Main Image Credit Courtesy of Alex Proimos/Wikimedia Commons/CC BY 2.0
The fêting of new company registration requirements in the US is understandable, but critical gaps remain.
Between Christmas and New Year, lawmakers on both sides of the Atlantic were busy. While in London, Parliament was waving through the EU–UK Trade and Cooperation Agreement and marking the end of the post-Brexit transition period, the US Congress was active too. The latest National Defense Authorization Act (NDAA) was being passed into law as both houses of Congress resoundingly overrode President Donald Trump’s refusal to sign it into law himself.
The NDAA is an annual affair that provides for the budget of the US Department of Defense. But for financial crime fighters, this year’s edition held particular importance as, hitched to its coattails, was the Anti-Money Laundering Act (AMLA) 2020. In the view of many, this Act is the most significant overhaul of the US response to illicit finance since the USA PATRIOT Act was introduced in the aftermath of 9/11, which shaped the global response to financial crime for nearly two decades.
AMLA legislates for a range of actions to strengthen the US response to financial crime. It emphasises the role of effective responses to financial crime in safeguarding national security (something the UK would do well to study closely), for example directing the US Treasury to produce studies on the abuse of the US financial system by China and other authoritarian regimes; it expands the frameworks for information sharing among financial institutions; and it increases the power of the Department of Justice to demand information from banks around the world.
But most headlines have been devoted to Title LXIV of the Act, known, promisingly, as ‘The Corporate Transparency Act’. For the growing coalition of civil society, academics, advocacy organisations and members of Congress that have been campaigning for greater transparency of corporate beneficial ownership in the US for a decade or more, the passing of this legislation was a great victory and testament to their indefatigable campaign. Chat rooms, opinion pieces and press releases heralded this ‘major victory’ as the end of ‘anonymous companies’. On Twitter, the hashtag #CorporateTransparency trended.
Transparency and Trust
Addressing the lack of transparency in US corporate ownership is long overdue. The 2016 evaluation of US anti-money laundering and counterterrorist financing measures by the global financial crime watchdog, the Financial Action Task Force (FATF), repeatedly drew attention to the ‘lack of timely access to adequate, accurate and current beneficial ownership (BO) information’ as a fundamental gap in US defences. It noted that ‘measures to prevent the misuse of legal persons are inadequate [and that] the US legal framework has serious gaps that impede effectiveness in this area’ as there were no legal requirements to record beneficial ownership information. The FATF further noted that this deficiency – along with the equally critical failure to regulate and supervise certain other key financial system gatekeepers, notably lawyers and accountants – remained unaddressed, despite having been raised by the FATF in prior reports in 2006 and 1997.
This failing matters. Obscuring the ownership of companies is one of the fundamental tools used by kleptocrats, organised crime groups and the corrupt for hiding their illicit gains – the financial crime ‘getaway car’ of choice, some say. This vulnerability in the world’s largest economy and leading global financial centre helps undermine much of the global effort to combat money laundering. It also undermines the credibility of the US in its worthy efforts to raise standards against illicit finance around the world, when it has itself been a leading facilitator of financial crime. For the dominant voice in global anti-money laundering to tolerate such glaring shortcomings for so long has seemed hypocritical to the many countries that find themselves subject to the coercion of the US Treasury and the FATF for less systemically significant failings.
So, what do we make of this fêted victory for corporate transparency? The AMLA requires a range of companies (mainly smaller companies and shell corporations) to self-report beneficial ownership information to FinCEN (the US financial intelligence unit) for storage in a secure, non-public database. This information will only be directly available to authorised government authorities for national security, law enforcement and intelligence purposes.
Work in Progress
While it is most certainly a step forward, its likely impact on financial crime remains in question, as the timetable for implementation is long and winding; and the protocols federal agencies are required to put in place to access and use the information are daunting and may deter use. Furthermore, for those for whom the only acceptable form of corporate transparency is a register open for all to review, such as exists in the UK, this victory must seem hollow.
But perhaps most disappointing is the missed opportunity to set an example for the importance of data verification. The UK has learned from its own experience of opening up its register of unverified company ownership data to public scrutiny, and at times ridicule, that collecting beneficial ownership information (transparent or otherwise) is no guarantee of improved anti-financial crime outcomes when the data is unverified. Currently in the US, the onus on beneficial ownership verification falls on financial institutions, and even then, those institutions need only verify that the named beneficial owners are, in fact, natural persons, not that they are the beneficial owners. By granting tightly governed access to the new database, the new law might, arguably, allow banks to more easily conduct these mandated verifications. However, access to the new database is only allowed with the reporting companies’ consent. This not only limits its use to onboarding and ongoing due diligence, and not for investigations into potential suspicious activity, but it begs the question as to how the data provided by the remaining companies will be verified.
In a recent RUSI Occasional Paper co-authored with Anton Moiseienko, we provide five principles for maximising the impact of beneficial ownership registries on efforts to combat financial crime, including the critical importance of domestic verification by the registrar or another appropriate agency or regulated intermediary and the ineffectiveness of self-reporting. The approach proposed by the AMLA falls short, as while the information provided to the database may at some point be verified by a financial institution, there is no guarantee that this will occur. It may therefore be the case that information provided to US law enforcement by FinCEN (or onward to foreign law enforcement agencies on request) is unreliable.
The US has long led the global effort to strengthen the integrity of the global financial system, both directly and through the FATF. For too long, the US has ‘talked the talked’ but failed to ‘walk the walk’ on key matters central to strengthening the integrity of the global financial system.
As Joe Biden takes over in the White House, the outlook for US leadership in strengthening responses to global illicit finance is promising. But alongside exhorting other states that represent global vulnerabilities such as the UK, the UAE, the EU and other systemically important financial hubs to redouble their efforts to combat illicit finance, US leadership must continue to tackle the flaws in its own domestic system – such as the glaring failure to regulate lawyers and accountants effectively – that facilitate global illicit finance.
The views expressed in this Commentary are the author's, and do not represent those of RUSI or any other institution.
BANNER IMAGE: Courtesy of Alex Proimos/Wikimedia Commons/CC BY 2.0.
Centre for Financial Crime and Security Studies