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Bill Waite Contributing Editor

Shruti J. Shah Contributing Editor

Russell A. Stamets Contributing Editor

Richard Bistrong Contributing Editor 

Eric Carlson Contributing Editor

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Wednesday
Apr112018

Shruti Shah: Growing bipartisan interest in beneficial ownership transparency

I have written several times in the past about how anonymous/shell companies facilitate corruption and limit the ability of investigators to hold corrupt officials accountable. I have also been critical of the limited progress in the United States on this front. 

However, this is slowly changing.

The Financial Crimes Enforcement Network (FinCEN) recently renewed Geographic Targeting Orders (GTOs) that temporarily require U.S. title insurance companies to identify the natural persons behind shell companies that pay “all cash” for high-end residential real estate in select markets. This is the third time the GTOs have been extended. The new FinCEN rules regarding customer due diligence requirements which requires financial institutions to identify and verify the identity of beneficial owners of legal entity customers come into effect in May 2018.

There are six bills in Congress addressing anonymous companies. While bipartisan legislation requiring incorporation transparency has been proposed in each session of Congress since 2008, it has never become law. This has the potential to change in 2018. Even in Congress, one can sense increased interest in a bipartisan transparency issue which has national security implications.

In addition to the six bills, another not-yet introduced bill is being considered by the House Financial Services Committee - the Counter Terrorism and Illicit Finance Act. Section 9 of this draft, discusses transparent incorporation practices. In comments that the Coalition for Integrity filed in December 2017, we strongly supported a strong definition for beneficial owner currently contained in the proposal.

We believe that increased attention -- and hopefully action -- to curtail use of anonymous companies is growing for national security reasons. In addition to use by kleptocrats and organized crime for hiding stolen assets, anonymous companies allow foreign interests to interfere in U.S. elections through social media and political action committees, which are not required to disclose their contributors.

The issue came up yesterday when Facebook's CEO admitted before a joint session of the Senate commerce and judiciary committees that shell corporations could get around Facebook’s newly installed policy of requiring location verification for groups purchasing political ads on their network. Shell companies also provide a mechanism for terrorist organizations to launder money that can then be used to benefit their illegitimate causes.

The United States makes it easy for criminals, terrorists and those looking to interfere in U.S. politics. Every year, over two million corporations, LLCs, and other business entities are formed in the United States -- with many states collecting less information from the individuals forming these entities than from people applying for a public library card.   

We are encouraged by the House Committee on Financial Services’ interest in requiring transparency of the beneficial owners of companies and strengthening U.S. anti-money laundering laws to counter terrorism and illicit finance. The provision already has substantial support from non- profit organizations and law enforcement groups. The American Bar Association and the Chamber of Commerce remain opposed to incorporation transparency legislation though we are encouraged by individual ABA members speaking out  in favor of increased transparency.   

There is also increasing support from the private sector for efforts to increase ownership transparency. The Clearing House Association, BAFT (the Bankers Association for Finance and Trade), the Institute of International Bankers, and the Institute of International Finance support beneficial ownership transparency legislation, as do 27 institutional investors, representing more than $855 billion in assets under management. CEOs of Allianz, The Dow Chemical Group, Kering Group, Salesforce, Unilever, and Virgin Group have also voiced support for company ownership transparency. Internationally, Brazilian cosmetics company, Natura Cosmeticos, and global consumer goods company, Unilever are leading by example and have released the details of their company ownership on their websites.

A poll released earlier this month found that 84 percent of the small business owners surveyed said the use of shell (anonymous) companies to win contracts reserved for small businesses is a problem. The survey results indicate that these small business owners do not believe that ownership disclosure would place a burden on their business.

It is not surprising to see private sector interest on this issue. Transparency is key to fair competition and knowing who you are doing business with is important for managing supply chain risks. At a time when American credibility on anti-corruption is at stake, it is commendable to see the private sector stepping up. 

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Shruti Shah, pictured above, is a contributing editor of the FCPA Blog. She's the Vice President of Programs and Operations at Coalition for Integrity (formerly Transparency International-USA). She can be contacted here.