The US could enact an anti-money-laundering update
If you’re a corrupt foreign official or drug trafficker, there’s a pretty easy way to protect your illicit cash: create an anonymous shell company.
You form a shell company — meaning a business that exists only on paper, with no employees, no products it makes or sells, no revenue, nothing except maybe a bank account and some assets — but you do it without disclosing your (the owner’s) real name, offering a convenient way to launder your money and evade law enforcement in the United States.
If signed into law, when someone opens a shell corporation, they’ll be required to provide the owner’s name and some basic identifying information. This simple step will give law enforcement and national security officials a powerful tool to crack down on corruption.
The NDAA, including this provision, passed with overwhelming support in Congress. Trump is threatening to veto the defense package, but the bill should have enough support in the House and the Senate to override a presidential veto.
To help understand more about what this new provision does and why it’s so important, I called up Clark Gascoigne, a senior policy adviser at the Financial Accountability and Corporate Transparency (FACT) Coalition, a nongovernmental organization that advocates against corrupt financial practices by promoting transparency and anti-money laundering policies.
“This is the biggest anti-money-laundering update that we’ve had in 20 years,” he told me.
Our conversation, edited for length and clarity, is below.
So can you explain — in really simple dummy terms — what this law actually does?
So in dummy terms, it will require that, when you form a company in the United States, you simply have to disclose the identity of the true human being who owns the company.
It asks for four readily available pieces of information: your name, address, date of birth, and an ID number, which could be a driver’s license or passport number. You disclose that to the Treasury Department.
And that’s it. That’s what it does. When you form the company, you disclose that, and then if you sell it or the company’s ownership changes, you have to update that with the Treasury Department. That’s it.
Okay, so, I’m thinking: If I wanted to start a business, of course I would have to give that information. But you’re telling me that’s not the case for all businesses?
So right now, in the United States — in fact, in every state in the country — you can set up an anonymous shell company. You can create a company without disclosing who the true owner is.
Some states ask for more information than other states, but no state actually asks for the person who ultimately owns the company. It could be a manager that needs to be listed. Some states require a registered agent of the company. There are some states that don’t even require a human being to be listed on the forms anywhere.
It’s a major problem for law enforcement and national security investigators as they’re pursuing criminal networks or national security threats. When they stumble across an anonymous shell company, they can’t figure out who is behind the company. They just hit this brick wall of corporate secrecy. And investigations often stall, and can, at times, be abandoned due to a lack of time and resources to be able to figure it out and continue to pursue the case.
So having this disclosure is going to be a critical reform that’ll allow investigators to actually follow the money trail.
I’m thinking, “Why would I want to form an anonymous company?” Maybe it’s because I want to do something that is not exactly aboveboard. Can you explain who, exactly, wants to open an anonymous shell company?
So I would state, first off, that there are many reasons to have a shell company if you want to hold assets. It’s the anonymity that this is going after. You can still incorporate shell companies after this, you just have to disclose who’s behind it to the government.
The reason that people oftentimes set these anonymous companies up is because they are looking at engaging in nefarious activity. There’s a pretty well-documented history of these anonymous companies being used to undermine various national security safeguards that we have, to hide bad actors and to launder proceeds for a wide variety of crimes.
Anywhere from North Korea setting up anonymous shell companies to evade sanctions on their nuclear proliferation financing to human traffickers who set up anonymous shell companies to own the illicit massage businesses they are operating through in order to stymie law enforcement from figuring out who the criminal kingpins are behind those shell companies.
Gotcha. And my understanding is the US has been a bit of an outlier here until now in allowing this practice. Is that right?
So there’s a number of studies and research that’s gone into this. There was a study a few years ago by some academics at the University of Texas, Brigham Young University, and [Australia’s] Griffith University, where they sent emails to corporate-formation companies in hundreds of different countries around the world, intentionally setting off red flags for terror financing, corruption, or drug-trafficking.
They actually found that the corporate formation agents in the United States were most likely to ignore the red flags and proceed with setting up the companies. There was one corporate-formation agent in Florida who responded saying, “This is clearly dirty money, it could possibly even be terror financing” — and then followed that by saying, “I wouldn’t even consider getting involved for less than $5,000 a month.” So totally willing to do it for a price.
There’s other studies, too. The World Bank and the United Nations took a look at 150 of the largest corruption cases over the past few decades and found that more than three-quarters of them utilize anonymous companies to launder their illicit funds, and US entities were the most common of those companies in those cases.
It seems the ease with which people could set up anonymous shell companies in the United States made some of the US’s foreign policy tools, particularly when it came to sanctions, somewhat ineffective. Is that a fair characterization?
I mean, without knowing who the beneficial owners of companies are, you can sanction any company you want, but a sanctioned individual can just set up another shell company anonymously. And that entity is not sanctioned, and they can just continue with business as usual. And this happens all the time. It’s like whack-a-mole.
Okay, so then this new law sounds pretty good, in that it’s very bad for people who want to launder money.
This is the biggest anti-money-laundering update that we’ve had in 20 years. It’s a big deal, and it plugs what most people in the national security and law enforcement community view as the biggest loophole in our anti-money-laundering system.
Are there are flaws in it?
This is, of course, a compromise, right? If I could have waved a magic wand, this is not the bill I would have written.
But it is a compromise with integrity. Most importantly, the definition of who is a “beneficial owner” in the bill is very strong and will truly identify the ultimate owners of the companies. That’s a big deal.
