Anonymous Companies Help Finance Illicit Commerce and Harm American Businesses and Citizens

A Need for Incorporation Transparency

By David M. Luna

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Overview

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Titled “Anonymous Companies Help Finance Illicit Commerce and Harm American Businesses and Citizens: A Need for Incorporation Transparency,” this May 2019 report from the Financial Accountability and Corporate Transparency Coalition (FACT Coalition) explains that the trafficking and smuggling of counterfeit and pirated goods is a very profitable illegal activity for many of today’s criminals and illicit networks and that these networks rely on the secrecy provided by anonymous entities to launder their ill-gotten-gains and escape detection.

Illicit commerce remains the lifeblood of today’s bad actors, criminal organizations, and terrorist groups. A very profitable illicit activity for many of today’s criminals and illicit networks is their involvement in the trafficking and smuggling of counterfeit and pirated goods.

In the United States, there are enormous threats posed by counterfeits and internet pirates — impacting legitimate commerce, markets, and financial systems, including critical national industries and local economies, placing consumers at risk, and harming the market reputational value of American brands and companies.

  • The OECD and European Union Intellectual Property Office (EU IPO) estimated the value of imported fakes worldwide at US$509 billion in 2016, or up to 3.3 percent of world trade.
  • In a 2017 report by the International Chamber of Commerce’s Business Action to Stop Counterfeiting and Piracy (BASCAP) and the International Trademark Association (INTA), it is projected that the global economic value of counterfeit and pirated goods alone will reach close to US$3 trillion by 2022. It is expected that the total employment losses globally due to counterfeiting and piracy will rise from 2 to 2.6 million jobs lost in 2013 to 4.2 to 5.4 million jobs lost in 2022.
  • A recent report by Cybersecurity Ventures estimates that the financial costs from cybercrime will double from US$3 trillion in 2015 to US$6 trillion by 2021.

From recent scandals to successful criminal prosecutions, we have gleaned sharper insights into how criminal networks evade detection and how dirty money is hidden — through the use of anonymous shell and front companies.  A few summaries of the cases outlined in this Report’s Section V include the following:

  • Anonymous companies have helped criminals across the United States sell in recent years several billion dollars in fake and counterfeited luxury handbags and apparel accessories branded as Burberry, Louis Vuitton, Gucci, Fendi, Coach, and Chanel, as well as sportswear and gear from the NFL, NBA, and MLB including Nike, Adidas, and Under Armour, among many others.
  • Anonymous companies were used to import and sell to American consumers, through internet pharmacies, counterfeit medicines from India and China worth hundreds of millions of dollars. These counterfeits included fake versions of Arimidex, a breast cancer treatment, Lipitor, the cholesterol drug, Diovan, for high blood pressure, and other medications such as illicit OxyContin, Percocet, Ritalin, Xanax, Valium, and NS Ambien.
  • Anonymous companies assisted in selling knock-off parts to the Pentagon that have cost the US military tens of millions of dollars.
  • Anonymous companies helped an organized criminal network sell counterfeit cellphones and cellphone accessories on Amazon.com and eBay.com. They also misrepresented goods worth millions of dollars as new and genuine Apple and Samsung products.
  • Anonymous companies were leveraged to help criminals sell millions of dollars’ worth of counterfeit computer anti-virus software over the internet.
  • Anonymous companies assisted in selling Venezuelan oil, false securities, and fraudulent contractual relationships in the United States that have cost American businesses millions of dollars.

As a direct consequence, the use of such anonymous companies impacts the economic and financial interests of US companies and markets, as criminals and counterfeiters expand their market share of fake products across American cities and on-line markets.

Anonymous companies created by criminals help to finance the distribution of harmful counterfeits across the US economy that seriously harm and even kill Americans — from illicit opioids and fake medicines, food, and alcohol to fake parts in cars and airplanes to counterfeited apparel and toys that are sometimes made with deadly chemicals and toxic materials.

There is a global trend toward transparency.

  • The United Kingdom now has a public registry that includes the names of the beneficial owners of companies formed in the country. They have recently passed a law to require its overseas territories (i.e. Anguilla, Bermuda, British Virgin Islands, Cayman Islands, Gibraltar, Montserrat, and Turks and Caicos Islands) to create public registers as well.
  • The European Union has adopted new rules to require all member nations to establish public registers of beneficial owners by 2020. In addition to the 28 members of the EU, this also effectively extends to members of the European Economic Area (Norway, Iceland, and Liechtenstein).
  • Additional nations and jurisdictions that have enacted or are pursuing enactment of beneficial ownership registration laws include: Afghanistan, Brazil, Costa Rica, Curacao, Dominican Republic, Ghana, Guernsey, Isle of Man, Jersey, Nigeria, South Africa, Ukraine, and Uruguay.

