Guest Post: Evaluating the Personal Privacy Objections to Public Beneficial Ownership Registries

Today’s guest post is from Adriana Edmeades-Jones and Tom Walker of The Engine Room:

The abuse of anonymous companies to facilitate corruption, tax evasion, and other sorts of criminal activity has prompted reformers to call for corporations and other legal entities to provide governments with accurate information on the true (or “beneficial”) human owners of these companies. Transparency advocates have argued that governments should not only compile such beneficial ownership registries, but should make them public.Public beneficial ownership registries, according to their proponents, would increase the efficiency of financial investigations, ease the due diligence burden on companies investigating supply chains and corporate counterparties, and enable media civil society to scrutinize more effectively who owns and controls what among the global corporate elite. Opponents have advanced multiple objections to creating public beneficial ownership registries, including questions about their accuracy and effectiveness, as well as concerns about the effect on individual privacy, and the associated risks that such public registries could facilitate “identity theft, cybercrime, and blackmail.”

How seriously should we take the “personal privacy” objection to public beneficial ownership registries? In a new report, OpenOwnership, The Engine Room, and the B Team propose a framework to evaluate this issue, borrowing from the structured analysis of international human rights law. Crucially, under international human rights law not every interference with personal privacy qualifies as a violation of an individual’s privacy rights. A violation only arises if the interference with privacy lacks a legitimate justification. Determining whether an interference with privacy is justified, in turn, entails addressing three questions: (1) Is the interference lawful (that is, consistent with generally-accepted standards governing personal information)? (2) Is the interference necessary to advance some legitimate aim? (3) Is the degree of interference proportionate to the legitimate end sought?

Application of these three criteria in turn suggests that an appropriately-designed public beneficial ownership registry would not violate individual privacy rights: Continue reading

Are Legislative Changes to US AML Rules Finally on the Way? Some Thoughts on Tomorrow’s Subcommittee Hearing

Although the United States has been a leader in the fight against global corruption in some respects—particularly in its vigorous enforcement of the Foreign Corrupt Practices Act and, at least until recently, its diplomatic efforts—there is widespread agreement in the anticorruption community that the United States has not done nearly enough to address the flow of dirty money, much of it stolen by kleptocrats and their cronies, to and through the United States. Effectively addressing this problem requires updating the US legislative framework, a task made difficult by the checks and balances built into the federal legislative process, coupled with high levels of political polarization. Yet there are reasons for cautious optimism: Thanks in part to skillful lobbying efforts by several advocacy groups, and aided in part by the Democrats taking control of the House of Representatives in the most recent mid-term elections, it looks as if there’s a real chance that the current Congress may enact at least some significant reforms.

Three of the reform bills under consideration are the subject of a hearing to be held tomorrow (Wednesday, March 13, 2019) before the House Financial Services Committee’s Subcommittee on National Security, International Development, and Monetary Policy. That hearing will consider three draft bills: (1) a draft version of the “Corporate Transparency Act” (CTA); (2) the “Kleptocracy Asset Recovery Rewards Act” (KARRA); and (3) a draft bill that currently bears the unwieldy title “To make reforms of the Federal Bank Secrecy Act and anti-money laundering laws, and for other purposes” (which I’ll refer to as the Bank Secrecy Act (BSA) Amendments). The subcommittee’s memo explaining the three proposals is here, and for those who are interested, you can watch a live stream of the subcommittee hearing tomorrow at 2 pm (US East Coast time) here.

For what it’s worth, a few scattered thoughts on each of these proposals: Continue reading

Ownership Transparency Works: Geographic Targeting Orders in the US Real Estate Market

The anticorruption community, along with those concerned about tax evasion, fraud, and other forms of illicit activity, has made anonymous company reform a high priority on the reform agenda. It’s not hard to see why: Kleptocrats and their cronies, as well as other organized criminal groups, need to find ways to hide and launder their assets, and to do so in ways that are difficult for law enforcement authorities to trace. Moreover, those whose legitimate sources of income would be insufficient to obtain luxury assets would like to conceal their ownership of such assets, as the ownership itself could arouse suspicion, and might make the assets more vulnerable to forfeiture.

