Tag Archives: beneficial ownership

In the Excitement of the New, Let’s Not Neglect the Tried and True

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In my two posts last week (here and here), I attempted to go through all of the 41 country statements submitted by the participants in the London Anticorruption Summit held earlier this month, to see what those statements had to say about four specific issue areas highlighted by the Summit’s joint Communique: (1) accessibility (and possibly transparency) of beneficial ownership information for companies and other legal entities, (2) public procurement transparency, (3) independence, effectiveness, and transparency of national audit institutions, and (4) whistleblower protection (and encouragement). I didn’t originally intend to say much more about this, other than putting the information out there for others to examine, but on writing up the summaries, I was struck by the following observation:

Of the four issue areas I picked out–all of which, again, were prominently featured in the Communique–I would characterize two (beneficial ownership and, to a somewhat lesser extent, procurement transparency) as relatively “new” topics that have generated a lot of excitement. (This is clearly the case for beneficial ownership; public procurement transparency has been on the agenda for much longer, though I put it in this category because a lot of the focus of discussion in this area has been on relatively new initiatives like e-procurement and the Open Contracting Data Standard.) The other two issues I chose to highlight–independent and competent audits of government programs, and adequate protection of (and, preferably, affirmative encouragement for) whistleblowers–have been part of the conversation for considerably longer, though that doesn’t mean we’ve yet seen anywhere near as much movement on either of those issues as we’d like. And, compared to the newness and (relative) sexiness of topics like beneficial ownership registries and e-procurement initiatives, whistleblower protection and audits seem a bit humdrum. (Audits especially. Even I get bored when I hear the word “audit,” and I happen to think they’re really important.)

The thing that struck me, when going through the country statements, was the dramatic lopsidedness of the attention lavished on beneficial ownership and procurement transparency (to say nothing of other topics I didn’t cover, like corruption in sports and improved asset recovery mechanisms), compared to the relative neglect of country commitments in the areas of improving national audit institutions and whistleblower protections. Continue reading →

London Anticorruption Summit–Country Commitment Scorecard, Part 2

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This post is the second half of my attempt to summarize the commitments (or lack thereof) in the country statements of the 41 countries that attended last week’s London Anticorruption Summit, in four areas highlighted by the Summit’s final Communique:

  1. Increasing access to information on the true beneficial owners of companies, and possibly other legal entities, perhaps through central registers;
  2. Increasing transparency in public procurement;
  3. Strengthening the independence and capacity of national audit institutions, and publicizing audit results (and, more generally, increasing fiscal transparency in other ways); and
  4. Encouraging whistleblowers, strengthening their protection from various forms or retaliation, and developing systems to ensure that law enforcement takes prompt action in response to whistleblower complaints.

These are not the only subjects covered by the Communique and discussed in the country statements. (Other topics include improving asset recovery mechanisms, facilitating more international cooperation and information sharing, joining new initiatives to fight corruption in sports, improving transparency in the extractive sector through initiatives like the Extractive Industries Transparency Initiative, additional measures to fight tax evasion, and several others.) I chose these four partly because they seemed to me of particular importance, and partly because the Communique’s discussion of these four areas seemed particularly focused on prompting substantive legal changes, rather than general improvements in existing mechanisms.

Plenty of others have already provided useful comprehensive assessments of what the country commitments did and did not achieve. My hope is that presenting the results of the rather tedious exercise of going through each country statement one by one for the language on these four issues, and presenting the results in summary form, will be helpful to others out there who want to try to get a sense of how the individual country commitments do or don’t match up against the recommendations in the Communique. My last post covered Afghanistan–Malta; today’s post covers the remaining country statements, Mexico–United States: Continue reading →

London Anticorruption Summit–Country Commitment Scorecard, Part 1

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Well, between the ICIJ release of the searchable Panama Papers/Offshore Leaks database, the impeachment of President Rousseff in Brazil, and the London Anticorruption Summit, last week was quite a busy week in the world of anticorruption. There’s far too much to write about, and I’ve barely had time to process it all, but let me try to start off by focusing a bit more on the London Summit. I know a lot of our readers have been following it closely (and many participated), but quickly: The Summit was an initiative by David Cameron’s government, which brought together leaders and senior government representatives from over 40 countries to discuss how to move forward in the fight against global corruption. Some had very high hopes for the Summit, others dismissed it as a feel-good political symbolism, and others were somewhere in between.

