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Anonymous Companies and Dirty Money: What Congress Can Do

Nate Sibley

The anonymous ownership of shell companies might sound like a problem for accountants—but in fact it underpins and exacerbates many of the most serious threats to U.S. national security. As key states, law enforcement, military leaders, the financial industry, and small businesses all call for urgent action, Congress has a chance to close this dangerous loophole for good—but a new anti-money laundering bill is looking more like a missed opportunity.

Because the United States still allows individuals to own legal entities, transfer funds, and control assets with total secrecy, it has become an increasingly attractive jurisdiction for criminals with dirty cash to hide. American companies have been used to launder money by the same bad actors who are shooting at American troops; plotting terror attacks against American citizens; stealing American aid and development funds; selling dangerous narcotics that destroy so many American lives; running real estate scams that gut American communities; and trafficking vulnerable women through American brothels.

Despite a highly aggressive anti-money laundering stance, U.S. law enforcement agencies are often unable to pursue these criminals through the global financial system because, thanks to the anonymity loophole, there is no way to identify or locate criminal assets. The U.S. Treasury is likewise unable to issue credible sanctions while the United States itself remains one of the easiest places to circumvent them. Perhaps the most alarming example of this was Iran’s use of anonymous companies to purchase an entire skyscraper on New York’s Fifth Avenue; it controlled the building without detection for 22 years. And given that the problem here is total secrecy, the worst examples are probably those that we haven’t even heard about.

To its credit, the Treasury has done what it can in the absence of congressional action, passing temporary measures known as Geographic Targeting Orders. These require title insurance agents to disclose the beneficial ownership of companies involved in luxury real estate deals in certain high-risk jurisdictions (one-third were found to have previously triggered Suspicious Activity Reports). Treasury has also issued a Customer Due Diligence (CDD) rule which requires financial institutions to identify the true identities of new customers. But ultimately, these are targeted, piecemeal, and stop-gap measures which are not designed to address the full scale of the problem, meanwhile piling more responsibility and bureaucracy on the private sector. Only Congress can deliver a comprehensive legislative solution.

By mandating the introduction of a beneficial ownership register and ending corporate anonymity, Congress could severely diminish many of the financial threats facing the United States—and with them, the need for such heavy-handed regulation. Beneficial ownership transparency should be viewed not as the imposition of additional burdens, but the chance to sweep away the awkward piecemeal system imposed in its absence. Ending corporate secrecy is the cornerstone on which a leaner, meaner anti-money laundering regime can be built—one that not only equips American law enforcement to meet the challenges of a globalized economy, but empowers American businesses to take advantage of it.

A beneficial ownership register would bring the United States into line with its international commitments and steps already taken by its allies, and provide the moral and operational platform necessary to pressure other countries to clean up their acts. This is hardly a controversial idea—indeed, the United Kingdom recently adopted a central beneficial ownership register with no major issues, and EU member states are doing the same. Meanwhile, the United States languishes at the bottom of global financial transparency ratings with the likes of Switzerland and the Cayman Islands.

In the United States itself, support for ending anonymous companies has grown into powerful, broad-based movement, including law enforcement and senior military officers; all the major banks and a majority of small businesses; and think-tanks and NGOs from across the political spectrum. Even the State of Delaware, hitherto America’s most notorious financial secrecy jurisdiction, has openly backed beneficial ownership transparency in a letter to Congress.

The emergence of such a broad coalition is partly due to the pervasiveness of the problem, but also because the solutions being proposed are not too intrusive. It is important to distinguish between total anonymity and reasonable expectations of privacy, for example. The solutions being proposed have nothing to do with radical transparency or ending “shell” companies, which are necessary for a whole range of legitimate business activities. Nor is the question of a publicly accessible register being mooted in the U.S.—it would likely be accessible to law enforcement only.

It is therefore profoundly disappointing that, far from prioritizing the end of corporate anonymity, the Counter Terrorism and Illicit Finance bill being marked up by the House Financial Services Committee this week does not include plans for a beneficial ownership register. The bill does require a report—in two years’ time—on the efficacy of the CDD rule (mentioned above), apparently as a dry-run for possible future beneficial ownership reform. But the CDD rule is a targeted stop-gap measure introduced in lieu of comprehensive legislation. It cannot yield the kind of data on which any future decisions should be based—and in any case, what more evidence of the need to act can Congress possibly require?

Congress must urgently begin the complicated process of reforming the U.S. anti-money laundering system so that it is fit for the 21st century. As a first step, ending anonymous ownership of U.S. companies is the surest route to defunding the kleptocrats, terrorists, drug dealers, human traffickers, and other criminals who wreak havoc and misery on communities throughout the United States and worldwide.

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