So-called “know-your-customer” (KYC) laws in the financial sector have made it much more difficult—though, alas, far from impossible—for account owners to conceal their identities from the banks and government overseers, at least in the US and most other OECD countries. But it is still far too easy for criminals to purchase substantial assets in wealthy countries like the United States while keeping their identities hidden. All the bad actor needs to do is, first, form a company in a jurisdiction that does not require the true owner of the company to be disclosed and verified to the government authorities, and, second, have this anonymous shell company purchase assets in a transaction that is not covered by KYC laws. Step one is, alas, still far too easy. Though we often associate the formation of these sorts of anonymous shell companies with “offshore” jurisdictions like the British Virgin Islands, in fact one can easily form an anonymous shell company in the United States. Step two, having the anonymous company purchase substantial assets without having to disclose the company’s owner, is a bit trickier, because you’d need to avoid the banking system. But you can get around this problem by having your anonymous company purchase assets with cash (or cash equivalents, like money orders or wire transfers), so long as no party to the transaction is under obligations, similar to those imposed on banks, to verify the company’s true owner.

One of the sectors where we’ve long had good reason to suspect this sort of abuse is common is real estate, especially high-end real estate. Though money laundering experts had long been aware of the problem, the issue got a boost from some great investigative journalism by the New York Times back in 2015. The NYT reporters managed to trace (with great effort, ingenuity, and patience) the true owners of luxury condos in one Manhattan building (the Time Warner Center), and found that a number of units were owned by shady characters who had attempted to conceal their identities by having shell companies make the purchases.

The US still hasn’t managed to pass legislation requiring verification of a company’s true owners as a condition of incorporation, which would be the most comprehensive solution to the anonymous company problem. Nor has the US taken the logical step of extending KYC laws to real estate agents across the board. But starting back in 2016, the US Treasury Department’s Financial Crimes Enforcement Network (known as FinCEN) took an important step toward cracking down on anonymous purchases of luxury real estate by issuing so-called Geographic Targeting Orders (GTOs). And thanks to some excellent research by the economists C. Sean Hundtofte and Ville Rantala (still unpublished but available in working paper form), we have strong evidence that many purchasers in the luxury real estate market have a strong interest in concealing their true identities, and that requiring verification of a company’s ultimate beneficial owners has a stunningly large negative effect on the frequency and aggregate magnitude of anonymous cash purchases. Continue reading

Will 2019 Be the Year the US Finally Passes Anonymous Company Reform? Not If the ABA Gets Its Way

It’s a new year, a new US Congress, and a new opportunity for the United States to take action to close some of the most glaring loopholes in its anticorruption and anti-money laundering (AML) framework. So far, Washington has been consumed with the government shutdown fight, along with early chatter about who might seek the Democratic nomination to challenge Trump for the presidency in 2020, such that there hasn’t yet been much coverage of what new legislation we might see emerging from this new Congress over the next two years. And to the extent there has been such discussion, it has tended to focus on initiatives—such as the Democrat-sponsored “anticorruption” bills that focus on lobbying, voting rights, and conflict-of-interest law reform—that, whatever their usefulness in shaping the debate and setting an agenda for the future, have virtually no chance of passing in the current Congress, given Republican control of the Senate and the White House. Indeed, many commenters assume that on a wide range of issues, political gridlock and polarization means that the new Congress is unlikely to accomplish much in the way of new legislation.

That may be true as a general matter, but there are a few areas—including some of particular interest to the anticorruption community—where the opportunity for genuine legislative reform may be quite high. Perhaps the most promising such opportunity is so-called anonymous company reform. Anonymous companies are corporations and other legal entities whose true “beneficial owners” are unknown and often hard to trace. (The registered owner is often another anonymous legal entity registered in another jurisdiction.) It’s no secret that anonymous companies are used to funnel bribes to public officials, to hide stolen assets, and to facilitate a whole range of other crimes, including tax evasion, fraud, drug trafficking, and human trafficking. And although in the popular imagination shady anonymous shell companies are associated (with some justification) with “offshore” jurisdictions, in fact the United States has one of the most lax regulatory regimes in this area, making it ridiculously easy for kleptocrats and others to use anonymous companies registered in the US to shield their assets and their activities from scrutiny.

