We are all familiar with the maxim “There’s no such thing as a free lunch,” but a sticking point is who will foot the bill when one side has to put up the money.
The issue of who pays for compliance is taking on added urgency with new financial regulations to fight money laundering and foreign corruption through increased transparency set to take effect in May. Complying with these rules, it turns out, is not a cheap proposition, and the banks want to shift at least some of those added costs to the federal government.
The new rules from the Treasury Department’s Financial Crimes Enforcement Network will require banks, credit unions, mutual funds, and securities and commodities brokers to undertake greater due diligence into the ownership of corporate shells — usually limited liability companies or partnerships created under state law — when they open accounts. The purpose is to identify who is putting up the money, beyond just the names that appear on the formal documents but have no real connection to the assets.
The problem of shielding an owner’s identity through a corporate facade has been especially acute in expensive real estate transactions. An article in USA Today showed that President Donald Trump’s companies sold more than $35 million (Dh128.55 million) in property last year, mostly to shell companies. The New York Times reported that many condominiums on the billionaires’ row of residential towers in Manhattan were purchased through limited liability companies that hide the identities of the owners, many of whom are foreigners.
Attorney-client privilege
Attorneys have played a crucial role in this process, relying on the attorney-client privilege to help maintain the veil of secrecy surrounding shell companies. A report by Global Witness in 2016 highlighted the willingness of some New York City lawyers to help a potential client hide purportedly tainted assets in the United States.
Figuring out who owns these shell companies has been a long-running challenge. The release of the Panama Papers in 2016 showed that a Panamanian law firm had helped to hide the flow of money worldwide by setting up thousands of shell companies under the laws in Delaware, Nevada and Wyoming. As far back as 2006, the Senate Permanent Subcommittee on Investigations held a hearing on how the failure to identify the owners of shell companies impeded efforts to combat money laundering and foreign corruption.
But the new rules will increase compliance costs for financial companies. Tougher requirements to combat money laundering have proved to be a thorn in the side of banks, and failure to follow the rules has triggered numerous enforcement actions in recent years. They have ranged from HSBC’s $1.3 billion settlement with the Justice Department in 2012to recent regulatory settlements for $70 million by Citibankand $60 million by Western Union.
Fragmented information challenge
To best fight financial secrecy, the question is whether private firms should be the first line of defence, or whether the federal government should take charge of gathering and organising the information. One problem with putting it all on the banks and brokers is that the information is fragmented, making it harder to detect the patterns that might reveal money laundering.
The financial institutions are trying to shift the onus to the federal government. A legislative proposal from the House Financial Services Committeewould require applicants seeking to form corporations or limited liability companies to file a report with the Treasury Department listing the beneficial owners, including updates if there is any change in ownership. The proposal is similar to a bill introduced in June, the Corporate Transparency Act, which would allow a financial institution to request information from the Treasury Department about a legal entity to meet its compliance obligations.
This approach would relieve banks of at least some of the burden of gathering the information, in the first instance reducing the costs of complying with the new disclosure rules. The federal government would be responsible for maintaining a database that banks could check to establish compliance with the disclosure rules.
The House proposal goes further. It would increase the threshold for when a bank must file a currency transaction report to $30,000 from $10,000, and double the amount for when a suspicious activity report is required to $10,000. Congress would also require the Treasury Department to adopt new regulations “to further reduce reporting burdens” on financial institutions.
No one is in favour of money laundering or helping foreign officials hide money plundered in their home countries. But the availability of shell companies in the United States that obscure the true owners is something that has been around for decades. For those who crave privacy, they shield transactions from the prying eyes of the media — and law enforcement.
Is there a realistic chance that the use of secretive shell companies will be substantially curtailed? The new regulations are a good first step, but to effectively combat the misuse of these legal entities the government may need to undertake the burden of maintaining a detailed registry of who the actual owners are. And that is going to cost a lot of money, which may be the greatest impediment to real change in how assets can be hidden.
