Perilous Position: The U.S. Must Strengthen Transparency Laws for the Sake of National Security

As U.S. Allies Move to End the Abuse of Anonymous Companies, Corporate Secrecy Leaves the U.S. Vulnerable to its Adversaries

These past few months, the fight against illicit finance received excellent news — the U.K. Government moved to require their Overseas Territories to disclose the real owners of companies they incorporate. Those territories include tax haven A-listers like Bermuda, the Cayman Islands, and the British Virgin Islands. These critical legislative actions taken by the British Government should similarly be adopted by the U.S. Congress — lest America risk becoming the favorite haven for dirty money.

The U.S. is already one of the top places in the world for drug cartels, human trafficking operations, rogue nations, and corrupt leaders to hide and hold the proceeds of their crimes. The problem rests in secrecy.

Similarly, for too long, the British Overseas Territories have been a safe harbor for those committing global financial crimes such as money laundering, terrorist financing, and tax evasion.  Under the new law, the Overseas Territories must disclose the owners of all their registered companies by the end of 2020. Anonymous owners will no longer be able to mask themselves.

Globally, transparency advocates were delighted — yet no doubt surprised — to see the U.K. government make this move. So where did it come from?

The answer is at least partly that the deterioration of U.K.-Russian relations have made the national security threats of secrecy all the more concerning. Back in March, the nerve-agent attack of ex-Russian spy, Sergei Skripal, sparked intense scrutiny of Russian malfeasance, including oligarchs’ use of Britain and its offshore satellites. The “Salisbury effect” — as it has been coined by British journalists — is the reason for the change in policy. Named after the town where the poisoning took place, it is a strong explanation for this sudden turn of events and souring of international relations.

“President Putin’s allies have been able to exploit gaps in the sanctions and anti-money laundering regimes that allow them to hide and launder assets in London.”

U.K. Foreign Affairs Committee Report.

The U.K. has further reason to be skeptical of Russia. According to a U.K. foreign affairs committee report, London is a “base for the corrupt assets” of individuals linked to Russian President Vladimir Putin and the Kremlin. Additionally, the committee said that the financial crimes were “linked to a wider Russian strategy” to undermine British national security. In response to all of these revelations, the U.K. has moved to close the loopholes within its Overseas Territories in order to prevent Russia from relying on the U.K. financial system.

Unfortunately, national security threats due to the gaps in anti-money laundering regimes are not a unique problem to the U.K.  Despite the bizarre spectacle that occurred in Helsinki last month, U.S. intelligence again confirmed that the Russian government meddled in the 2016 election cycle (using, at times, anonymous companies to evade detection), and — as the nation’s top national security officials detailed in an extraordinary press conference at the White House Thursday — the Russians are continuing to interfere in American democracy in the lead-up to the midterm elections in November.

Beyond election interference, a slew of other cases highlight the threats posed to U.S. national security from anonymous companies. A recent investigation found that American made aircrafts have been used to transport Russian mercenaries to Syria. U.S. and E.U. sanctions on Russia and Syria have been in place since the occupation and annexation of Crimea, yet U.S. military equipment continues to surface in the hands of our adversaries with the help of shell companies. Sanctioned nations use financial secrecy to bypass restrictions with ease, resulting in operations that put U.S. interests and security at risk.

North Korea, another sanctioned nation, uses similar mechanisms to skirt sanctions.

Despite strict technology bans, they have been able to get their hands on products from American companies such as Apple and Microsoft, according to a new report from a U.S. cybersecurity firm.  At the same time, cybersecurity experts and government agencies have linked North Korea to a range of illicit online actions, including crippling ransomware attacks, the 2015 hack of Sony Pictures, cyber espionage, and electronic heists on banks around the world. North Korea’s ability to finance its nuclear program, despite growing international sanctions, can be credited to a broad range of illicit activity that spans the world, according to experts.

Sanctions on Iran are rendered equally ineffective.  In response to previous U.S. sanctions, Iran’s national bank used anonymous shell companies to secretly launder money and continued to fund its operations through those investments. The National Bank of Iran used a shell company set up in New York to own property on Fifth Avenue in Manhattan.

Anonymous companies allow bad actors to have unfettered access to global markets. For example, reports have identified the schemes employed by sanctioned nations and others to garner profits including currency and cigarette counterfeiting, insurance fraud, illicit drug production and trafficking, weapon sales, and even wildlife and human trafficking.

These examples and others prompted 36 former military and civilian national security leaders to send a letter to the House and Senate in May, urging action against anonymous shell companies. These experts include former officers from the United States Armed Forces as well as former civilian leaders from the National Security Council; the Departments of State, Treasury, Defense, Justice, and Commerce. All of which are deeply concerned with the national security threats posed by leaving the door open to these types of entities.

These sentiments and others were echoed by two dozen state attorneys general on Thursday in a letter calling on Congress to help them counter money laundering, corruption, and terror financing by passing legislation to end the incorporation of anonymous shell companies in the United States.

It appears that the U.S. is beginning to understand the dangerous impact of corporate secrecy.  A bipartisan bill to sanction Russia for its interference in the American democratic system includes a key provision to require all shell companies purchasing real estate in the U.S. to disclose their true owners.  That’s a good start, but to comprehensively protect the U.S. financial system, all companies must be required to disclose their true owners at the time of formation.

In some cases like Salisbury, activities surrounding shell companies can be fatal. It took a long time for the U.K. to recognize these dangers and, for some, it was too late. The U.S. must seize the opportunity now to end the abuse of shell companies and corporate anonymity in the interest of national security and for the protection of American citizens.


Peter Munro is an advocacy intern with the FACT Coalition.