Encouraging Signs for a Possible U.S. Legislative Crackdown on Anonymous Companies

By Gary Kalman

This article was originally published by the Global Anticorruption Blog (GAB).

Gary Kalman, the Executive Director of the FACT Coalition, contributes today’s guest post:

A little over a year ago, the International Consortium of Investigative Journalists (ICIJ) released the Panama Papers, a treasure trove of information and a window into the world of financial secrecy. In some ways, much of what the Panama Papers revealed was already well known. Previous estimates put the amount of money hidden in offshore secrecy havens somewhere between $8 trillion and $32 trillion. In 2015, The New York Times published an impressive five-part series on the use of anonymous shell companies to purchase prime real estate in New York City. Prior to that, the U.S. Justice Department filed a lawsuit (which they just won on June 29th) to force the forfeiture of New York property secretly owned by the government of Iran in direct violation of economic sanctions. And so on. Yet it is hard to deny the captivating intrigue of the specific stories in the Panama Papers involving Russian kleptocrats, world leaders, athletes, movie stars, and others.

The big question is: more than a year later, did anything change? As I recently observed, there are indeed encouraging signs around the world, particularly in Great Britain, several EU member-states, and some developing countries such as Ghana. What about the United States? After all, with U.S. transparency laws ranging from weak to non-existent, there is little need to go to Panama to launder one’s dirty money. While Delaware gets the most notoriety, no state collects information on the true (“beneficial” owners of corporations. In fact, in its recent assessment of the U.S., the Financial Action Task Force, an international anti-money laundering body, noted that for all the progress the U.S. has made, the lack of beneficial ownership transparency remains a glaring weakness. And in the past, when some U.S. legislators – most notably former U.S. Senator Carl Levin (D-MI) – pushed legislation to require states to collect beneficial ownership information, the proposed bills never received so much as a hearing.

That may be about to change, and anticorruption advocates should take note.

Last month, bipartisan bills were introduced in both the House and the Senate. While slightly different, they both require that the beneficial owners of companies be named in incorporation documents. The definition of “beneficial owner” is clear and strong – no managers, nominee owners, or formation agents. The Senate bill (S.1454) requires states to collect the information and provides funding to help update state forms and databases. The House bill (H.R. 3089) allows states to opt out of collection but then requires the Financial Crimes Enforcement Network (FinCEN) at the U.S. Treasury Department to step in and collect the information on their behalf. Neither bill makes the information public, but it will be available to police, prosecutors, and financial institutions with anti-money laundering responsibilities. This last addition is important, as it makes sense to provide all available tools to those asked to help keep illicit funds out of the U.S. financial system. As a matter of politics, it provides a powerful new set of allies.

Other elements of the business community are weighing in to support greater beneficial ownership transparency. Several prominent CEOs of multinational companies, including the CEO of Dow Chemical, wrote a letter to Congress in support of the legislation, arguing that corporate beneficial ownership transparency “increases integrity in the system and provides a higher level of confidence when managing risk, developing supply chains and allocating capital,” allowing firms to ‘have greater reputational and legal certainty in our dealings with third parties, protecting our ability to enforce contracts and safeguard our investments.” And an association of small business owners in the U.S. also wrote in support of the bills, pointing out that “shell corporations have been used to falsely underbid and win contracts they have no intention of fulfilling. They undermine the integrity of supply chains and disrupt local commerce. Fraudulent business to business companies present increased risk to honest small businesses looking to subcontract to leverage opportunities to grow their business. With anonymity there is far less accountability.”

The Chairman of the newly created House Subcommittee on Terrorism and Illicit Finance, Chairman Steve Pearce (R-NM), has promised to hold hearings on the bill and work with the sponsors to move a bill forward. In the Senate, Judiciary Chairman Charles Grassley (R-IA), an original co-sponsor of the bill, has also expressed renewed interest in moving the bill.

The Trump administration has not formally weighed in, but during his confirmation hearing, Treasury Secretary Steve Mnuchin raised concerns about the dangers of anonymous companies to our national security and expressed interest in working with Congress on the issue. Perhaps of greater importance, shortly after his confirmation, Secretary Mnuchin signed off on extending an Obama-era pilot program that requires the collection of beneficial ownership information in high-end cash-financed real estate deals in targeted cities (a.k.a. Geographic Targeting Orders or GTOs). (The GTOs will likely be extended again in the fall with consideration of a rulemaking that would make them permanent.)

No one can say for certain, but one can sense a shift in momentum and interest. A bipartisan issue to strengthen national security has genuine appeal, perhaps increasing appeal as we get closer to the 2018 mid-term elections.

This article was originally published by the Global Anticorruption Blog (GAB).