Secrecy

State Tax Havens: Shell Company Secrecy Enables Harm to the United States

Patrice McDermott Secrecy

In a September 20, 2017 article in Foreign Affairs, Casey Michel discusses how the United States has become has become one of the most important destinations for offshore ownership vehicles, enabling tax evasion, corruption, and crime and offered the world some of the foremost tools for combating crime and grand corruption. The Department of Justice Kleptocracy Asset Recovery Initiative was formed in 2010 to

“curb high-level public corruption around the world. Led by a team of Department of Justice prosecutors working in tandem with the FBI and other federal law enforcement agencies, its mission is to forfeit the proceeds of corruption by foreign officials and, where appropriate, to use recovered assets to benefit the people who were harmed. Individuals with information about possible proceeds of foreign corruption located in or laundered through the United States should contact federal law enforcement or send an e-mail to kleptocracy@usdoj.gov.”

Casey and Ana Swanson author of an April 2016 post  How the U.S. became one of the world’s biggest tax havens note that, contrary to popular belief, notorious tax havens such as the Cayman Islands, Jersey and the Bahamas werre far less permissive in offering them (as researchers) shell companies than states such as—primarily, Delaware, Nevada, and Wyoming—but also including Montana, South Dakota, Wyoming  and New York.

A combination of lax requirements at the federal government level and the abuse of federalism at the level of the states has created this dilemma.  Although the federal government has signed on to international agreements committing the United States to disclose company ownership—and even though many other offshore havens require this basic level of transparency—the US federal government does not force registering companies to identify their “beneficial owners” (those who will ultimately benefit from the company’s business or holdings).  Federal officials who do seek such information, moreover, encounter push-back from state-level authorities. For their part, U.S. company service providers—the groups that form “shell companies”* on behalf of anonymous clients—face relatively little pressure to do such identification, certainly not from the states benefiting from the registrations.

Because the negative consequences of their permissiveness mostly land elsewhere—and serve to let kleptocrats plunder their own countries, Michel notes, the states have little reason to introduce stricter rules or to more rigorously enforce those already in place. A 2016 investigation by National Public Radio found that Wyoming had audited only 20 of its 450 company service providers since 2009.

The negative consequences of the secrecy provided by shell companies hit home as well, however.  Anonymous companies represent an important nexus of corruption, money laundering, transnational organized crime, and terrorism, which directly harm U.S. interests. As a recent highly-informative post by Jodi Vittori, on the Council on Foreign Relations site, points out the secrecy enables “terrorists, criminals, and their ilk to use American corporations, real estate, and trusts to finance activities that harm the United States and its foreign interests.”

The effects of the secrecy may get Congress to act: current bills include Corporate Transparency Act (S.1717/H.R. 3089) and the True Incorporation Transparency for Law Enforcement (TITLE) Act (S. 1454).

*Anonymous shell companies are often no more than a title in a corporate registry and a name plate on a door; the actual person or persons who own and control the company—the so-called beneficial owners—are either concealed or not recorded at all. These companies enable the powerful and connected to hide their assets from law enforcement, tax authorities, or other interested parties, frequently by nesting these companies inside a complex web of businesses incorporated in different jurisdictions.

Often, shell companies are established through a corporate service provider—a company that can incorporate on behalf of one or more individuals, a firm, a charity, or some other party. Instead of recording the actual beneficial owners, the company can be registered to someone who rents out his or her identity, known as a nominee. This nominee can be a lawyer, law firm, relative, or other person connected to the real owner, or even another company or trust, which itself may be anonymously owned.1


 1 Jodi Vittori, How Anonymous Shell Companies Finance Insurgents, Criminals, and Dictators, Council on Foreign Relations.

Counting (Some of) the Costs of War

Patrice McDermott Government Openness, Secrecy

The FY 2017 National Defense Authorization Act included a provision—added by Rep. John Lewis (D-GA)—requiring the Defense Secretary and Internal Revenue Service Commissioner to post online all of the costs, “including the relevant legacy costs, to each American taxpayer of each of the wars in Afghanistan, Iraq, and Syria.”  Defense One reports that, by October of next year, the Pentagon’s share of the wars in Afghanistan, Iraq and now Syria will have collectively cost taxpayers more than $1.5 trillion, according to the Defense Department’s figures. As the article notes, though, the figures do not include classified amounts spent on the wars by the CIA and other intelligence agencies.

