.
The FATF review provides absolutely no evidence that the use of bearer shares in Britain is in fact rare, beyond an unsubstantiated assurance from the UK authorities. As I noted in the original paper, the FATF report does in fact seem to present one example of UK bearer shares being used to facilitate tax evasion. Unlike the example on the Netherlands, the reviewer presents no statistics on the frequency of UK bearer shares companies, I suspect because this is unknown. Why wouldn’t the lack of publicly available cases of British bearer shares simply be a product of the fact that a large majority of such cases are never detected?
The significance of the Global Witness report is that it points out that, contrary to what the reviewer asserts, the duty on British CSPs to Know Their Customer is not enforced, whether it is bearer share warrants or regular shares. UK Treasury has yet to perform a single audit of CSPs to ensure they are complying. Furthermore, many British CSPs openly claim to be excluded from this measure on the grounds that forming a company is a one-off transaction, rather than an on-going relationship. Here (as elsewhere) the reviewer has simply chosen to ignore or deliberately misinterpret the points being made.
Regarding the insinuation that the Global Witness report is unreliable, here and elsewhere the reviewer seems to think that the only legitimate sources of knowledge on the topic is the OECD, and perhaps the FATF. This close-minded attitude is symptomatic of a tendency to dismiss contrary evidence and inconvenient facts, rather than actually engage in a process of logical argumentation and dialogue with those outside the organisation.
4. The US has a much greater population than Panama, so it’s no surprise that it has more companies. The OECD assesses legal ownership, not beneficial. The FATF has not yet developed effectiveness criteria. It is impossible to say whether Panama has an effective system of beneficial ownership, because it hasn’t been assessed by the FATF or Global Forum. The US has an effective system of information exchange through its tax system.
In relation to US companies the reviewer has again deliberately chosen to ignore the point being made, rather than actually engaging with the issue. The problem is obviously not that the US forms so many companies, but that it forms so many anonymous, untraceable companies. This conclusion is supported by testimony from a wide range of US government agencies before the US Senate Permanent Subcommittee on Investigations, as well as in separate reports by FinCEN, the US Treasury, and the Government Accountability Office. The US received a Non-Compliant rating in its last FATF assessment on Recommendation 33, a report which specifically criticised Delaware, Nevada and Wyoming (see p.231 passim).
The reviewer knows this issue about US shell companies full well, but is sticking to the OECD’s default position of ignoring glaring problems among its powerful member states, despite the unanimity among impartial observers (including US law enforcement) that there is in fact a major problem here. To deny this problem is simply to lose any credibility, and retreat to a position that black is white if the OECD says so.
The FATF has long had an interest in measuring effectiveness, rather than just laws on the books, and this has been in place all through the third round of Mutual Evaluations; once again, the reviewer already knows this but has chosen to misinterpret the point. The FATF is now discussing techniques for better measuring effectiveness and building it into the rating system, but it is simply untrue to say that this is the first time the FATF has considered the issue.
The claim that no one knows how effective the Panamanian system for establishing the ownership of corporations is because it has not been assessed by the Global Forum is again testimony to the solipsistic attitude that evidence is only evidence if it comes from the OECD. In general, the evidence that the reviewer refers to is a product of reading legislation, collecting an ad hoc sample of descriptive statistics, and then soliciting some anecdotes about past instances of tax evasion. There appears to have been no thought given to obvious problems with this approach, such as that rules on the books often have no relation to what goes on in practice, or that the anecdotes are by definition unrepresentative, and thus are an entirely misleading basis for action, because most instances of tax evasion are never detected.
In contrast, in the paper I take evidence from a study I have conducted with two co-authors testing the effectiveness of corporate ownership regulation in 182 countries. This is in the form of a Randomised Controlled Trial, the gold standard of scientific procedure, with a sample size of over 7400. We registered the manual of how we went about the exercise in advance, including designing and pre-testing treatments, double-coding responses, and using blocking techniques to ensure proper randomisation. We subjected the results to various tests to make sure our findings were robust, including Sartori selection tests, multinomal logit and multinomial probit tests, again making all the results and workings public (much of this is online, https://www.griffith.edu.au/__data/assets/pdf_file/0008/454625/Oct2012-Global-Shell-Games.Media-Summary.10Oct12.pdf, I am happy to provide the technical appendices). It has been accepted for publication after a rigorous process of double-blind peer review. For people with a genuine interest in scientific process and reliable conclusions, which I would have thought includes the OECD, this is how accurate knowledge is generated. The main result of our study was that OECD countries do a notably worse job of ensuring the availability of company ownership than either Offshore Financial Centres, or developing countries.
I would invite the reviewer to ask any one of the professional economists at the OECD (or anywhere else for that matter) which approach is more likely to generate accurate findings that form a reliable basis for making policy: reading rules and collecting anecdotes, or running a Randomised Controlled Trial.
The FATF, G20 and the OECD itself (Behind the Corporate Veil 2001) have rightly identified beneficial ownership, not legal ownership, as the real issue in combating a wide range of financial crimes, including tax evasion. Of course the Global Forum can adopt whatever standards it likes, but for those with a genuine interest in the substance of the problem, beneficial ownership is the name of the game.
5. The US did not receive unduly lenient treatment from the OECD
I can understand why for public relations purposes the OECD/Global Forum has to maintain the position that the US is held to the same standards with the same consequences as any other member. But I can’t understand why they would expect any independent observer to actually believe this.
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