By Ashley Pratt
Buried amid end-of-the-year wrangling over then-President Trump’s threats to veto the National Defense Authorization Act (NDAA) over Section 230 (protecting social media companies from liability for posts on their sites), it was easy to miss several articles covering modifications to banking regulations that made it into the bill. Yet there was actually a significant progressive foreign policy win among the new banking rules.
In short, this legislation requires that companies in the US report ultimate beneficial owners, the natural person or persons who ultimately benefit from the commercial activity of the company due to their overall ownership stake, to the Department of the Treasury. While that may seem like an arcane bureaucratic change, it hands progressives the tools they need to press for global financial transparency – if they choose to do so.
These reporting requirements matter because the US is the world’s largest offshore financial hub. For fun, try visiting the Delaware corporate registry and getting any useful information whatsoever. You’ll be able to get evidence that a company by a certain name has been registered in Delaware from a particular date, and not much else. Places like South Dakota and Nevada also offer similar levels of anonymity.
Now try UK Companies House, where you can find far more information, not just about shareholders (the people with a financial stake in, and sometimes significant control of, a company) but also the board of directors, the people who make decisions about how the company moves forward. There are plenty of problems with the UK’s corporate registry, but the mere threat of legal enforcement keeps these Companies House disclosures fairly accurate – and the UK is working on further enforcement mechanisms to encourage compliance.
While the Treasury data won’t be made publicly available, it is still a good first step towards transparency in our corporate records. These reporting requirements are a key part of reigning in the extensive use of “shell companies” – companies that exist as a corporate name on a document, but disclose as little as possible about the people ultimately controlling the company and benefiting from it.
Shell companies make it harder to track the flow of financial assets and control of corporate entities, making them crucial tools for people engaged in tax evasion, kickback schemes, and other forms of elite corruption. Until now, shell companies have been fairly easy to incorporate in the US. For example, Zack Kopplin has written in these pages on the difficulty of figuring out just who is behind Delta Crescent, a shadowy energy company with exclusive rights to deal in sanctioned Syrian oil. The legislation will also improve transparency by strengthening financial crime enforcement bodies like the Financial Crimes Enforcement Network (FinCEN), and incentivizing potential financial crime reporting to the Justice and Treasury Departments.
It is hard to overstate just how lax existing US reporting requirements are. For all that we’ve heard corruption in Ukraine described as endemic and widespread, that country’s public corporate registry not only discloses direct control, but also the names of ultimate beneficial owners. The NDAA provision brings the US closer to that standard, by giving regulators and financial institutions (though not yet the public) a direct, authoritative, and enforceable source of information for confirming beneficial ownership information.
This change is particularly important because of the central role that the US plays in the international financial system. It doesn’t matter if Ukraine reports beneficial ownership in their registry; if someone is trying to evade disclosing beneficial ownership, they can just avoid Ukraine. When the United States requires that kind of information, however, it’s much more difficult (though not impossible) to avoid disclosure. Nearly the entire dollar-based economy runs through US financial systems, and falls under the jurisdiction of US law. Avoiding the reach of US financial regulators for large transactions requires herculean efforts, even for governments with the best intentions. Beyond that, US enforcement of beneficial ownership disclosure sets a clear precedent for other countries and closes off a lucrative operating space for shell companies and other shady legal entities.
These regulations provide US officials and politicians with meaningful tools to address international financial corruption, beyond an obsessive focus on “terror finance.” This is an issue of global equity – as Buzzfeed’s collaborative FinCen Files investigation revealed, “white-collar crime” often results in tangible harm to any number of vulnerable people in the US and abroad. Enforcement mechanisms meant to prevent the global financial system from serving designated terrorist organizations can struggle to follow the trail of money leading back to corrupt actors, including governments – permitting “laundered” money to finance arms purchases and large-scale graft alike. As an example, check out this visualization from the New York Times of a money laundering network for Hezbollah that touches five continents and involves used cars, cocaine, and consumer goods.
Some people – including the director of legislative affairs at the National Federation of Independent Business – have argued that this legislation doesn’t belong in an NDAA. Yet even setting aside the fact that the NDAA became Congress’s sole must-pass bill, there are plenty of reasons why this issue connects directly to global security and the well-being of citizens of the US and elsewhere.
Loopholes in our financial systems are already exploited by actors like drug cartels, arms traffickers, and authoritarian regimes – all entities known for committing human rights violations. A well-maintained financial crimes enforcement system does meaningful damage to those networks, as well as to white collar criminals engaged in insider trading or money laundering. Concerns that might seem remote, like the minutiae of corporate-entity disclosure regulations, deserve our attention because of the effect they can have on the security and stability of global affairs, and the direct and indirect harm better regulation can prevent both domestically and globally. Regulation of this type serves both US security needs and also supports a vision of the American financial system as a leader on the global stage heading up efforts towards transparency, not as a haven for corruption.
As progressives, now invested in the project of reforming the US’s public records disclosure regulations and reducing the possibility of funding human rights abuses through the global financial system, what else should we keep an eye on? A clear next step would be to push for public disclosure of this information in addition to the privileged disclosure specifically to regulators that the bill mandates. In the interest of not reinventing the wheel, I will also direct you to the International Consortium of Investigative Journalists’ list of six money laundering reform action items, where they detail several expert recommendations – including ending the US’s ability to serve as a tax haven. One key thing to pay attention to is whether these regulations, or those to come, have adequate enforcement mechanisms. All the legislation in the world will change very little if it’s just ink on paper.
Ashley Pratt has several years’ experience working in public records and open-source research. You can find her on Twitter at @vaguelyacademic.