Of course it’s possible for law enforcement agencies, armed with subpoena power and with the assistance—one hopes—with cooperative foreign partners and sympathetic courts can eventually figure out who really owns a company involved in illicit activity, doing so is arduous, time-consuming, and sometimes simply impossible. It would be much better if there were a central register of beneficial ownership information, with verification of the information the responsibility of those registering the companies and stiff penalties for filing inaccurate information. Indeed, one of the striking things about the debate over anonymous company reform is how little disagreement there seems to be among experts about the benefits of a centralized company ownership register. There’s still significant controversy over whether these ownership registers should be public (see, for example, the extended exchange on this blog here, here, here, here, and here). But even those who object to public registers of the sort the UK has created acknowledge, indeed emphasize, the importance of creating a confidential register that’s accessible to law enforcement agencies and financial institutions conducting due diligence. But the US doesn’t even have that.

There’s a chance this might finally change. Continue reading

Guest Post: To Be Effective, Public Company Ownership Registries Must Be Linked

Today’s guest post is from Louise Russell-Prywata, Program Manager at OpenOwnership, a global non-governmental organization that promotes greater corporate transparency by making it easier to publish and access data on company ownership.

Danske Bank’s Estonian branch appears to have enabled international money laundering on an enormous scale, with Danske Bank currently investigating  about $236 billion in suspicious transactions (including, but not limited to, the notorious “Azerbaijani Laundromat” in operation from 2012-2014). Yet while money laundering on this scale may be unusual, the mechanisms that allowed funds to flow undetected from countries such as Russia, through Danske Bank Estonia, and into jurisdictions including the UK, are quite familiar. One of the most important of these techniques is the use (and abuse) of anonymously-owned companies.

If we want to stem the tide of money laundering through corporate vehicles, then public registers of the every company’s “ultimate beneficial owners” (UBOs) are an important part of the solution. Publicly available information would decrease reliance on whistleblower allegations to uncover money laundering, and companies themselves would benefit by reducing the costs of due diligence. There has been significant progress to implement public UBO registers in some countries, including the UK and Ukraine, and several other countries have committed to adopting UBO registers in future. There is already some evidence that these registers can make a difference. For example, following the requirement for UBO disclosure for Scottish Limited Partnerships (SLPs), the number of new incorporations fell dramatically; this is encouraging, as SLPs have featured prominently in several grand corruption cases. However, the Danske Bank revelations highlight that the power of national registers in isolation is limited.

To effectively deter and detect corruption and money laundering, public UBO data from different countries needs to be linked in a manner that is useful for law enforcement, investigative journalists, and others. The data from different registers must be compatible, so that it would be possible, for example, to ascertain whether the Ms. Doe owning Doe Holdings Ltd. registered in the UK, is the same Ms. Doe owning Doe’s Ltd. in Cayman Islands. This is important because a money-laundering trail rarely leads neatly from source jurisdiction straight to a company whose UBO is listed in a public register. Criminals and their associates tend to create a complex chain of legal entities to hide the illicit origin of their funds. This was the case in the Azerbaijani Laundromat, for example. Linking together UBO information from different jurisdictions would make it far easier to “follow the money” in grand corruption and money laundering cases. While law enforcement in some cases have powers to do this now, in practice the process can be complex and expensive, and it is not easily possible to link information at scale. Continue reading

What, Besides Creating a New Court, Could the International Community Do To Fight Grand Corruption? A Partial List

Last week, Richard Goldstone and Robert Rotberg posted a response to Professor Alex Whiting’s critique of the proposal to create an International Anti-Corruption Court (IACC). Early in their response, Goldstone and Rotberg–both advocates for an IACC–remarked, a bit snarkily, that “[n]otably absent from [Professor Whiting’s] post is a description of what the other effective responses to combating grand corruption might be.”