Policy Recommendations

1. Enact Legislation to Require Beneficial Ownership Disclosure

The United States Congress must pass legislation to end the abuse of anonymous companies by requiring the collection of “beneficial ownership” information — the natural person who controls the entity and has an entitlement to the funds — at the point of corporate formation.  The information should be updated whenever the ownership changes.  The legislation should ensure that federal, state, and local law enforcement agencies as well as those with anti-money laundering responsibilities in the private sector have full access to the information. Foreign law enforcement should also have appropriate access to the beneficial ownership information.

Doing so will enable law enforcement agencies at the international, federal, state, and local levels to more effectively target corrupt financial practices and transnational criminal activities, including the trafficking of counterfeit and pirated goods.

2. Require Beneficial Ownership Disclosure from Government Contractors

Either Congress or the administration should require bidders for federal contracts, sub-contracts, and grants to disclose their beneficial ownership information at the time of their bids, as a means to ensure that counterfeiters, fraudsters, sanctioned individuals, and other criminals and corrupt facilitators are neither able to undercut bids from honest businesses nor to receive taxpayer money.

3. Deny Entry to Counterfeiters and Corrupt Actors

The United States government should deny entry into the United States to complicit and corrupt actors and their facilitators, including criminals engaged in the illicit trade of counterfeited and pirated goods.  Bad actors should not benefit from their corruption and criminality.

4. Make All Felonies Predicate Offences for Money Laundering

The United States is one of only a small number of industrialized countries that enumerates a list of predicate offenses for money laundering, rather than referencing all serious crimes as recommended by the international anti-money laundering standards body, the Financial Action Task Force (FATF).  Worse, the United States uses one list for crimes committed in the US and another list for crimes committed abroad.  Most industrialized countries instead use a “threshold” approach to predicate offenses, where all crimes that carry a certain minimum sentence or fine are considered predicate offenses.  In the United States, the equivalent would be to amend the money laundering statutes to make all felonies predicate offenses for money laundering.  Legislation to make all felonies predicate offenses for money laundering has been introduced by both Sen. Charles Grassley (R-IA) and Rep. Maxine Waters (D-CA) in previous Congressional sessions but has not yet been adopted.

5. Establish a Global Network of Trade Transparency Units (TTUs)

One key countermeasure for trade-based money laundering (TBML) is to establish trade-transparency units (TTUs) between affected countries.  TTUs are formed when two countries agree to exchange transaction-level trade data on trade between individuals or trading companies of the two countries in order to detect and combat wrongdoing. For the vast majority of global trade, government authorities are only able to see one side of cross-border trade transactions. Importers and exporters are subject to reporting in the jurisdiction where they operate, but not in the jurisdictions where their counterparties operate. This practice means that parties on either side of a cross-border transaction are able to report different information to their respective authorities, without the authorities of either jurisdiction being aware of the discrepancies.

The concept behind TTUs is simple. By providing government authorities access to information reported on both sides of a trade transaction, anomalies can be spotted. The anomalies, like the misinvoicing of price, value, quantity, or quality of goods, could be indicative of simple customs fraud, TBML, or even underground financial systems.  TTUs can provide additional value in TBML analysis by adding law enforcement data, financial intelligence, and commercial information. The creation of these additional data sources is key to identifying more sophisticated schemes, where false information is reported identically on both sides of a transaction.

The United States pioneered the concept of TTUs.  Today, approximately 16 TTUs exist around the world, loosely cooperating under a US-sponsored TTU umbrella.  Most are in Latin America.  Other countries around the world are interested in TTUs.  Not only is trade transparency a proven countermeasure to TBML, but, by cracking down on customs fraud, it enhances revenue collection.  TTUs have only been in existence a few years, but the network has already recovered well over US$1 billion.[i]

Specific line item funding should be provided to fund a TTU in the United States so as to enhance its analytic capabilities and augment the personnel necessary to foster trade transparency across the country and to continue to expand the international network of TTUs.

6. Expand Due Diligence Obligations to All Gatekeepers to the Financial System

In December 2016, the FATF came out with its latest mutual evaluation report on the progress of the United States in meeting international anti-money laundering (AML) and counter-terrorism financing standards. [ii]  While the report gave the United States strong marks overall, it highlighted two key deficiencies. First, it stated that the lack of timely access to adequate, accurate, and current beneficial ownership information remained one of the fundamental gaps in the US AML regime. Second, the evaluation noted that lawyers, accountants, real estate agents, and other significant professional service providers operating in the US were still largely exempt from the AML requirements levied on financial institutions under the Bank Secrecy Act, and that this exemption presented a real vulnerability given the propensity for abuse in this area.

