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 2012 to recent regulatory settlements for $70 million by Citibank and $60 million by Western Union.
To best fight financial secrecy, the question is whether private firms should be the first line of defense, or whether the federal government should take charge of gathering and organizing 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 Committee would 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 just 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 favor 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.