There are, however, other “costs of war” that are not as easily quantified.  A project at Brown University, the Watson Institute Costs of War Project tracks the the Economic costs—under which they include: veterans care and disability; increases in the homeland security budget; interest payments on direct war borrowing; foreign assistance spending; and estimated future obligations for veterans’ care.

The Project also has documented the Human and Social & Political costs. Regrettably, the pages and much of the information on Human and Social & Political costs have not been updated in the past couple of years. These costs are not counted by the Defense Department, and some of the Social & Political costs are classified, such as “major human rights and civil liberties violations, including detention without trial, torture, expanded US government surveillance…”

What Happens When Agencies Don’t — or Won’t — Create Records?

Patrice McDermott Accountable Government, Secrecy

The first important thing to know is the Federal Records Act imposes obligations on agency heads to “make and preserve records containing adequate and proper documentation of the organization, functions, policies, decisions, procedures and essential transactions of the agency.” Moreover, the federal agencies have an affirmative obligation to retain all recorded information—”regardless of form or characteristics”— that was “made or received by a Federal agency under Federal law or in connection with the transaction of public business” and serves as “evidence of the organization, functions, policies, decisions, procedures, operations, or other activities of the United States Government….” 44 U.S.C. § 3301 (2012).  A thoroughly-researched memo by the Sierra Club Environmental Law Program details the record retention policies at the Environmental Protection Administration, the Department of Interior, and the Department of Energy.

The New York Times reported1 earlier this month on reports and indications of secrecy at the EPA—including employees sometimes being told not to take notes at meetings.  More troubling for accountability, Administrator Pruitt’s aides recently asked career employees to make major changes in a rule regulating water quality in the United States (Waters of the United States or WOTUS)—without any records of the changes they were being ordered to make.  Citizens for Responsibility and Ethics in Washington (CREW) has noted that “That same rule was initially backed up by an analysis of “the economic benefits of preventing water pollution,” but once Mr. Pruitt decided to reverse the rule EPA “‘economists were verbally told to produce a new study that changed the wetlands benefit[.]’”* 

As the above memo notes, EPA’s records policy covers “all records made or received by EPA employees under federal law or in connection with the transaction of public business, and preserved or appropriate for preservation as evidence of EPA functions, organization and activities or because of the value of the information they contain.”2 Records must be retained if they contain information related to how EPA carries out its mission, such as communicating EPA requirements, or documenting the agency’s
decision-making process.3 

In a letter to the Archivist of the United States, CREW points out that Mr. Pruitt and EPA “are evading public scrutiny of their decisions by failing to create records in the first place.  Not only are these actions bad from a public policy perspective, but also they appear to violate the FRA requirements to both document and preserve records reflecting essential EPA decisions and policies and how they are made.  Adequate documentation is one of the two main pillars of the FRA; EPA’s failure to create this documentation undermines the goals of the FRA and deprives the public of access to records that document how the agency is fulfilling its statutory mission.”

The letter requests that the Archivist exercise his authority and responsibility under the Federal Records Act to evaluate actions of the U.S. Environmental Protection Agency (“EPA”) and EPA Administrator Scott Pruitt that appear to violate the Federal Records Act, and make recommendations to EPA for their correction and “full compliance with the FRA and inform both the President and Congress of these violations.”

* There is a pattern in this Administration; see White House Blocks Report Showing Societal Benefits of Refugees in the US

1Coral Davenport and Eric Lipton, Scott Pruitt is Carrying Out His E.P.A. Agenda in Secret, Critics Say, New York Times, Aug. 11, 2017 ;  2  EPA Information Policy, Records Management Policy (dated 7/07/2005),  at 1 – from SCELP Memo;  3  Id at 3.