That struck me as a bit of a cheap shot. Professor Whiting’s post offered a careful, thoughtful argument based on his experience and knowledge of the International Criminal Court (ICC) and similar tribunals, and not every such critical commentary on a given proposal must include a full-blown discussion of alternatives. Still, Goldstone and Rotberg’s implicit challenge to IACC skeptics to articulate alternative responses to grand corruption is worth taking seriously, for two reasons:

  • First, this seems to be a common rhetorical gambit by advocates for an IACC, or for other radical measures that critics deem impractical: Rather than answering and attempting to refute the critics’ specific objections directly, the move is to say, “Well, but this is a huge problem, and there’s no other way to solve it, so poking holes in this proposal is really just an excuse for inaction. This may seem like a long shot, but it’s the only option on the table.”
  • Second, and more charitably to those who make this point, grand corruption is indeed an enormous problem that needs to be addressed. And so even though not every critical commentary on a particular proposal needs to include a full-blown discussion of alternatives, those of us who (like me) are skeptical of deus-ex-machina-style responses to the grand corruption problem ought to make a more concerted effort to lay out an alternative vision for what can be done.

In this post I want to (briefly and incompletely) take up the implicit challenge posed by Goldstone and Rotbert (and, in other writings, by other IACC proponents). If the international community is serious about fighting corruption, what else could it do, besides creating a new international court and compelling all countries to join it and submit to its jurisdiction? When people like Professor Whiting (and I) suggest that lavishing time and attention on the IACC proposal might be a distraction from other, more effective approaches, what do we have in mind? What else could international civil society mobilize behind, besides something like an IACC, to address the problem of grand corruption?

Here are a few items on that agenda: Continue reading

Applying Anti-Money Laundering Reporting Obligations on Lawyers: The UK Experience

Anticorruption advocates and reformers have rightly been paying increased attention to the role of “gatekeepers”—bankers, attorneys, and other corporate service providers—in enabling kleptocrats or other bad actors to hide their assets and launder their wealth through the use of anonymous companies. An encouraging development on this front are the bills currently pending in the U.S. Congress that would require corporate formation agents to verify and file the identity of a registered company’s real (or “beneficial”) owners, and also would extend certain anti-money laundering (AML) rules, particularly those requiring the filing of suspicious activity reports (SARs) with the US Treasury, to these corporate formation agents.

Not everyone is thrilled. The organization legal profession, for example, is crying foul. American Bar Association (ABA) President Hilarie Bass wrote to Congress that the proposed expansion of SAR obligations to corporate formation agents, many of whom are attorneys or law firms, would compromise traditional duties of lawyer-client confidentiality and loyalty. As Matthew pointed out in a prior post, it’s not clear that this assertion is correct, as the proposed bills contain express exemptions for lawyers. But even putting that aside, it’s worth recognizing that applying SAR obligations to attorneys wouldn’t be unprecedented. Many European countries have had similar requirements in place since the early 2000s, when the European Commission issued directive 2001/97/EC, which required states to adopt legislation imposing obligations on non-financial professionals, including lawyers, to file suspicious transaction reports (STRs, essentially another term for SARs). As in the US right now, that aspect of the 2001 EC directive was extremely controversial. One EU Commission Staff Working Document went so far as to say it was “the most controversial element of the Directive” because it represented “a radical change to the principle of confidentiality that the legal profession has traditionally observed.” Some EU states and national bar associations launched an ultimately unsuccessful legal challenge to the requirement that attorneys file STRs, on the grounds that it violated the right of professional secrecy guaranteed by the Charter of Fundamental Rights of the European Union.

Yet in the end, the imposition of the STR obligations on lawyers does not seem to have radically altered the legal profession in Europe. Countries appear to have developed safeguards that preserve the essential aspects of attorney-client confidentiality, even while implementing the EC Directive. Consider, for example, how this all played out in the United Kingdom. Continue reading