An earlier version of this article was posted on Business & Human Rights Centre
The biggest vulnerability in the global anti-money laundering regime is the incorporation of anonymous shell companies. These opaque structures have a well-documented history of being used to undermine human rights and international security. They’re routinely used by a host of bad actors — including authoritarian dictators, human traffickers and illegal arms dealers — to pay and receive bribes in secrecy, evade detection from law enforcement and launder the proceeds of their crimes.
And the United States (US) is particularly vulnerable on this front. Experts at the World Bank and United Nations investigated 150 grand corruption cases over the past several decades — many of them involving authoritarian dictators — and found that roughly three-quarters of them utilized anonymous companies to launder their illicit funds, with US companies being the most common. In a UT-Austin and Brigham Young University study, researchers found the US was the easiest place for suspicious individuals to form an anonymous company to launder their proceeds with impunity.
According to the anti-human trafficking group Polaris, anonymous companies play an outsized role in hiding the identities of the criminals behind trafficking enterprises, specifically illicit massage businesses. Of the more than 6,000 illicit massage businesses for which Polaris found business records, only 28% have an actual person listed on the business registration records at all.
Viktor Bout, who’s been nick-named the “the Merchant of Death,” used a global network of anonymous shell companies, including at least 12 incorporated in Delaware, Florida and Texas, to disguise weapons trafficking into conflict zones around the world.
While we normally think of corporate secrecy being an issue for states like Delaware, Nevada, and Wyoming, a recent Global Financial Integrity report reveals that in all 50 states in the US, more personal information is needed to obtain a library card than is required to establish a company that can be used to facilitate money laundering, corruption and terror financing.
Fortunately — after more than a decade of debate and inaction — there is reason for optimism the days of abusing anonymous US companies may finally come to an end.
Over the past several years, the FACT Coalition and our allies have recruited a powerful alliance of ideologically-diverse constituencies to support legislation to end the incorporation of anonymous companies in the US. Supporters of reform, which would require companies to disclose their true owners at the point of formation and update that information upon any change, now include the national security community, police and prosecutors, banks and credit unions, CEOs, the real estate sector, small business owners, faith groups, anti-human trafficking groups, human rights organizations, global development NGOs, anti-corruption advocates, labor unions and conservative and liberal think tanks. Large business trade associations including the National Foreign Trade Council and the US Council for International Business are both in support. The US Chamber of Commerce was once opposed, but they made news over the summer by sending a letter of endorsement to the Senate.
The outgoing administration, led by Treasury Secretary Mnuchin, has been very supportive and even the State of Delaware is supportive. President-elect Biden is also in favor of beneficial ownership transparency (BOT). He called for passage of BOT legislation in essays in Foreign Affairs and Politico, and the 2020 Democratic party platform calls for “new transparency measures aimed at preventing illicit money from flowing through the American financial system, including a ban on anonymous shell companies, expansions of anti-money laundering requirements, disclosure of beneficial ownership and greater oversight of cross-border transactions.” The President-elect has already started appointing personnel who similarly support reform. For example, the incoming national security advisor, Jake Sullivan, is on-the-record in support of beneficial ownership transparency.
Thanks to this widespread, diverse and growing support, it’s now likely that the outgoing Congress will enact BOT legislation this December as part of the National Defense Authorization Act for Fiscal Year 2021. If this passes, the new Biden Treasury Department will be tasked with issuing implementing regulations within one year of enactment. Ensuring regulations are strong will require an organizing effort, but supporters of reform should find an ally in the Biden Administration.
Should the BOT legislation fail to pass this year, wide-spread, bipartisan support for reform should ensure that ending anonymous companies remains a top priority for the 117th Congress — regardless of whether Republicans or Democrats control the Senate.
In addition to BOT, President-elect Biden ran on a platform that endorsed stronger anti-money laundering (AML) rules. The incoming administration will also have the ability to unilaterally advance a number of administrative policies, both on BOT and AML reforms.
The FACT Coalition has compiled 15 pages of recommendations for the Biden Administration. Regarding BOT this includes:
- Mandating BOT and Legal Entity Identifiers for all federal contracts and grants;
- Initiating a rulemaking to make the Financial Crimes Enforcement Network’s (FinCEN) temporary geographic targeting orders (which already cover residential real estate transactions in 12 large US real estate markets like Miami and New York) nationwide, permanent and inclusive of commercial real estate; and
- Strengthening the definition of “beneficial owners” in FinCEN’s 2016 Customer Due Diligence rule for Financial Institutions.
The Treasury Department has broad authority to issue important anti-money laundering rules. AML options include:
- Finalizing the proposed Obama-era rule requiring investment advisers (including private equity and hedge funds) to establish AML programs;
- Ending the Treasury Department’s other “temporary” exemptions to the USA PATRIOT Act’s AML program requirements. In addition to investment advisers, this includes sellers of luxury vehicles and sellers of US real estate; and
- Convening a task force to modernize US AML strategies to address mobile payment systems.
Despite the uncertainty regarding Senate control, the next four years present many opportunities to advance human rights through key transparency and AML reforms. Let’s hope the incoming administration seizes them.