For over a decade, there have been calls in Congress to address shadowy corporate entities, known as shell companies, that are considered a cornerstone of fraud, corruption, and money laundering.
These companies help unsavory characters and organizations hide wealth or use the proceeds of crime to buy up legitimate assets ranging from a condo to an entire building on Fifth Avenue in Manhattan, and the US is one of the easiest jurisdictions in the world for setting them up. Startlingly, these entities can require less disclosure than getting a library card.
Now, legislation that would force disclosure of who owns a company registered in the US has once again advanced in Congress. Its fate is uncertain, but interested parties agree this is the strongest chance yet for reforms to pass.
The final push comes as BuzzFeed News and the International Consortium of Investigative Journalists, in the FinCEN Files investigation, have exposed the vast amounts of dirty money washing through the US economy and how shell companies help foster that flow.
"I don't think people think about it. Not enough of my colleagues do,” said Democratic Sen. Sherrod Brown. “It's bigger all the time, there's more money swashing around all the time in all kinds of nefarious ways. Organized crime, elections, everything."
Senate Banking Committee chair Mike Crapo and Brown, the ranking member, coauthored legislation that would force limited liability companies every year to reveal their true beneficial ownership — the person who controls the company, owns at least 25% of it, or receives economic benefit from the company’s assets. Such disclosures would make it harder to run these companies anonymously, removing one of the reasons these companies are employed for moving money around the globe.
Ownership information would be shared with the Financial Crimes Enforcement Network, or FinCEN, an agency within the Department of Treasury that combats money laundering, terrorist financing, and other financial crimes. Crapo’s legislation would also require the Government Accountability Office to study the availability of true beneficial ownership information for other legal entities.
Companies with over 20 employees and at least $5 million in annual sales, as well as a physical presence in the United States, would be exempt under the assumption they’re legitimate businesses rather than shell companies. The legislation also would take steps to improve how banks communicate with FinCEN, require federal regulators to undergo training in detecting money laundering, and establish a new FinCEN whistleblower program.
Linda Lacewell, superintendent of the New York Department of Financial Services, recently wrote in Law360 that the reports filed to the federal government by banks about suspicious financial activity are “frequently riddled with the names of anonymous shell companies that make it practically impossible to determine the identity of the perpetrator.”
In that essay, prompted by the FinCEN Files investigation, she also wrote: “Therefore as a first step, we must all move to require disclosure of beneficial owners of corporations and limited liability companies in financial transactions.”
Banks, law enforcement, human rights groups, labor unions, and state attorneys general are among the coalition supporting the legislation. Even the US Chamber of Commerce is on board.
But there is one influential force pushing back: small business.
“The difficulty is, in order to do the reporting that we need to get past the shell companies, it requires all of our legitimate, honest businesses to disclose lots of information and do significant reporting,” said Crapo, the Senate Banking Committee chair.
The National Federation of Independent Business, the largest and most influential small business group in the country, is leading the charge to block the legislation. “We just don’t believe it is worth criminalizing a new paperwork burden. It’s a scary thing for small business owners who don’t have the time, resources or bandwidth,” said Kevin Kuhlman, the group’s vice president of federal government relations.
Kuhlman argues the legislation would inflict small businesses with burdensome reporting obligations under threat of fines or jail time. The House legislation, authored by Rep. Carolyn Maloney, outlines fines of up to $10,000 and up to three years in prison for the owners of companies that provide false information or refuse to comply. Kuhlman also raised the possibility of hackers accessing the FinCEN data.
For most legislation in Washington it’s obvious in advance whether it will pass or not. But this is a rare case where the legislation is close to the finish line and no one knows what will happen.
To get a bill like this through Congress, you typically need support from the “four corners” — the top Republican and Democrat on both the Senate Banking Committee and the House Financial Services Committee. The bill has support from only three.
Political aides and outside stakeholders say Rep. Patrick McHenry, the ranking Republican on the House side, is the main force of opposition. With him opposed, passage of the bill is in jeopardy. “I think it is probably 50/50,” Kuhlman said of the bill’s chances.
The conclusion will not come down to a dramatic vote on the floor of Congress; rather, it likely will be worked out in closed-door negotiations. Proponents want to include the legislation in the National Defense Authorization Act, a must-pass bill that funds the military. The Democrat-controlled House included it in its version of the NDAA.
Crapo and Brown proposed their legislation, which is almost identical to the House version, as an amendment to the Senate’s NDAA, but it was not adopted.
Crapo said he believes there is enough bipartisan support in the Senate to pass the legislation. The problem, he said, was that so many senators were proposing controversial add-ons to the NDAA that Senate leadership ended up cutting almost all of them out — including the money laundering provisions — so as not to sink the overall bill.
“It was not wanting to kill the overall NDAA by having it amended to death,” said Crapo. “There’s a dozen controversial amendments, and if you let one amendment go then the floodgates open.”
But with the House including money laundering provisions in its version, Crapo said that gives congressional negotiators an opening to include some version in the final bill that will have to pass both chambers. The House and Senate have already begun those negotiations. The next several weeks will be critical, with dueling industries lobbying for their interests.
Banks are lobbying for Crapo’s legislation because they say they need help thwarting money laundering.
They are required to report clients’ questionable transactions by filing suspicious activity reports, or SARs, to FinCEN, and the industry sees this as an onerous and expensive burden. The Banking Policy Institute, whose members include both domestic banks and large foreign banks doing business in the US, said these financial institutions employ 14,000 people dedicated to compliance.
A BPI survey from 2017 found member banks reviewed 16 million alerts and filed 640,000 SARs. But they reported that only 4% of SARs received follow-up inquiries from law enforcement. Banks also filed 5.2 million currency transaction reports, which law enforcement followed up less than half of one percent of the time, according to BPI.
Forcing companies to disclose their true beneficial ownership was first proposed in Congress back in 2008. It’s gone through different versions since then. Earlier proposals would have forced companies to disclose their ownership publicly, but both the House and Senate versions of the bill would only require disclosure to FinCEN.
The politically powerful Koch family previously opposed the legislation and had lobbied Congress to make changes. In response, the Senate version was massaged to expand exemptions for nonprofit organizations, which are used as part of the Kochs’ political operations. The Kochs have now dropped their objections to the legislation, according to congressional aides with knowledge of the talks.
“This type of bipartisan cooperation doesn’t come around every day,” said BPI head of government affairs Mike Lee, “and represents years of stakeholder negotiations and scrutiny.”