Financial Secrecy Feeds Kleptocracy and Environmental Destruction. Now is the Time for the U.S. and the World to Act on Beneficial Ownership Reform

(Note: This is the third in a series of FACT blogs directly connecting our tax justice and anti-corruption work to the climate crisis.)

As the recent U.N. climate report reminds us, the rapid move towards sustainability that the climate crisis demands can only be achieved through a committed rewriting of the rules of the global economy to recognize the importance of our shared planet. Yet, as the Pandora Papers have revealed once again, criminals, kleptocrats, and the global elite play by a different rulebook that openly mocks international efforts to collectively address climate change and saps public faith in the institutions necessary to implement reform. Operating in financial secrecy, bad actors are free to profit from environmental degradation, and in doing so undermine the global fight against climate change. As global leaders make new commitments this week at COP26, it’s time that politicians promise to shine a light on global financial secrecy, particularly the use of anonymous shell companies, as a crucial climate reform.

A favorite tool for financial crimes, anonymous shell companies sit at the heart of this global web of secrecy. Through the secrecy that shell companies provide, bad actors are able to engage in destructive extraction, shield themselves from public accountability, and siphon away natural resource revenues by corrupting and capturing political agendas around the world. We need strong beneficial ownership reforms to require corporations and similar entities list their true beneficial owners. Effective implementation of transparency reform, like the Corporate Transparency Act (CTA), in the U.S. and around the world, along with well-tailored information exchange requirements, is a necessary step in enforcing meaningful environmental protections. 

The Key to Hiding from Legal and Public Accountability

Anonymous shell companies offer criminals a simple means to flout environmental regulation while avoiding legal and political accountability. This is particularly true when state capacity to enforce those regulations is weak as is often the case in resource rich, developing countries (including many of the same countries that lose out on global revenues from the ongoing race to the bottom on corporate taxation). By wrapping an illegal extraction operation in an anonymous shell company, criminals are able to put a layer of legal separation between them and on-the-ground violations of environmental regulations. Should a government ever step in to stop operations, criminals need only rebrand their operations under a new shell company to throw authorities off their trail while the profits keep rolling in. Once the resource has been extracted, a network of still more shell companies are put to work laundering the commodities and the $281 billion in annual criminal profits they raise. Bringing these schemes into the light would make it easier for governments to enforce environmental protections. 

Exposing true beneficial owners of shell corporations would also give the public and environmental advocates the information to name and shame corporations–especially those with well-known brand names–engaged in environmental destruction through complex webs of subsidiaries or through partnerships with other corporations with unsustainable business practices. Corporate duplicity undermines the public’s trust in environmental standards, the efficacy of non-governmental action, and our ability to make real change in the fight against climate change. 

Capturing the Political Agenda

Shell companies also serve as a principal tool to disburse bribes and seize control of the political agenda. Untangling the secrecy that shell companies afford to criminals and kleptocrats is a difficult task for even the most committed environmental and climate activists. Still worse is that, by design, anonymous shell companies may facilitate corruption, acting as ideal vessels for bribery and other corrupt payments that compromise the very governments or officials tasked with protecting public resources or investigating environmental crimes.  

These tools are not reserved for autocrats and well-known kleptocrats; the 2016 Panama Papers revealed that 140 politicians from more than 50 countries relied on their own personal web of offshore companies to escape public accountability or worse. The list included democratically elected officials and autocrats alike from across the globe. Far from being dissuaded from secretive financial practices, politicians have been emboldened to exploit offshore accounts since the 2016 exposé. The recent Pandora Papers found that a staggering 300 politicians used offshore accounts from over 90 countries. Once it has been put to use, the cost of this political capture can be staggering, from multi-millions stashed away for presidential allies to billion-dollar windfalls being shuffled into private pockets.

Lost Revenues and Broken Trust

This global system of kleptocracy has tragic knock-on effects for a country’s ability to address the climate crisis. The loss of billions from public coffers drains away funds that might otherwise be put towards the massive climate investments needed to achieve drastic emissions reductions. Even in countries well equipped to invest in cleaner economies, we have seen that when budgets run tight, environmental protection is usually one of the first items on the political chopping block

Country’s pay a price in more than just dollars, however. Corruption scandals shatter the trust between a government and the people it represents. As accountability breaks down, so too does civil society’s ability to push public officials to adopt environmentally minded policies. Instead of advancing the interests of the people, corrupted public officials have incentives to keep their states dependent on extractive industries to maximize future gains from corruption. Again in turn, corrupt control of geographically fixed natural resources hardens authoritarian rule and further ostracizes the people from the government. Authoritarianism, kleptocracy, and dependence on destructive industries all go hand-in-hand in a vicious cycle.

A Cause for Hope: Beneficial Ownership Taking Shape Worldwide

While the role of anonymous shell companies in contributing to environmental and climate destruction is stark, momentum is building for the U.S. and the global community to take strong action to clamp down on the global web of financial secrecy reliant on these entities. Under the Corporate Transparency Act, a historic bipartisan bill passed this January, the Biden Administration must enact a rule to require corporations, LLC’s, and similar entities to report their beneficial ownership information to the Financial Crimes Enforcement Network (FinCEN). The Treasury must move quickly to advance a final rule that both meets the legislatively mandated 2022 deadline and is strong enough to deliver on the CTA’s promise. To do this, the Treasury should, among other things, guarantee broad inclusion of entities under the rule, automatic information exchange with the IRS and clear, ready exchange with other enforcement agencies.

At the global stage, the Pandora Papers have opened a key opportunity for reform. Discussions around beneficial ownership have vaulted ahead at the Financial Accountability Task Force’s (FATF) recent plenary session. FATF recommended that countries move towards setting up central beneficial ownership registries and improved verification efforts, charting a path for successful registries around the world. 

The Biden Administration’s Summit for Democracy, slated for this December, also offers a chance to showcase progress on reforms against illicit financial flows and financial secrecy, and to encourage other countries to follow suit. Now is the time for the United States to capitalize on these opportunities. By delivering on a highly useful beneficial ownership database under the CTA, covering a wide variety of entities, the U.S. can embolden future action at FATF and among other countries. The United States should also consider joining the OECD’s common reporting standard, or pursuing alternative information exchange regime’s necessary with competent authorities the world over. Without strong efforts like these, the United States risks perpetuating global financial secrecy and other collective threats, like climate change, that secrecy fuels.