Guest Post: The U.S. Just Created a Public Beneficial Ownership Registry for a Subset of Companies

Today’s guest post is from Neil Gordon, a Senior Researcher at the Project On Government Oversight (POGO).

Companies with anonymous ownership structures are a serious global problem. Anonymous companies, as readers of this blog are likely well aware, play a significant role in facilitating grand corruption. Anonymous companies are associated with a wide range of other criminal misconduct as well. Unfortunately, the United States bears much of the blame for the proliferation of anonymous shell companies and the harm they cause. Most states make it relatively easy to set up a business without revealing the real owners—even easier than getting a library card, according to the anticorruption think tank Global Financial Integrity. That’s why it was so important that Congress finally enacted two key corporate transparency provisions as part of the fiscal year 2021 National Defense Authorization Act (NDAA).

The first provision, the Corporate Transparency Act (CTA), requires most companies to register their beneficial owners—the people who really own, control, and financially benefit from the company—with the Treasury Department’s Financial Crimes Enforcement Network. This provision received a great deal of media coverage, and rightly so. But the second key beneficial ownership transparency provision in the NDAA has received almost no attention, even though it could be a real game-changer. That second provision can be found in Section 885 of the NDAA. Section 885 requires all companies receiving federal contracts or grants over $500,000 to report their beneficial owners in the Federal Awardee Performance and Integrity Information System (FAPIIS), a database containing the misconduct and performance histories of federal contractors and grantees. Continue reading

New Podcast, Featuring Gary Kalman

A new episode of KickBack: The Global Anticorruption Podcast is now available. In this week’s episode, we’re delighted to welcome back to the podcast Gary Kalman, the Director of Transparency International’s United States office. I was fortunate to be able to interview Gary a little over one year ago, just before he stepped into his new role as TI’s U.S. Director. In our more recent conversation, we had the opportunity to discuss how his first year in this position has gone, touching on some major successes–most notably the passage of the Corporate Transparency Act, which requires companies to provide the government with information on their true beneficial owners–as well as ongoing challenges. Gary discusses some of the advocacy strategies that proved effective on the corporate transparency issues, and suggests how similar strategies might be deployed to advance other aspects of the anticorruption agenda. He also lays out what he sees as the highest priorities for TI’s advocacy work in the United States, and what vulnerabilities have been exposed by the experience with the Trump Administration and how those might be addressed. You can also find both this episode and an archive of prior episodes at the following locations: KickBack is a collaborative effort between GAB and the ICRN. If you like it, please subscribe/follow, and tell all your friends! And if you have suggestions for voices you’d like to hear on the podcast, just send me a message and let me know.

Guest Post: Trump’s Pardons and Putin’s Palace Show Why Biden Must Tackle Corruption at Home and Abroad

Today’s guest post is from Joe Powell, the Deputy Chief Executive Officer for the Open Government Partnership.

The corruption continued to the end. A cast of convicted fraudsters, tax dodgers, and money launderers littered President Trump’s final pardon list. One clemency went to Elliott Broidy, a former top fundraiser for Mr. Trump who had been implicated in illegal lobbying in connection with Malaysia’s multi-billion dollar 1MDB embezzlement scandal. Trump’s final official act as President, taken minutes before the official transfer of power, was to pardon the tax evading ex-husband of one his favorite Fox News hosts, Jeanine Pirro.

None of this was remotely surprising after four years in which ethics, conflict of interest, and the rule of law did not seem to apply to the executive branch of the U.S. government. Contrast this with the extraordinary act of bravery from Russian opposition leader Alexey Navalny, who despite being jailed on his return to Moscow after his near-fatal poisoning, released a viral documentary last week about the construction of President Putin’s palace on the Black Sea. The film, which within days had racked up nearly 100 million views, details the corruption, bribery, and opaque corporate structures used to fund what Navalny claims is the world’s most expensive real estate project, with an estimated price tag of at least $1.4 billion. The funds come from Putin’s oligarch friends who dominate the top positions in many of Russia’s biggest companies, and drain state resources that could improve the lives of ordinary Russians. A single gold toilet brush and toilet paper holder, purchased for one of Putin’s wineries near the palace, cost more than the average annual state pension in Russia. No wonder Putin is so desperate to silence Navalny.

What ties Trump’s pardons and Putin’s palace together is the insidious effect of corruption on democracy. Globally, corruption has been one of the main drivers of 14 years of consecutive decline in civil and political liberties around the world. This democratic recession has affected long-standing and emerging democracies alike, and has spurred street protests and civil society campaigns in many countries. Hungary is a textbook example. Prime Minister Orbán has used state funds for patronage, ensuring that only close supporters receive high value government contracts, and threatening to veto the European Union budget over any checks on his power. Throughout the world, dark money has increasingly fueled online disinformation and a decline in press freedom, which has made accountability harder to achieve.

To turn the tide on this democratic backsliding, a major global effort to combat corruption is needed. President Biden is well placed to help lead the charge. Continue reading

A Few Thoughts on the Passage of the U.S. Corporate Transparency Act

[Note: I drafted the post below earlier this week, before yesterday’s shocking events in the U.S. Capitol. I mention this only because it might otherwise seem odd, and perhaps a bit tone-deaf, to publish a commentary on new corporate transparency rules when we just saw an attempted insurrection incited by the siting U.S. President. I don’t really have anything to say about the latter events (at least nothing that others haven’t already said), so I decided to go ahead and publish the post I planned to publish today anyway.]