Prime Minister Cameron stirred things up a bit right before the Summit started by referring to two of the countries in attendance – Afghanistan and Nigeria – as “fantastically corrupt,” but the kerfuffle surrounding that alleged gaffe has already received more than its fair share of media attention, so I won’t say more about it here, except that it calls to mind the American political commentator Michael Kinsley’s old chestnut about how the definition of a “gaffe” is when a politician accidentally tells the truth.) I’m going to instead focus on the main documents coming out of the Summit: The joint Communique issued by the Summit participants, and the individual country statements. There’s already been a lot of early reaction to the Communique—some fairly upbeat, some quite critical (see, for example, here, here, here, and here). A lot of the Communique employs fairly general language, and a lot of it focuses on things like strengthening enforcement of existing laws, improving international cooperation and information exchange, supporting existing institutions and conventions, and exploring the creation of new mechanisms. All that is fine, and some of it might actually turn out to be consequential, but to my mind the most interesting parts of the Communique are those that explicitly announce that intention of the participating governments to take pro-transparency measures in four specific areas:

  1. Gathering more information on the true beneficial owners of companies (and possibly other legal entities, like trusts), perhaps through a central public registry—which might be available only to law enforcement, or which might be made available to the general public (see Communique paragraph 4).
  2. Increasing transparency in public contracting, including making public procurement open by default, and providing usable and timely open data on public contracting activities (see Communique paragraph 9). (There’s actually a bit of an ambiguity here. When the Communique calls for public procurement to be “open by default,” it could be referring to greater transparency, or it could be calling for the use of open bidding processes to increase competition. Given the surrounding context, it appears that the former meaning was intended. The thrust of the recommendation seems to be increasing procurement transparency rather than increasing procurement competition.)
  3. Increasing budget transparency through the strengthening of genuinely independent supreme audit institutions, and the publication of these institutions’ findings (see Communique paragraph 10).
  4. Strengthening protections for whistleblowers and doing more to ensure that credible whistleblower reports prompt follow-up action from law enforcement (see Communique paragraph 13).

Again, that’s far from all that’s included in the Communique. But these four action areas struck me as (a) consequential, and (b) among the parts of the Communique that called for relatively concrete new substantive action at the domestic level. So, I thought it might be a useful (if somewhat tedious) exercise to go through each of the 41 country statements to see what each of the Summit participants had to say in each of these four areas. This is certainly not a complete “report card,” despite the title of this post, but perhaps it might be a helpful start for others out there who are interested in doing an assessment of the extent of actual country commitments on some of the main action items laid out in the Communique. So, here goes: a country-by-country, topic-by-topic, quick-and-dirty summary of what the Summit participants declared or promised with respect to each of these issues. (Because this is so long, I’m going to break the post into two parts. Today I’ll give the info for Afghanistan–Malta, and Thursday’s post will give the info for Mexico–United States). Continue reading →

The U.S. Government’s New Anticorruption Proposals: A Cause for Cynicism, Optimism, or Both?

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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: Continue reading →

Big Data and Anticorruption: A Great Fit

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There is no shortage of buzz about Big Data in the anticorruption world. It’s everywhere — from public efforts like Transparency International’s public procurement analysis to cutting-edge private-sector FCPA compliance programs implemented by Ernst & Young. TI has blogged about Big Data and corruption, with titles like “Can Big Data Solve the World’s Problems, Including Corruption?” and “The Potential of Fighting Corruption Through Data Mining.” Ernst & Young’s conclusion is more definite: “Anti-Corruption Compliance Now Requires Big Data Analytics.”

