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Sometimes, ranking near No. 1 is not a badge of pride. The U.S. ranks as the third biggest offender – just after Switzerland and Hong Kong – on the Tax Justice Network’s 2015 Financial Secrecy Index when it comes to facilitating financial secrecy and tax evasion, or, in other words, enabling individuals to hide their assets. 

The largest drivers for the United States’ high ranking are its financial secrecy laws and that it has the largest share of the global market for offshore financial services.

How did the United States become such an important offshore financial center? It began with the passage of the Revenue Act of 1921, which exempted the interest income of non-U.S. residents from tax. The combination of this tax break and weak financial disclosure rules made U.S. banks ideal places for foreign individuals looking to hide their assets.

The United States does not require financial institutions to collect basic ownership information from corporations. This allows entities to create illicit shell corporations, which criminals can use to commit crimes such as money laundering and tax evasion without much fear of being identified. Because incorporation is a function of state governments, many states, including Delaware, Nevada and Wyoming, have facilitated the proliferation of shell corporations as a way to raise revenue by collecting fees for each corporation created.

Some states have taken nominal steps to reverse their secrecy laws in recent years, but no real progress has been made. Federal legislation would help. The Incorporation Transparency and Law Enforcement Assistance Act, for example, would require states to collect the beneficial ownership information for each corporation registered in their state.

The United States’ lack of transparency on information about non-resident investments also aides those seeking to hide assets. Over the years, lawmakers have made several attempts to create a more transparent legal framework, but the only hopeful moment came during the 1990s when the Clinton administration proposed that banks in the United States be required to inform the U.S. Internal Revenue Service (IRS) about all bank interest paid to non-resident individuals. This regulation never went into effect.

The United States should end its protection of potential criminals by allowing more reciprocal exchange information between it and other countries. Steps are already being taken in this direction with the enactment of the Foreign Account Tax Compliance Act (FATCA) in 2010. Unfortunately, FATCA relies on an array of bilateral agreements instead of a broader multilateral agreement, making the exchange of information less streamlined. There are also numerous examples where bilateral agreements require U.S. access to information from foreign institutions, but they fail to provide that same information to other countries. Rather than being an impediment to progress, the United States should take a leadership role in combatting tax evasion by fighting for financial transparency around the world.