U.S. Dirty-Money Law Seeks to Expose Owners of Shell Companies

(Bloomberg) -- Criminals may soon find it much harder to stash their dirty money anonymously in the U.S.

That’s because the 2021 defense authorization bill passed overwhelmingly by the House late Tuesday includes a provision that would require companies to identify their owners when they register in U.S. states.

The bill, whose language was drawn from anti-money-laundering legislation that’s been circulating on Capitol Hill for years, is expected to sharply curtail the practice of laundering money through anonymous shell companies that exist only on paper.

A vote is expected as early as Thursday in the Senate, where its backers hope it’ll have at least the two-thirds margin to make it veto-proof. President Donald Trump has threatened a reject the $740 billion National Defense Authorization Act for reasons unrelated to the anti-secrecy provision. Democratic leaders in the House have said they have enough votes to override the president.

“The U.S. is to this day the easiest place in the world to set up shell companies,” said Clark Gascoigne, senior policy adviser at the Financial Accountability and Corporate Transparency (FACT) Coalition, which has pushed for the legislation. “Disclosure is the single most important thing we can do to crack down on money laundering.”

At least $7 trillion in private wealth is hidden in haven countries, a United Nations panel estimates, a reality laid bare by a massive 2016 leak of a law firm’s financial records known as the Panama Papers. The U.S. is the second-biggest “enabler of financial secrecy” in the world, behind the Cayman Islands, according to the Tax Justice Network, a watchdog group.

The anti-secrecy legislation has been endorsed by an unusual coalition of lawmakers in both parties as well as the Treasury secretary, the banking industry and even Delaware, the leading domicile for U.S. corporations.

The provision means that states will be required to collect information at the time of incorporation about anyone who owns 25% or more of a company or exerts “substantial control” over it. The owners must provide their names, addresses, dates of birth and driver’s license or passport numbers. Existing companies will be given two years to comply with the regulations once they go into effect.

“This will make it harder for terrorists, criminals and kleptocrats to finance their operations and move their money,” Representative Carolyn Maloney, a New York Democrat and the original sponsor of the bill, told reporters this week.

Many organizations with a low risk of illicit activity would be exempt from the new rules, including publicly traded companies, banks, securities firms and other regulated entities, as well as businesses that employ more than 20 people.

U.S. banks already collect such information, under a 2018 regulation that requires “customer due diligence.” The new law would create a federal registry to track the data collected by the states. To verify information on customers, banks would have access to the registry at the Treasury Department’s Financial Crimes Enforcement Network, known as FinCEN. The records would also be available to national security, intelligence and law enforcement agencies, as well as federal financial regulators.

“The bank itself will be able to rely on the FinCEN directory to help confirm that someone is who they said they are,” said Cara Camacho, a senior vice president at the Bank Policy Institute. “It will be a much faster and more efficient way to confirm identity.”

Some Transparency Act supporters had pushed without success to have the information made available to the public, as it is in some other countries.

If enacted, the bill would also add a new whistle-blower program for those who provide information about possible money laundering and terrorist financing. Tipsters could collect as much as 30% of any money collected.

Proponents of the legislation say the new requirements will help investigators thwart drug rings, human traffickers, tax cheats and others who hide behind shell companies. But because the law was devised to shine a light on companies most likely to be used as shells -- those with minimal assets and few employees -- that leaves open the possibility that people dealing in illicit money could hide behind front companies with actual operations.

The U.S. has long been a favored destination for the world’s ill-gotten riches. But recent crackdowns in the European Union and the U.K. have left it increasingly isolated. In 2016, the U.K. introduced a national registry of corporate ownership that’s available to the public. The European Union is setting up publicly available registries for companies, trusts and other legal entities.

“With the U.K., E.U., and the U.S. now doing this, they can go to secrecy jurisdictions and say ‘Clean up your act like us,’” said Gascoigne of FACT.

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