In previous posts, contributors to this blog have written about how the anticorruption community was excited about social media-style apps (“crowdsourcing”) in anticorruption efforts. Apps like iPaidABribe allow citizens to report their encounters with corrupt officials, generating a fertile data set for anticorruption activists. Big Data is a related effort: activists can mine huge amounts of data for patterns that reveal corrupt activity, making it a powerful tool for transparency. However, as the name suggests, Big Data requires massive amounts of data in order to be useful.The anticorruption community should throw its weight behind proposals to open up data sets for Big Data analysis. As with crowdsourced anticorruption efforts, the excitement surrounding Big Data could quickly turn into disappointment unless this tool can be integrated into the broader anticorruption effort. Continue reading →

When Transparency Isn’t the Answer: Beneficial Ownership in High-End Real Estate

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Earlier this month Transparency International UK published a report entitled “Corruption on Your Doorstep: How Corrupt Capital Is Used to Buy Property in the UK.” The Britain-specific recommendations are part of TI’s broader “Unmask the Corrupt” campaign, a call by TI, and echoed by others, to establish public registries of beneficial ownership. A similar call to unveil the individuals behind the shell corporations used to buy luxury condos in Manhattan garnered a lot of attention stateside during last month’s New York Times “Towers of Secrecy” series on the city’s high-end property market (see here, here, here, here, here, and here). The anticorruption rationale for mandating disclosure of real property beneficial ownership seems straightforward: As both the TI-UK report and the NYT series argue, buying real property in New York and London is an appealing way to launder stolen funds, because high-end real estate purchases allow a corrupt actor to inject millions of dollars into the legitimate market without having to deal with pesky anti-money laundering regulations, completing the purchases through shell companies that disguise the true beneficial owner. Requiring public disclosure of the beneficial owners of real property would in theory have two related benefits: First, requiring purchasers to reveal beneficial ownership information up front would dissuade some from using real property as a means of laundering money, and second, if law enforcement authorities have ready access to this information, it will make it easier to instigate and conduct investigations, as well as to seize assets later on.

Indeed, transparency in real property beneficial ownership seems like the kind of thing all anticorruption advocates should support, which is why it may seem a little counterintuitive when I say TI and others are taking the wrong tack. Pushing for central public registries of beneficial ownership of real property will not likely achieve the two objectives, and may have serious drawbacks. Here’s why: Continue reading →

Guest Post: Global Shell Games — Experimenting with Untraceable Shell Companies

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GAB is delighted to welcome back guest contributor Professor Jason Sharman of Griffith University, Australia, who contributes the following post:

Among the various mechanisms for hiding and laundering large sums of money associated with corruption, shell companies that cannot be linked with their real owners have proved one of the most troublesome. A 2011 Stolen Asset Recovery Initiative report on laundering the proceeds of grand corruption noted that from a total of 213 cases, 150 involved the use of shell companies (or, more rarely, trusts) to launder $56.4 billion. Since 2003, all those governments bound by the standards of the Financial Action Task Force (FATF) have promised to ensure timely access to information on identity of those owning shell companies, and FATF rates member countries according to their compliance and the overall level of risk they present. Despite (or perhaps because of) a renewed stress on tracing shell companies’ beneficial (i.e. real) owners, most recently at the G20 leaders’ summit in my home state of Brisbane, there are good reasons to be skeptical about whether the standards are really enforced.