Now, it doesn’t solve all of our money-laundering problems. One big exemption in this is that while it applies to corporations, limited liability companies, it does not apply to trusts or partnerships.
Partnerships are generally considered lower risk, but trusts are a major issue, particularly because the vast majority of trusts in the United States don’t actually register with their legal contracts.
So you will still be able to set up a trust that could potentially be abused for money laundering after this. That’s something that we’re going to have to take a look at. There are studies that the Government Accountability Office and Treasury Department are going to have to do on the risks posed by trusts. The bill mandates those studies, and hopefully we’ll be able to address that down the road.
There’s also some concerns around pooled investment vehicles, like hedge funds and private equity funds, that are operated or advised by a registered investment adviser. Law enforcement will be able to tie the fund to the investment adviser, and they’ll know the beneficial ownership information for the investment adviser, but they won’t know it for the fund itself.
There is a big concern around that because you’ve got trillions of dollars in money going into these private pooled investment funds that could potentially pose some risk for money laundering.
When it comes to those pooled investments, just to make sure I’m understanding this: So if I have dirty money, and I am putting it into this fund with a lot of other investments, it basically muddies the waters. You know who’s managing the fund, but you have no way to pull out each investment, correct?
Gotcha. Okay, so is this law retroactive? If you already have an anonymous shell company, must you now register? Or does it all begin once the law goes into effect?
It applies both to new companies formed after this law, as well as to existing companies.
The Treasury Department will have one year to issue final rules spelling out exactly how this will be implemented, at which point new companies will immediately have to start reporting their ownership information. There will be a two-year grace period, though, for existing companies to come into compliance.
So why now? You say this is the biggest update to the US’s anti-money-laundering regime in 20 years, but what was the impetus in Congress to actually agree on this right now?
You know, the last update to our anti-money-laundering laws was included in the US Patriot Act back after 9/11. There was a clear reaction to the terror attacks on 9/11 that led to the updates in our anti-money-laundering laws at that time.
We don’t have anything similar to that right now. However, there has been a growing understanding of the strategic threats that anonymous shell companies posed to our national security, as well as to legitimate commerce, which has led to an increased level of support from various interest groups, in addition to prior opponents reversing their opposition and endorsing reforms.
A decade ago, opposition came from interest groups like the US Chamber of Commerce, and secretaries of state particularly in Delaware, Nevada, and Wyoming. Fast-forward a few years, and the secretary of state of Delaware endorsed the bill in 2018, and the US Chamber of Commerce just endorsed reform this summer.
I would say a big turning point in that started around 2016 when the Panama Papers were released. The International Consortium of Investigative Journalists, a sort of pan-journalistic investigative collaborative effort for hundreds of news outlets around the world, published stories that dominated news headlines at the time, after they received a leak of millions of documents relating to individuals who’d been setting up anonymous shell companies to engage in all sorts of unscrupulous activity.
It also coincided with us, the FACT Coalition, reaching out to banking trade associations, because we thought, you know, banks have all these anti-money-laundering responsibilities, they need to know who’s opening accounts with them, wouldn’t it be better if the government collected this and then they could check a database? Wouldn’t that save them some money?
In August of 2016, the Clearing House Association, which has since merged and become the Bank Policy Institute, endorsed the bills, and that was the first major business trade group to endorse the bills. Pretty soon thereafter, the rest of the banking and credit union trade associations came on board. That was really a turning point, as it opened the door for additional business groups to also sign on and support.
So you just had a growing chorus of support among the business community, a reversal of opposition from the state secretaries of state, as well as a growing chorus of support in the national security community, which started, I’d say, after Russia invaded Crimea.
Folks in the national security community started taking a closer look at sanctions, asking, “How do you enforce sanctions? Can we actually enforce them if people are setting up these anonymous shell companies? Are Russia and China using corruption as a form of foreign policy to undermine our national security?”
There was a growing awareness that they were. That snowballed to the point where you’ve got hundreds of national security scholars from Republican and Democratic administrations alike calling for transparency. It was a mix of a few things. But those are the most notable.
What do you think will be the immediate impact of this legislation?
It’s going to take a couple years to implement, so it’s going to take a few years to start collecting information and making it available to investigators here at home.
But on immediate impact, there’s a recent op-ed in the Toronto Star where anti-corruption advocates in Canada are pushing the Canadian government to address their problem there with anonymous shell companies.
The biggest sticking point in Canada to collecting the information on the true owners of companies was the fact that the US didn’t do it, and they didn’t want to get too far out ahead of the United States. Now that we’ve moved forward, folks in Canada are saying their government had been waiting for us, and they’re now likely to follow suit.
I’ve also been in discussions with diplomats at the State Department for years who feel like they’ve had their hands tied behind their backs when they’re going overseas, talking to places like Singapore and Dubai about collecting this information and getting money laundering issues in their countries in check. Because those officials in Singapore and Dubai officials will just point the fingers back at us and say, “You guys are the worst at anonymous shell companies. How can you tell us that we need to figure out the situation when you don’t even do it yourself?”
Now that we’ve passed this bill, that we’re moving forward and implementing it, it allows our diplomats to go around the world and to truly push some of the seedier financial hubs around the world to clean up their act. That has just as big of an impact, if not probably a larger impact, than us collecting this information here in the United States.