Last week, as I suspect many readers of this blog are well aware, the United States Congress enacted one of the most significant anticorruption/anti-money laundering (AML) reforms in a generation. The Corporate Transparency Act (CTA), which was incorporated as part of the annual National Defense Authorization Act (NDAA), will require—for the first time in the United States—that corporations, limited liability companies, and similar entities will have to provide the U.S. government (specifically, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN)) with the identities of the ultimate beneficial owners of those entities. That beneficial ownership information, though not made publicly available, will be provided to law enforcement agencies, as well as to financial institutions conducting due diligence (with customer consent). This reform will make it substantially harder for kleptocrats and their cronies—as well as other criminals, including human traffickers and terrorists—to conceal and launder their assets in the United States through anonymous shell companies, and will make it substantially easier for law enforcement to “follow the money” when investigating possible criminal activity.

This important reform has already gotten a ton of coverage in the anticorruption/AML community (see here, here, here, and here), as well as the mainstream media (see here, here, here, and here), though mainstream coverage has understandably been overshadowed by both the coronavirus pandemic and President Trump’s attempts to subvert the recent election. And we’ve had quite a bit of discussion of the issue on GAB prior to the passage of the NDAA (see, for example, here, here, here, here, and here). So, I’m not sure I really have that much to add to what others have already said. Nevertheless, it felt strange to allow this landmark event to go entirely undiscussed on GAB, so at the risk of self-indulgence, I’d like to throw out a few additional thoughts and observations related to the CTA. Continue reading

Guest Post: Anonymous Companies Are Undermining Mexico’s Public Health

Today’s guest post is by Miguel Ángel Gómez Jácome, the Communications Coordinator at the Mexican civil society organization Impunidad Cero (Zero Impunity).

The COVID-19 pandemic has already affected millions of people. (As of the time this piece was initially drafted, around 2 million people had been infected; the exponential spread of the virus means that by the time this piece is published, that number is likely to be much higher.) And while Mexico has not yet been as severely impacted as other countries, official statistics (which likely understate the true prevalence) already report thousands of infections and hundreds of deaths. To confront this problem, Mexico, like other countries, will need to marshal its resources effectively. Unfortunately, though, Mexico’s ability to manage the COVID-19 epidemic is threatened by Mexico’s epidemic of embezzlement in the health sector, much of it facilitated by anonymous shell companies. This widespread corruption drains away vital public resources needed to combat public health emergencies like the COVID-19 pandemic.

In March 2020, two civil society organizations (Justicia Justa (Just Justice) and Impunidad Cero (Zero Impunity)), documented the extent of the problem in a research report entitled Fake Invoices: The Health Sector Epidemic. The research found that between 2014 and 2019, 837 shell companies issued 22,933 fake invoices to 90 health institutions across the country (in 30 of Mexico’s 32 states, as well as the federal government), ultimately embezzling a total of over 4 billion pesos (roughly $176 million US dollars) from the health sector—an amount that could have paid for around 80,000 hospital beds or between 3,400 and 6,900 ventilators. (To put this in context, Mexico currently has 5,000 ventilators in the whole country, and the government is looking to acquire 5,000 more.) And the problem is only getting bigger: According to Mexico’s Tax Administration authority (the SAT), the number of anonymous shell companies in the country has increased from 111 in 2014 to over 9,000 in 2020.

To crack down on the abuse of shell companies to embezzle public funds from the health sector (as well as other sectors), the authors of the Fake Invoices report propose three responses: Continue reading

New Podcast, Featuring Gary Kalman

A new episode of KickBack: The Global Anticorruption Podcast is now available. In this episode, I interview Gary Kalman, formerly (and at the time of the interview) the Executive Director of the FACT Coalition, and now the Director of the U.S. Office of Transparency International. The first part of our conversation focuses on the work Mr. Kalman did at the FACT Coalition on the push for new U.S. legislation to crack down on anonymous companies. We also discuss his vision, and top priorities, for Transparency International’s new U.S. office.

You can find this episode, along with links to previous podcast episodes, at the following locations:

KickBack is a collaborative effort between GAB and the ICRN. If you like it, please subscribe/follow, and tell all your friends! And if you have suggestions for voices you’d like to hear on the podcast, just send me a message and let me know.

Guest Post: Expert Interviews on Corruption Control in Latin America

Today’s guest post is from Columbia University Professor Paul Lagunes, who this year is also a Visiting Fellow at Rice University’s Baker Institute for Public Policy:

Elections in Latin America are freer and fairer than they used to be, and, with rare exceptions, political power in the region is no longer monopolized by a single individual, junta, or party. From Chile to Mexico, legal reforms have promoted higher levels of government transparency and citizen participation. But in spite of these improvements, the region continues to grapple with systemic corruption. Not only are individuals asked to pay bribes by lower-level government officials, but scandals such as Lava Jato (“Car Wash”) in Brazil, La Estafa Maestra (“The Master Fraud”) in Mexico, and La Línea (“The Line”) in Guatemala have revealed grand corruption at the most senior levels, making the fight against corruption a top priority for the region.

Prompted by these concerns, I contributed to organizing a conference at Rice University’s Baker Institute for Public Policy on corruption control in Latin America, which has already been featured (with links to the conference videos) on this blog. Some of the conference panelists stayed long enough that we were able to interview them about their important work. Tony Payan, my colleague at the Baker Institute and an expert on U.S.-Mexico border issues, agreed to conduct the interviews.

The videos of these interviews are now publicly available, and are well worth viewing for those interested in hearing a diverse range of perspectives on the corruption challenges currently facing Latin America. In this post I will provide links to the interviews as well as a brief summary of their content. (There’s also an online website, where you can find all the interviews, here.) Continue reading

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