Congress should pass legislation requiring persons who form legal entities, including transactional lawyers, to carry out AML due diligence.  Specifically, the legislation should require formation agents to conduct a risk-based due diligence review before accepting a client; to identify higher risk clients; to conduct risk-based monitoring of client funds and activities; and to report suspicious transactions to law enforcement. These AML obligations have long been part of the international AML standards set by FATF, and the US should take the steps necessary to meet its FATF commitments.

Footnotes:

About the Author

David M. Luna

David M. Luna is the chief executive and president of Luna Global Networks and Convergence Strategies LLC, an international security consultancy that provides strategic advisory services to businesses and NGOs to tackle the most pressing illicit trade and governance challenges and related security threats across borders, markets, and industries through convergence strategies and tactical plans that holistically target webs of corruption and criminality, and illicit markets.

A former US Diplomat and national security official, Mr. Luna is a frequent speaker on transnational threats, international affairs, geopolitical risks, illicit trade, and the global illegal economy (“dark side of globalization”), including transnational organized crime, corruption, money laundering, terrorist financing, intellectual property rights enforcement, counterfeit and pirated goods, cybersecurity/cybercrime, environmental crime, and smuggling/trafficking crimes that impact economies and communities around the world, and destabilize global security and world order.

With 22 years of federal service in the US Government, Mr. Luna held numerous senior positions with the US Department of State, Bureau of International Narcotics and Law Enforcement Affairs (INL), including directorships for national security, transnational crime, and illicit networks, and anti-corruption and good governance; and served as an advisor to the Secretary’s Coordinator for the Rule of Law.  Mr. Luna also served as an Assistant Counsel to the President, Office of the Counsel to the President, The White House, as well as in other positions with the US Department of Labor, and the US Senate Committee on Banking, Housing, and Urban Affairs.

Mr. Luna is the new chair of the Anti-Illicit Trade Committee of the United States Council for International Business (USCIB) and is also currently a Senior Fellow for National Security at the Terrorism, Transnational Crime, and Corruption Center, Schar School of Policy and Government, George Mason University.

Mr. Luna previously served as the President (Chair) of the OECD Task Force on Countering Illicit Trade; Chair and Vice Chair of the APEC Anti-Corruption and Transparency (ACT) Working Group; US Coordinator, APEC ACT Pathfinder Dialogues on Fighting Corruption and Illicit Trade; Vice Chair of the World Economic Forum’s Global Agenda Council on Illicit Trade and Organized Crime (and Member of the Human Trafficking Task Force); Co-Chair, G-7 Experts Group on Combating Illegal Wildlife Trade; US Coordinator, Dialogues on the Crime-Terror Nexus and Dismantling Transnational Illicit Networks; US Representative, Global Forum on Fighting Corruption II-VI; and other diplomatic initiatives and public-private partnerships on anti-crime and global security.

Mr. Luna is a graduate of the US Army War College and received his B.A. from the University of Pennsylvania and his J.D. from The Columbus School of Law, The Catholic University of America.

Acknowledgements

The FACT Coalition would like to thank the Ford Foundation for supporting this report.

The FACT Coalition would also like to thank Amie Breslow, Dr. Chris Corpora (Mercyhurst University), Tyler Crowe (Motion Picture Association of America), Mark Hays (Global Witness), Lakshmi Kumar (Global Financial Integrity), Jane Ley, Jack Radisch (OECD), Alexandria Robins (Global Witness), Richard Sawaya (National Foreign Trade Council), Steven J. Shapiro (Federal Bureau of Investigation, National Intellectual Property Rights Coordination Center), Dr. Louise Shelley (George Mason University), Piotr Stryszowski (OECD), and Kelsey Wallace for their contributions to the report.

Cover Image Sources: Alexey Lesik / Shutterstock.
Cover Image Copyright: All Rights Reserved.
Cover Design: Clark Gascoigne and Jacob Wills, The FACT Coalition

Copyright © 2019 The FACT Coalition. Some Rights Reserved.

This work by David M. Luna and the FACT Coalition is licensed under a Creative Commons Attribution 4.0 License.  To view the terms of this license, visit www.creativecommons.org/licences/by/4.0.  The cover image is copyrighted, with all rights reserved.

The recommendations are those of the author and the FACT Coalition.  The views expressed in this report are those of the author and the Coalition, and do not necessarily reflect the views of our funders, our members, or those who provided review.

Founded in 2011, the Financial Accountability and Corporate Transparency (FACT) Coalition is a non-partisan alliance of more than 100 state, national, and international organizations working toward a fair tax system that addresses the challenges of a global economy and promoting policies to combat the harmful impacts of corrupt financial practices. More information about the coalition can be found at the back of this report or on the FACT Coalition website at www.thefactcoalition.org.

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