08 Dec 2016
Since the ratification of the Patriot Act after the September 11 attacks in 2001, the United States has led the way in the aggressive prosecution of financial crime. All of the ten largest bank settlements ever—ranging from $1.5 billion to $16.7 billion, for alleged crimes including the financing of terrorism, sanctions busting, anti-money laundering failures and the facilitation of tax evasion—have involved the U.S. authorities.
Aided by the status of the U.S. Dollar as the world’s de facto reserve currency, the United States also frequently extends its jurisdiction extra-territorially. In June 2014 French bank BNP Paribas agreed to pay a record fine of $8.9 billion to U.S. prosecutors. The sum was to settle allegations that the bank processed thousands of transactions through the U.S. financial system on behalf of clients in Iran, Cuba and Sudan, in breach of international trade sanctions. More recently, a non-U.S. national was arrested on a family trip to Disney World in Florida, for operating a money service business in Turkey and the UAE that moved money between foreign bank accounts for Iranian entities. His business took place entirely outside of the U.S. and was legal where it occurred. The only link to the United States was that some transactions were dollar-denominated and therefore passed through correspondent banking accounts in the U.S.
A report by the Financial Action Task Force (“FATF”) and the Asia Pacific Group (“APG”), released this month, found that United States “has a comprehensive legal and institutional framework for investigating and prosecuting money laundering and terrorist financing offenses” and “vigorously pursues, seizes and confiscates the assets of criminals involved in money-laundering and terrorist financing”.
But the U.S. is vulnerable to accusations of double standards. Despite aggressively pursuing financial crime abroad and posturing on the international stage about the importance of tax compliance and terrorist financing prevention, in U.S. States such as Delaware, Wyoming and Nevada it is possible to establish a company quickly, cheaply and with almost complete anonymity.[i] In Wyoming, the company will pay no State income tax, no franchise tax, and minimal annual fees. Stockholders are not revealed to the State and shareholders can be nominees. In Nevada, no tax information at all is shared with the IRS.
While many offshore jurisdictions are making gradual improvements to corporate transparency—the British Virgin and Turks and Caicos Islands, for example, recently agreed to keep registers of beneficial ownership—there has been something of a race to the bottom amongst certain U.S. States in the level of opacity their legal entities offer. It is notable in contrast to the general tone of the report, which points to significant progress since the previous assessment in 2006, that concern is raised about “Lack of timely access to adequate, accurate and current beneficial ownership information” which “remains one of the fundamental gaps in the U.S. context.” The regulation of legal entities is the only FATF Immediate Outcome for which the U.S. is rated as having a low level of effectiveness.
The report estimates that 30 million companies and other legal persons exist in the U.S. and that 2 million more are created each year. Law Enforcement and Federal authorities have a fairly good understanding of the risks that opaque legal entities, particularly when grouped into complex structures, can present. But the same is not always true of the State authorities who oversee their creation and operation. Federal rather than State authorities are responsible for the U.S.’s anti-money laundering and terrorist financing regimes, so States consider their role in the formation of legal entities to be essentially administrative and do not feel that they have a significant part to play in preventing the criminal misuse of those entities. The report finds measures for preventing such misuse ‘generally inadequate’.
Opaque legal entities are vulnerable to abuse in various ways. According to FATF their most common criminal application in the U.S. is small scale laundering money: a shell company might be used, for example, to illicitly blend the proceeds of criminal activity with legitimate income. But the perceived global credibility of the U.S. makes its legal entities useful tools for a much wider range of criminal activity, including financing terrorism, breaking international sanctions and laundering the proceeds of large scale organised crime such as drug trafficking and modern slavery. They can also facilitate various kinds of fraud, including healthcare fraud, which is estimated to cost the U.S. Government $80 billion a year.
Law Enforcement Agencies and Federal authorities have fairly comprehensive powers to access information, but these are of limited use when little is collected in the first place. Unless entities are listed on a U.S. stock exchange, beneficial ownership information is often either unavailable or takes a lengthy and expensive investigation to unearth.
Various efforts have been made at Federal level to improve matters, including the introduction of more stringent due diligence requirements for financial firms and casinos, but none have been particularly successful. Some of the deficiencies are clearly attributable to the quirks of the Federal system but this may be something of a blind. Legislation such as Frank Dodd, SOX and the aforementioned Patriot Act demonstrate that when there is political will, the U.S. is well capable of imposing radical developments in regulation from the top down. FATF make seven recommendations for reducing the vulnerability of U.S. legal entities to criminal abuse, all of which centre on ensuring that beneficial ownership information is available to investigating authorities in a timely manner. None of the recommendations would be especially difficult to implement—although it is fair to say that the current political environment is not conducive to new regulation. Nonetheless, until improvements are made the opacity of U.S. legal entities will remain a major flaw in an otherwise impressive financial crime prevention regime.
Amos Wittenberg – Editor, KYC360
[i] Delaware, Wyoming and Nevada are the most notorious States for offering corporate anonymity, although they have taken some small steps to raise awareness about potential criminal abuse.
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