The Combative Nature of US Tax Haven Legislation Relating to International Measures to Curtail Money Laundering Schemes
Analysis
The proliferation of corruption and money laundering schemes, both domestically and abroad, have been one of the most corrosive mechanisms in undermining international law. The tenuous balance of the enforcement of international law requires the active participation of the countries that agree to enforce such laws. However, if even just one nation refuses to partake in such prosecution, or even take active measures to undermine it, these systems become essentially useless over time. Contrary to public statements of support, the United States has been a driving force in the undermining of these agreed upon practices and has acted in a way that is at odds with international conventions regarding corruption and money laundering. United States tax haven policies, both on the state and federal level, establish domestic tax havens that foster international money laundering schemes that have corroded the efficacy of measures implemented by individual foreign states and international organizations. This raises the question of whether or not individual U.S. policies are impeding the best efforts of international organizations to curtain and prosecute the international money laundering schemes shielded under state legislation.
In this paper, the United States’ complex, and often nefarious, history of passing state and federal legislation that fosters the use of tax havens for the purposes of corruption and money laundering will be explored. Additionally, the ineffective measures to combat global financial fraud on the behalf of the U.S. will be evaluated. Furthermore, the measures and responses by international organizations will be highlighted and their relative efficacy will be reviewed. Finally, the victims that are impacted by the money laundering schemes will be detailed, the true impact of the United States’ interference with the prevention of these practices will be analyzed, and the actors involved in such practices in relation to the lack of enforcement will be discussed.
In order to evaluate the international impediment that the United States is placing on the prevention of corruption and money laundering activity, such measures of deterrence should be evaluated on the state and federal level within the United States and on the international level. The first section of this paper will detail the U.S. federal laws that address venality and will explore their relative effectiveness. Next, individual state laws that foster these nefarious practices will be discussed, particularly the laws found in South Dakota and in Florida. Following this, the procedures taken by U.S. organizations to combat corruption will be compared to the state laws that seemingly facilitate such practices. In the subsequent section, specific methods taken by various international public organizations will be highlighted and the ways in which these processes are curtailed by US laws will be explored. Finally, the individual non-state actors that work to foster these money laundering schemes will be evaluated in the context of their relationship with various governments and the impact that their actions have on the international community. This will then raise the final question of what steps that United States and other governing bodies can take to remedy these practices and which legal mechanisms can be implemented to prescribe some type of change on an international level.
From a legislative perspective, the United States federal government, on its face, is committed to the prosecution of corruption and money laundering. According to 18 U.S. Code § 1956 – Laundering of Monetary Instruments, money laundering is prosecutable when an individual performs or seeks to conduct a financial transaction with the knowledge that the property involved in the transaction constitutes the proceeds of some sort of illicit activity. Furthermore, according to the statute, the violation of 18 USC 1956(a)(1) and (2) carries a fine of up to $500,000 or twice the value of the monetary instruments involved, whichever is greater, or a sentence of up to 20 years in prison, or both; and a violation of 18 USC 1956(a)(3) carries an undetermined fine or a sentence of up to 20 years in prison, or both. However, according to the United States Sentencing Commission, not only has money laundering convictions decreased since 2016, but the average amount of money laundered was about $300,000 . This represents that predominantly smaller scale cases of money laundering are being prosecuted in the United States. Put in context, according to the United Nations Office on Drugs and Crime, it is projected that anywhere between $1-2 trillion are laundered globally every year . The UNODC further acknowledges that it is difficult to identify fiscal figures regarding money laundering by nation given the often cyclical and evasive nature of these practices.
An additional legislative measure that the US is taking on the federal level is through 26 U.S. Code § 951A - Global intangible low-taxed income included in gross income of United States shareholders. From an enforcement standpoint, this statute serves to ensure that for each taxable year in which a person is a United States shareholder of a controlled foreign firm, such shareholder's worldwide intangible low-taxed income must be included in gross income. In a 2021 presentation from the Internal Revenue Service, they explain that this statute functions to assume a 10% rate of return on the CFC's tangible assets, and any revenue exceeding that "normal return" on assets is effectively classified as intangible income, instead of requiring a filer to expressly declare intangible income. Once again, however, these measures only seem to address tax avoidance and money laundering schemes on a relatively small scale. For instance, a recent analysis from the Institute on Taxation and Economic Policy highlighted that under Trump era tax policies, some of the most profitable companies in the Fortune 500 managed to legally avoid paying federal income taxes at all . It is clear that if, on the federal level, there are already mechanisms in place for individuals and institutions to legitimately circumvent their civic financial obligations, attempts to prosecute nefarious methods are not truly done in earnest.
It is on the state level in which these fully legal tax haven mechanisms accentuate the combative relationship that US tax policy has with international methods of preventing corruption and money laundering. Looking to South Dakota first, it is clear from their legislative language that the state values individualism over the prevention of corruption. Interestingly, if not anecdotally, the South Dakota Department of Revenue Sales and Use Tax Guide includes a “Taxpayer’s Bill of Rights” which stresses confidentiality and one-sided transparency . According to the Tax Justice Network (TJN) the United States is ranked second globally in tax havens for money laundering purposes. This is in large part due to the tax laws found in states like South Dakota. Such practices can be found in South Dakota trusts like the South Dakota Trust Company . South Dakota has had a relatively long history of fostering tax havens for individuals and in 1983 was the first state to pass a law explicitly rejecting the enforcement of any Rule Against Perpetuities statutes . According to this law, which is a minority norm in most US states, the value of trusts can be passed down generationally without being affected by inheritance tax regulations. This fundamental tax avoidance mechanism creates an intergenerational buffer between possibly ill-gotten gains and any subsequent probing following the death of a bad actor.