Last Thursday, two United States cabinet departments – the Department of the Treasury and the Department of Justice – issued separate but thematically related announcements (see here and here) regarding new initiatives to combat corruption, money laundering, and related malfeasance:
- Treasury announced the finalization of a new Customer Due Diligence (CDD) rule (discussed previously on this blog), which would require that financial institutions collect and verify the personal information of the beneficial owners of accounts held at those institutions. Treasury also announced a proposal for new regulations that would require certain foreign-owned entities (single-member limited liability companies (LLC)) to obtain a tax ID number and report comply with the associated reporting requirements—a move that would close a loophole that currently allows these entities to shield the foreign owners of non-U.S. assets.
- Treasury also announced that it plans to send draft legislation to Congress (the text of which does not yet seem to be publicly available) that would require companies to know and report accurate beneficial ownership information at the time of a company’s creation, and to file this information with the Treasury Department.
- Justice also submitted proposed legislation to Congress that would give the Department new investigative powers (including the use of administrative subpoenas, rather than slower and less flexible grand jury subpoenas, for money laundering investigations, enhanced authority to access foreign bank and business records, and the ability to restrain property based on a request from a foreign country for 90 rather than 30 days). The draft legislation would also creating a mechanism to use and protect classified information in civil asset recovery cases, and would expand the scope of the money laundering offense to include, as a sufficient predicate offense, any violation of foreign law that would be a violation of U.S. law if committed in the United States.
I have not yet had time to review the final CCD rule or the proposed LLC rule, and as I noted above, I don’t think the full text of the legislative proposals is yet available. So I’m not yet in a position to comment on the substance, but at least on the surface, all this seems encouraging. It’s possible to take the cynical view that most of this doesn’t mean very much or represent genuine progress. And I’ll admit part of me is inclined to embrace the cynical view. But on the whole, I do think that last week’s announcements are genuinely encouraging, and signal the possibility of building greater political momentum for real progress.
First, though, the reasons for cynicism:
- With the exception of the CDD rule, neither the Treasury announcement nor the Justice announcement concerns any actual policy change. To be fair, the proposed LLC rule does represent the beginning of a process that’s likely to result in a final rule of some kind. But the more sweeping proposed changes take the form of proposed legislation to Congress. And the odds of Congress acting on any of these proposals any time soon—in an election year, with Congress controlled by a Republican party that is extraordinarily hostile to any policy initiatives from the sitting President—is vanishingly small. So, a cynic might be inclined to dismiss these announcements as cheap talk.
- A cynic might further note that the timing of the announcement—barely a month after the bombshell release of the Panama Papers, and a week before the London Anticorruption Summit (a gathering of senior government officials from around the world, including Secretary of State John Kerry representing the United States)—suggests that these announcements are more about burnishing the U.S. image, and helping to deflect criticism that the U.S. isn’t doing enough to address the extent to which the U.S. financial system and U.S. corporate secrecy laws help to facilitate corruption and money laundering.
- Speaking of which, it may be worth noting that although the CDD rule has been portrayed in some of the media coverage as a reaction to the Panama Papers, that rule has actually been in the works since 2014, and to the best of my knowledge the final rule was not all that different from—or stronger than—the original proposal, a fact that has already attracted pointed criticism from Transparency International’s US chapter. And while the proposed rule on foreign LLCs may do some good by closing a loophole, a cynic might further suggest that the fact that this is the only other regulatory proposal included in the Treasury announcement is more a cause for disappointment than celebration.
OK, so those are all the reasons for cynicism. And there’s something to be said for being cynical here, and for holding the U.S. government’s feet to the fire at this week’s London Summit and elsewhere. We shouldn’t be jumping for joy and congratulating the United States for finalizing a relatively modest, long-in-the-works regulatory improvement and making some dead-on-arrival proposals to Congress. But I don’t think we should be overly cynical either. The fact that the U.S. government issued these announcements is both a positive sign for the activists who have been pushing these issues, and a foundation on which to build:
- With respect to the former, even if these particular proposals are mostly “cheap talk,” rather than real progress, it’s telling and encouraging that the U.S. government felt impelled to try to show that it is taking these issues seriously. Remember, these issues—beneficial ownership due diligence, limits on corporate secrecy, etc.—that weren’t even on the radar screen in a serious way ten years ago.
- Moreover, even if these particular legislative initiatives don’t pass in the current Congress, the fact that they’re out there, on the table, and that the administration has made them a higher priority, increases the chances that in future legislative sessions, some version of these legislative proposals might move ahead, at least if Hillary Clinton wins the White House (and especially if the Democrats retake the Senate). Continued Republican control of the House of Representatives may pose a problem, given that the financial industry and business lobbying groups like the U.S. Chamber of Commerce are likely to oppose some of the most important proposed legislative reforms. And of course, if Donald Trump wins the White House, all bets are off. (If that comes to pass, lack of beneficial ownership transparency might be the least of our worries). Assuming no Trumpocalypse, if activists keep up the pressure and keep these issues alive, and find ways to effectively counter the resistance by business and finance interests, I think there’s a good chance that some kind of legislative reform on this issue may be in the offing—perhaps not now, but maybe within the next 4-5 years.
So let’s not be too naïve: Last week’s announcements are not an indication of significant U.S. policy change. But let’s not be too cynical, either: Those announcements are a positive sign that the campaign for cracking down on the ability of kleptocrats and others to hide their assets in the U.S. is having an effect, and with sustained effort could lead to genuine reform.