USA: Nowhere Left to Hide for Owners of Shell Companies

Questionable owners of anonymous shell companies may face a much harder time hiding their dirty money in the U.S. in the future.

That’s all thanks to the 2021 defense authorization bill passed by the U.S. Senate this week with an overwhelming 84-13 vote.

The historic bill includes a much overdue provision that would require companies to identify their actual owners when they register in the U.S. This historic approval is a victory for law enforcement, compliance officers, and anti-corruption groups that have long campaigned for more transparent measures to trace illicit money flows.

What is this bill?

The real owner identification rules (known in legal & compliance jargon as “beneficial ownership rules”) are part of The Corporate Transparency Act, which was included in the National Defense Authorization Act (NDAA). The NDAA is a broad annual defense authorization bill that sets spending for defense operations and national-security programs. The NDAA has successfully passed Congress every year for the last 59 years.

Legislators also introduced in the NDAA two separate legislation pieces tackling money laundering in 2020. The Anti Money-Laundering Act of 2020, introduced in the House of Representatives in June. Its equivalent in the Senate – the Illicit Cash Act – was introduced in September. Elements of both bills are being incorporated as an amendment to the NDAA.

Negotiators saw fit to include these elements in the 2021 defense spending bill to close existing gaps in U.S. laws that enable corrupt officials, criminals, and terrorists to launder their money in the U.S. The inclusion of anti-money laundering provisions into the NDAA highlights the extent to which illicit finance is viewed as an issue endangering U.S. National Security.

Why is the passing of this bill so important?

As per Global Financial Integrity, a think-tank specialized in analyzing illicit financial flows, creating a shell company in the U.S. is easier than obtaining a library card.

Many companies registered in the U.S. aren’t currently under any federal obligation to identify their true owner. In fact, in many states, company owners are enabled to obscure their identities by establishing complex corporate structures or through agents who register companies on their behalf.

When one thinks of an offshore haven, one imagines more exotic places such as Belize or the British Virgin Islands. Thanks to its remarkably opaque and lax anonymous shell company industry, the U.S. is the world’s largest offshore haven. States like Delaware, Nevada, or Wyoming, which pioneered the anonymous LLC have attracted business from some of the most questionable individuals. The Tax Justice Network  ranks the U.S. second in the world for global financial secrecy. You will find the U.S. comfortably niched somewhere between the Cayman Islands at the top of the list and Switzerland in third place.

What happens when you combine corporate secrecy, quick and easy corporate set-up, and a lax regulatory regime? The answer is hundreds of thousands of shell companies whose physical presence is little more than a P.O. box. Sounds familiar? The Panama Papers (also available in a more entertaining Netflix movie version, The Laundromat), or The Paradise Papers may ring a bell.

Why are anonymous shell companies problematic?

Firstly, let’s emphasize that not all shell companies are used for nefarious purposes; there are some legitimate uses for these entities (i.e., holding companies). But unfortunately, more often than not, shell companies are used to conceal illicit activities by some questionable individuals.

Unfortunately, shell companies are the financial and deception vehicle of choice for some of the most corrupt, dangerous, and ruthless individuals and entities in the world (arms dealers, drug dealers, corrupt politicians, fraudsters, terrorists, cybercriminals, sanction evaders, to name a few).

Shell companies do not conduct any business activities. They are set up solely to hold assets on a person’s behalf. Examples of assets include shares in a company, real estate, luxury assets such as private jets & yachts, “vanity assets” such as artwork, or cash. They are often set up in secrecy jurisdictions— and surprisingly also in the U.S.

Beneficial ownership is a topic that presents significant challenges to compliance officers and law enforcement charged with untangling complex webs of shell companies that span multiple international jurisdictions and ownership structures.

These anonymous companies are purposefully set up in complex layers of ownership incorporated across several international tax havens, secrecy jurisdictions, and free zones to enhance their obscurity. They are created in incomprehensible structures where subsidiaries seemingly own parent companies, controlled themselves by nominee directors appointed by shareholders registered in tax havens. The more shell companies are placed between an asset and its ultimate beneficiary, the harder it is to trace—making it difficult if not impossible to impose taxes or sanctions, levy fines for illegal behavior, or award damages from court rulings.

While the U.S. has pioneered brilliant ways to defend itself against foreign havens, it had not seriously addressed its role in attracting illicit financial flows –until now, that is.

So what shall we expect next?

1- First, the bill is headed to the Presidential desk for President Trump’s signature. While Trump had mentioned he would veto the bill over separate issues unrelated to these anti-money-laundering rules, the Senate vote exceeded the two-thirds majority needed to override his veto.

2- If the bill is approved, the U.S. Treasury Department will have a year to issue regulations detailing which companies would need to comply and how. But from what we know from The Corporate Transparency Act certain new and existing small corporations and limited liability companies (LLCs) will be required to disclose information about their beneficial owners.

A beneficial owner is defined as an individual who:

• exercises substantial control over a corporation or LLC,
• owns 25% or more of the interest in a corporation or LLC, or
• receives substantial economic benefits from the assets of a corporation or LLC.

3- Once the regulations are implemented, these companies will be obligated to immediately file the beneficial owner’s details (such as name, birth date, address, and a government-issued I.D. number) with the Financial Crimes Enforcement Network (FinCEN) which will maintain a Federal Beneficial Ownership Register. Existing companies would be given two years to comply. Companies would only have to update the information when there is a change in ownership.

Civil penalties and criminal penalties—a fine, a prison term for up to three years, or both—for providing false or fraudulent beneficial ownership information or for willfully failing to provide complete or updated beneficial ownership information are provisioned to that effect.

4- States would develop ways to collect and report the information to FinCEN when an entity is created and registered. This information would be kept in the FinCEN register. It won’t be available to the public, but federal law enforcement would have access to the data. Financial institutions would have access with customer consent.

Noteworthy: many companies would be exempt. Publicly listed companies and firms that are regulated by the federal government wouldn’t have to report. Nor would companies with more than 20 full-time employees, $5 million in annual sales, and a physical place of business.

Challenges ahead.

While evidence shows that beneficial ownership registers have essential roles to play in assisting in the detection and prosecution of money laundering cases by law enforcement, greater corporate transparency is not a guaranteed outcome based on the registers’ existence alone.

Implementing beneficial ownership corporate registers in other countries has come with a fair deal of challenges ( lack of a verification process for the information provided, data accuracy, etc.)
However, intuitively, criminals are less likely to engage in financial crime if information about the entities they use to move money and their relationship to those entities are publicly available. Criminals are also less likely to use shell companies if they know that these registers are used by law enforcement agencies.
Advances in beneficial ownership transparency are likely to make life difficult for those seeking to use anonymous companies to hide illicit activity.

Therefore, the corrupt are likely to look for countries with higher risk appetite and more corporate secrecy, so it is critical to ensure a global level playing field.

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