White House Blocks Report Showing Societal Benefits of Refugees in the US

Patrice McDermott Accountable Government, Government Openness, Secrecy

When the President released his second travel ban, it was accompanied by a Presidential Memorandum in which he called on the secretary of state to consult with the secretaries of Health and Human Services and Homeland Security and his White House budget director and — “[t]o further ensure transparency for the American people regarding the efficiency and effectiveness of our immigration programs in serving the national interest” — submit within 180 days “a report detailing the estimated long-term costs of the United States Refugee Admissions Program at the federal, state, and local levels, along with recommendations about how to curtail those costs.” As noted by the New York Times, the budget Trump released in May argued that refugees and other immigrants were a fiscal drain. “Under the refugee program, the federal government brings tens of thousands of entrants into the United States, on top of existing legal immigration flows, who are instantly eligible for time-limited cash benefits and numerous noncash federal benefits, including food assistance through SNAP, medical care and education, as well as a host of state and local benefits.” It would be less costly, it argued, if there were fewer refugees, since “each refugee admitted into the United States comes at the expense of helping a potentially greater number out of country.”  The White House apparently thought it was perfectly clear that the President was not interested in hearing about any benefits brought by refugees….

The internal (State, HHS, DHS) study, completed in late July but never publicly released, was obtained by The New York Times. The draft found that refugees “contributed an estimated $269.1 billion in revenues to all levels of government” between 2005 and 2014 through the payment of federal, state and local taxes. “Overall, this report estimated that the net fiscal impact of refugees was positive over the 10-year period, at $63 billion.” This report was spiked but, the Times notes, it was not clear who in the administration decided to keep the benefits-of-refugees information out of the final report. An internal email (shown to the Times), dated Sept. 5 and sent among officials from government agencies involved in refugee issues, said that “senior leadership is questioning the assumptions used to produce the report.” Continue reading →

DOJ Task Force on Crime Reduction and Public Safety Remains Closed and Unaccountable

Patrice McDermott Government Openness, Secrecy

On February 28, 2017, Attorney General Jeff Sessions announced the formation of the U.S. Department of Justice Task Force on Crime Reduction and Public Safety, pursuant to the President’s Executive Order.  Chaired by the Deputy Attorney General (now Rachel Brand), Task Force members were said to be drawn from relevant Department components, and will include the Director of the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), the Administrator of the Drug Enforcement Administration (DEA), the Director of the FBI and the Director of the U.S. Marshals Service (USMS).

The task force is charged with developing strategies to reduce crime; identifying deficiencies in existing laws and policies that have made them less effective in reducing crime and proposing new legislation and policies to improve public safety and reduce crime; evaluating the availability and adequacy of crime-related data and identifying measures to improve it; and conducting any other relevant studies.  In conducting its work, the task force will consult with federal, state, tribal and local law enforcement, law enforcement organizations and victims’ and community advocacy organizations, among others, to learn about successful local efforts and how they can best be supported at the federal level.

A publicly-available April 5 Memorandum  to Head of Department Components and United States Attorneys from Sessions directed the Task Force to “submit initial recommendations from the Task Force no later than July 27th”…  The Memo indicates that the “Task Force will accomplish its work through a variety of subcommittees, and those groups are already hard at work, benefiting from the expertise of many offices throughout the Department.”  The subcommittees were described as identifying, reviewing, making recommendations on:

…  overall violent crime reduction strategy, which will include focused enforcement against violent offenders. This subcommittee will also examine ways in which we can support local partners engaged in enforcement, prevention, and reentry efforts; leverage existing law enforcement efforts; and measure the effectiveness of our work;

…  existing policies in the areas of charging, sentencing, and marijuana to ensure consistency with the Department’s overall strategy on reducing violent crime and with Administration goals and priorities;

… use of asset forfeiture and make recommendations on any improvements needed to legal authorities, policies, and training to most effectively attack the financial infrastructure of criminal organizations;

…  the Hate Crimes Subcommittee will develop a plan to appropriately address hate crimes to better protect the rights of all Americans;

…  immigration enforcement and human trafficking to ensure that the federal government has an aggressive and coordinated strategy to deter those who violate our borders and subject others to forced labor, involuntary servitude, sex trafficking, and other forms of modern-day slavery.

