Brilliant or burdensome? Key points in the US beneficial ownership debate
02 Jul 2018

The subject of revealing the details of the beneficial or true owners of firms is becoming increasingly important in the fight against financial crime and the criminal aspects of corporate secrecy.

In the United States, hopes have been high for the new Counter Terrorism and Illicit Finance Act currently before Congress, but those hopes appear likely to be dashed after the removal of a crucial passage from the latest draft of the bill.

Introduced by Republican representatives Steve Pearce and Blaine Luetkemeyer, the bill could have marked the most significant reform to the US’s Bank Secrecy Act since the PATRIOT Act in 2001.

A key component of the bill was the proposal to require new corporations or limited liability companies to submit a list of beneficial owners to the federal Financial Crimes Enforcement Network (FinCEN), including names, addresses and passport or driver’s license numbers.

For existing companies, the same regulations would apply two years after the act came into force.

Under the draft bill, the information would have been used to create a national database of beneficial ownership.

The database was intended to be accessible to federal agencies with criminal subpoenas or acting on behalf of law enforcement of a foreign country.

With customer consent, the database would also have been accessible by financial institutions in compliance with existing laws.

The day before the original draft bill was scheduled for markup, however, a new draft was sent to Congress.
Crucially, the passages involving the proposed beneficial ownership changes have been completely stripped from the bill.

Instead, the new draft simply requires the Comptroller General to submit a report evaluating the effectiveness of the collection of beneficial ownership information.

An appropriate balance

The original draft of the bill had received bipartisan support, with both Republican and Democrat senators speaking out in favour of the proposed new beneficial ownership regime.

It seemed some regarded it as a brilliant concept.

The Secretary of State of Delaware (a state sometimes accused of acting as an onshore tax haven) also penned a letter in support of the proposal, saying that “the draft bill strikes an appropriate balance to assist law enforcement and help financial institutions meet their obligations under the Bank Secrecy Act, while maintaining critical safeguards to limit who may access information collected by FinCEN.”

Financial services organisations, law enforcement agencies, civil society organisations, industry bodies and even the CEOs of major companies like Allianz, Dow Chemical and Unilever all offered public support for the changes to beneficial ownership laws.

In a joint letter in January, 12 banking industry bodies expressed their support for the changes, noting that “currently, the lack of a beneficial ownership requirement allows criminals, money launderers, kleptocrats, and terrorist financiers, to obscure their identities from law enforcement… We are pleased to see this easily exploited loophole addressed in the draft bill. The provision is an important reason why we support the bill… ”

The organisations also expressed their hope that the new legislation would reduce customer due diligence compliance burdens for small businesses.

“Burdensome and intrusive”

Compared to the broad base of public support for the proposed beneficial ownership regime, opponents of the scheme were more difficult to pin down.

This is perhaps not surprising – those who do not want their names to be publicly associated with their companies are equally unlikely to want their names on a press release about how they don’t want their names associated with their companies, but it seems a safe assumption that a considerable amount of lobbying may be taking place behind the scenes.

One of the relatively few voices speaking out publicly against the changes is Heritage Action, a think-tank with ties to the Koch brothers, which accused the draft legislation of “creating a new class of up to one million inadvertent felons.”

The powerful American Bar Association put up perhaps the most significant public opposition to beneficial ownership changes, on the basis that it would impose “burdensome and intrusive new reporting requirements” on lawyers and small businesses.

The ABA also claimed that the new reporting requirements “would actually weaken the federal government’s current anti-money laundering and counter-terrorist financing tools.”

Weakening US AML

Law enforcement agencies and anti-corruption civil society groups disagree, and have hit back strongly against the decision to strip the beneficial ownership changes from the latest draft of the bill.

Mark Hays, head of the anti-money laundering team at international NGO Global Witness, said that “Criminals and corrupt officials around the world will be cheering Congressional Republicans this week.

“The facts are clear: terrorists, corrupt politicians and gangsters use anonymous companies to launder their cash and threaten the US’s national security.

“Instead of tackling this challenge head on, House Republicans have introduced a bill that could weaken US anti-money laundering efforts for years to come.”

The president of the National Fraternal Order of Police went even further, saying that “Law enforcement has been telling Congress that we need this information [about beneficial ownership] for years and to waste this opportunity to include a provision which will have an immediate impact on current and future investigations is almost criminal.”

He called on Congress members to reject the new draft of the bill, saying that “Simply put, this bill does nothing to counter terrorism or illicit finance because the law enforcement component – the collection of beneficial ownership information – has been removed.

“This means there is no reason for the FOP – or any law enforcement organization for that matter – to support the current draft of this now ill-named bill.”

The bill, which also includes a number of other provisions including raising reporting thresholds for suspicious activity reports and currency transaction reports, is currently referred to the House Committee on Financial Services.

After $500m HSBC suspicious activity report, money laundering probe widens

About the article author: Melbourne-based Elise Thomas has a background in international affairs and a strong interest in financial crime, data and technology issues.

 

 

 

Read more:

EU outlines its position on beneficial ownership, virtual currencies

Cayman islands accuses UK of “apparent double standard” on registers, considers legal action

Banking: CBA fined $700m, had compliance failings for 770,000 accounts

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