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

Is the Kleptocracy Initiative Worth It?: A Tentative Yes

The New York Times ran a very nice piece last week (with a GAB mention!) about the U.S. Department of Justice’s Kleptocracy Asset Recovery Initiative, and its ongoing efforts to seize foreign assets held by corrupt foreign leaders (and their cronies) in the United States. We’ve already had a lot of blog commentary on some of the issues associated with the Kleptocracy Initiative (see here, here, here, here, and here). But I wanted to pause for a moment to consider a question raised in the NYT piece: Is the effort worthwhile, given its resource costs and the relatively modest successes to date? The answer is not obvious; as Rick (quoted in the article) put it: “In terms of really helping the global anticorruption struggle, I wonder if this is the highest use of resources.” (Rick further suggests that the DOJ’s resources would be better spent on assisting countries pursuing their own anticorruption and asset recovery cases.)

Rick is right to raise these questions about the Kleptocracy Initiative—but my instincts are different from his. Even if it is the case, as the NYT reports, that the DOJ has so far only been able to recover around 8% of the assets it has gone after under the Kleptocracy Initiative, this still strikes me as a good use of DOJ resources. Here’s why: Continue reading

(Why) Is the Walmart Case Taking So Long?

So this might not be the most important question in the world, but I’ve been wondering why the U.S. Government’s investigation into Walmart’s alleged violations of the Foreign Corrupt Practices Act (or, more accurately, FCPA violations committed by Wal-Mart’s Mexican subsidiary, Walmex) has yet to produce a final settlement.

A quick and somewhat simplified recap (for those among our readers who don’t obsessively follow every FCPA case in the pipeline): In April 2012, two New York Times reporters broke a blockbuster story about how Wal-Mex had been systematically paying bribes to scores of Mexican officials to get permits for new stores (often circumventing local environmental protection and historical preservation regulations in the process), and—perhaps even more damningly—about how Walmart’s senior leadership, upon learning of the bribery allegations from an internal whistleblower and preliminary internal investigation, had decided to cover up the problem and reject its own compliance department’s calls for a thorough investigation. (Walmart tried to get out in front of the story by including a disclosure of possible FCPA problems in its December 2011 FCPA filing, though that disclosure downplayed the seriousness of the issue.) The original New York Times story, along with a follow-up story published in April 2012, netted the two reporters a Pulitzer Prize. Those reports, along with Walmart’s December 2011 disclosure, prompted the Department of Justice Securities & Exchange Commission to begin investigating Walmart for FCPA violations.

That was back in April 2012. It’s now three and a half years later, and there’s still no resolution of the case; the investigation is still ongoing—something that has prompted grumbling in some quarters about both the length and cost of the investigation (see here and here). Why is this taking so long?

This is a question I’ve heard several people raise at various conferences and meetings. I don’t have any good answers, but I thought I’d throw out a few hypotheses: Continue reading

More Flagrant Abuse of CPI Numbers by People and Outlets that Should Know Better

As regular readers of this blog know, I’ve been (figuratively) pounding my fists on the table for a while now about various misuses and misinterpretations of Transparency International’s Corruption Perceptions Index (CPI), particularly in the context of misleading year-to-year comparisons (see here, here, here, here, here, and here). Perhaps I’m overemphasizing a relatively small issue, but it seems that the problem just won’t go away.

Case in point: A piece in last Friday’s New York Times by Carol Giacomo – a member of the New York Timeseditorial board – on recent developments in Indonesia. Most of the piece is a perfectly fine discussion of recent troubling events involving conflict between the Indonesian anticorruption agency (the KPK) and the Indonesian police.  But near the end, in discussing the broader implications of recent events for anticorruption efforts in Indonesia, Ms. Giacomo writes:

Transparency International, which annually rates countries on corruption in their public sectors, says Indonesia has improved its performance on the organization’s “corruption perception index” from 1.9 in 2003 to 34 in 2014[.]

Almost everything about that statement is flawed. Continue reading