In the Memorandum, Sessions directed the Task Force to “hold a National Summit on Crime Reduction and Public Safety within 120 days [August 3], so that we can learn from federal, state, local, and tribal law enforcement agencies, victims’ advocacy organizations, and community advocacy organizations about how we can best support and replicate successful local violent crime reduction efforts.” It further indicated that “In addition, as part of the important work the Task Force is undertaking to combat hate crimes, the Department’s Civil Rights Division will be reaching out to affected communities to hear directly what strategies and support are most needed to help reduce this particularly pernicious crime.”

A July 26 story in The Hill indicates that, while the Justice Department did not provide details on what recommendations the task force has provided,  Sessions signaled that he has been receiving and implementing recommendations from the task force: Sessions said in a statement that he has been getting recommendations on a “rolling basis…”  and that he has “been acting on the Task Force’s recommendations to set the policy of the Department. I will continue to review all of the Task Force’s recommendations…”

Five-plus months later, despite repeated requests from journalists and others federal officials have refused to officially disclose the identities of those on the panel, its meeting agendas, or what recommendations it is handing to the attorney general.

On August 1, Senator Ron Wyden sent a letter to AG Sessions asking that the recommendations of the Task Force “immediately be made public” and posing specific questions to the AG.

New FBI final rule — the biometrics we have on you are none of your business & not subject to the Privacy Act

Patrice McDermott Government Openness, Secrecy

On August 1, the FBI issued a “final rule to amend its Privacy Act exemption regulations for the system of records titled, “Next Generation Identification (NGI) System,” JUSTICE/FBI-009, last published in full on May 5, 2016. Specifically, the FBI exempts the records maintained in JUSTICE/FBI-009 from one or more provisions of the Privacy Act. The FBI asserts that “[t]he listed exemptions are necessary to avoid interference with the Department’s law enforcement and national security functions and responsibilities of the FBI.”  The final rule is effective on August 31.

The FBI’s Next Generation Identification system stores the biometric records of people who have undergone background checks for jobs, volunteer positions and military service, as well as of those who have criminal records.  The new rule will prevent millions[1] of people from finding out if their fingerprints, iris scans and other biometric information are stored in a massive federal database. The rule asserts that this is because it could “specifically reveal investigative interest by the FBI or agencies that are recipients of the disclosures.”

Moreover, according to the final rule, because most of the criminal records in the NGI System are obtained from state and local agencies at the time of arrest, the FBI cannot always collect information directly from the individual and “[i]t is not feasible” to notify them that their records are being included.

Jeramie Scott, EPIC’s Domestic Surveillance Project director, told Nextgov that a person might become the subject of investigation without being notified because that person’s image may be erroneously called up in a search for a different individual.

[1] Electronic Frontier Foundation estimated in 2014 that it could contain up to 52 million facial images by 2015.

Creation of New Secrets Drops in 2016 — But is All the News Good?

Patrice McDermott Government Openness, Secrecy

Appreciation to Steven Aftergood for his July 20 Secrecy News blog on the Annual Report to the President of the Information Security Oversight Office (ISOO).  Steve is the indispensable source for cogent analysis of national security (and other) information and this post draws on that.

The Good News
Designation of New Secrets at Record Low: The ISOO reports that, in 2016, 39,240 “original classification decisions” (new secrets) were generated.  As Aftergood notes, this is an all-time low: by comparison, more than 230,000 new secrets a year were being generated a decade ago. And, indeed, from1980 – when this record-keeping began — to 2012, the total number never dropped below 100,000.  Even given the caveats below, the record low level is likely to reflect a real reduction in the scope of national security secrecy in the Obama years.

Caveats: And, yet, Aftergood notes “the reported reduction in new secrets cannot bear too much interpretive weight. The figures cited by ISOO represent a compilation of dozens of estimates provided by individual agencies, based on sampling methods that are inconsistent and not always reliable.”  Still, one can assume “that the uncertainties and the ambiguities in the data have been more or less constant over time.”

Critically, “this statistical approach to secrecy oversight implies that all classification decisions are of equal significance. In actuality, some secrets may be of profound importance — politically, morally, historically, or otherwise — while many other secrets (such as administrative or technical details) will have little or no public policy interest.”

Classification Challenges: Decisions to classify information often involve subjective judgments about the requirements of national security and the potential of particular information to cause damage, leading to disputes inside the government. Authorized holders of classified information who believe that the information is improperly classified, can file classification challenges within the system. As Aftergood points out, “If such challenges could be promoted and accepted as a routine element of classification practice, they could serve to invigorate classification oversight and to provide an useful internal self-check.”