Frustrated with the poor measurement of policy effectiveness in this area, Michael Findley, Daniel Nielson, and I decided to try a new approach. We ran a real-world experiment to see whether corporate service providers would comply with the rules on client screening, particularly in cases where the client profile raised “red flags.” Our findings, reported in our book Global Shell Games, were both worrying and counter-intuitive. Continue reading →

Transparency International’s Laudable Campaign for Beneficial Ownership Transparency

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As many readers of this blog are likely aware, Transparency International–the leading worldwide anticorruption NGO–has made the corporate secrecy problem a centerpiece of its “Unmask the Corrupt” campaign. TI is focusing in particular on the problem of shell companies whose true (or “beneficial”) owners are unknown, and which can be used by corrupt officials and businesspeople to shelter and launder stolen public funds. The TI Secretariat, along with several of TI’s national chapters, have been pushing for action at both the national and international level, especially for reforms that would make transparent the beneficial owners of these companies. I wanted to use this post as an opportunity to call attention to two of TI’s recent efforts in this area, which might be of interest to GAB readers:

  • First, the TI Secretariat wants to use the G20 leaders’ summit this weekend in Brisbane, Australia as an opportunity to raise awareness of the issue and to put pressure on the G20 leaders to commit to take action on this issue. To this end, TI organized an open letter, signed by a number of prominent civil society activists and other public figures (including John Githongo, Desmond Tutu, and Richard Goldstone), calling on the G20 leaders to outlaw secret company ownership and mandate public registries of the true beneficial owners of all legal entities.
  • Second, as I noted last month, the US government is currently in the midst of a rulemaking process to strengthen due diligence and disclosure requirements on beneficial ownership. TI-USA submitted a set of supportive but critical comments on the rule, urging the US Treasury Department to expand the definition of “beneficial owner” to include individuals who control the entities through means other than a formal management position, to apply the new rules apply to existing accounts as well as new accounts, and to require financial institutions not only to verify the identity of the (alleged) beneficial owner, but to independently verify that the person listed as the beneficial owner is in fact the true beneficial owner.

TI’s efforts in this direction are most welcome, and I hope they have some impact on the G20 summit and the development of new rules in the US (and elsewhere). I’m happy to take this this opportunity to publicize TI’s efforts, and I hope some of our readers out there might be able to contribute to the push that TI and other organizations are making on this issue.

U.S. Treasury Department Is Soliciting Comments on New Anti-Money Laundering Rule

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A quick public service announcement:

The Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department is seeking public comments on a proposed rule that is intended to make it harder to hade the proceeds of corruption (or other criminal activities, like drug trafficking) in the U.S. financial system. The full text of the proposed rule is here. That proposed rule is fairly lengthy and complicated (taking up close to 20 pages in the Federal Register, in 3-column small print), but the basic gist of the rule is that it would impose new “know-your-customer” obligations on U.S. financial institutions, and in particular would require banks to identify the “beneficial owner” — the actual person (human person, not corporate person) who benefits from an account owned by an artificial legal entity.

I’m not an expert in this area, but this strikes me as a very good idea. Some supporters, though, have argued that the rule does not go far enough. Global Witness, in a useful post summarizing and discussing the proposed rule, points out some of the deficiencies of the proposed rule, including the fact that although the rule requires financial institutions verify the identify the beneficial owner of an account — that is, to attach the account to a real live human being — the rule does not require banks to independently verify that the listed beneficial owner is in fact the real beneficial owner.

The Treasury Department, following standard procedures under U.S. Administrative law, is seeking pubic comments on the rule. Comments can be submitted in hardcopy, but can also be submitted online. Just go to the regulations.gov site, and in the “search” field type FINCEN-2014-0001. That should take you to the docket, where you can view the rule, read the comments that have already been submitted online (very few so far), and submit any comments of your own.  (A direct link to the docket is here, but I included the above instructions because the direct links to dockets sometimes stop working.) The notice of the proposed rule also lists specific questions and issues that the FinCEN would like commenters to address. Among other things, FinCEN seeks comments on:

  • The proposed definitions of “beneficial owner” and “legal entity customer,” as well as the proposed exemptions (and possible additional exemptions);
  • Whether the rule should apply retroactively to existing accounts, or only to accounts established after the new rule goes into effect;
  • Whether the proposed processes for verification of beneficial owners, updating of beneficial ownership information, and ongoing monitoring of suspicious transactions are sufficiently clear and appropriate.

Comments are due by midnight on October 3rd.