ISOO reports 954 such classification challenges in 2016 — about the same number as in 2015. Of these challenges, 684 (71.70 percent) were fully affirmed at their current classification status with 167 (17.50 percent) being overturned either in whole or in part, and 103 (10.80 percent) challenges remaining open. Aftergood notes that this compares to over 40% that were overturned in 2015.

According to ISOO, the Department of Defense (DoD) historically reports the largest number of formal classification challenges, the majority of which (496) come from the U.S. Pacific Command. Only a single one emerged from the Department of Justice

Caveats: ISOO found that about a quarter of all agencies do not even have a classification challenge program, though they are supposed to.

The Bad News

Derivative Classification Increase and Data Accuracy Questionable:  Executive branch agencies reported 55,206,368 derivative classification decisions; a 5 percent increase from FY 2015. ISOO notes, not for the first time, that the data concerning derivative classification continues to be problematic for agencies to capture and ISOO to analyze accurately. Agencies estimate the number of these decisions based on established sampling methods.

Classification Costs at a Record High

According to ISOO, the annual costs incurred by the classification system reached record high levels in 2016: “The total security classification cost estimate within Government for FY 2016 is $16.89 billion,” ISOO reported, compared to $16.17 billion the year before. Classification-related costs within industry were an additional $1.27 billion.”

The Mixed News

ISOO director Mark A. Bradley, whose tenure as director began this year, told the President that in the next reporting cycle, “ISOO will focus on improving our methodology in data collection and will begin planning and developing new measures for future reporting that more accurately reflect the activities of agencies managing classified and sensitive information.” Regrettably, this is a commitment also made previously in a better budget (and possibly political) climate: on May 23rd, the Administration released a Presidential Budget Request for Fiscal Year 2018 that would cut funding for the National Archives and Records Administration by $16.6 million.

Ninth Circuit poised to resolve major free speech issue in secret proceeding

Patrice McDermott Secrecy

Paul Alan Levy of Public Citizen just reported the the United States Court of Appeals for the Ninth Circuit has issued an order signed only by the Clerk declaring that a significant free speech issue bearing on the rights of anonymous Internet users will be decided in a totally secret proceeding, involving sealed briefs, a sealed record, and without any help from would-be amici (including Public Citizen) seeking to explain the dangers posed by the proceeding.

See more here

ICE should release its death reports so we can know the truth about immigration detention deaths

Patrice McDermott Accountable Government, Government Openness, Secrecy

In a 25 May op-ed, Grace Meng (a senior U.S. researcher at Human Rights Watch) and Christina Fialho (an attorney and the co-executive director of CIVIC – Community Initiatives for Visiting Immigrants in Confinement) write that ICE is required to investigate every death in detention and produce a “detainee death report,” but it generally does not publicly release these reports. ICE provides only sparse information about deaths in detention in its news release — the person’s name, nationality, and occasionally immigration or criminal history.

Meng and Fialho report that last June, ICE took the unusual step of releasing reports covering 18 of the 21 deaths of immigrants in detention from May 2012 through June 2015. At the request of HRW and CIVIC,  independent medical experts analyzed the facts and timelines, as documented by ICE’s own investigation. They found that the patients had received appropriate care in only two cases. In 16 of the deaths, the experts found evidence of severely inadequate medical care. In seven of the cases, they concluded that the poor medical care directly contributed to the deaths of these immigrants.

Thanks to the Marshall Project for highlighting this story.

Disappearing Information/Deconstructing Accountable Government — What We Track

Patrice McDermott Accountable Government, Government Openness, Secrecy

How do removals of information and limitations of access pertain to the Administrative State?  What is this thing (if it is, indeed, a thing), from where/whom does the concept come, and where does it lead (cui bono)?  Is it the immutable, first principles, originalist reading of the Constitution its proponents would have us believe — or is it quite mutable to suit the purposes of those it benefits?

This concept and how it relates to what is being done to our government and the career civil servants who make it work will be one of the focuses of Government Information Watch.

Continue reading →