Advancing Beneficial Ownership Transparency in the United States

By Kelsey Landau
Wednesday, October 28, 2020, 8:01 AM

The anonymous corporate ownership of shell companies crosses the boundaries of countries and of industries. Some implications are visible to the naked eye: Across the world, luxury buildings stand empty in high-demand cities. Others are instead reflected in what cannot be seen: Millions of pieces of fine art (including a Rothko, a da Vinci, a Van Gogh and an estimated thousand works by Picasso) are stored in one tax-free warehouse complex, unseen and unappreciated by human eyes. According to some estimates, the equivalent of 10 percent of the world’s global gross domestic product is stored in offshore financial centers and held by anonymous shell companies, collectively costing governments more than $800 billion in tax revenue each year.

The problem of anonymous corporate ownership is transnational. The corruption it facilitates, the threats it fosters, and, crucially, the policies that enable it, however, rest closer to home. Anonymous corporate ownership is not limited to the Cayman Islands, Panama or other island nations often linked in the headlines to illicit activities. On the contrary, a leading enabler of such practices is the United States—and so, too, does the United States bear many of their ill effects.

Notable among these ills is a clear danger to American national security. Anonymously owned shell companies abet corruption in federal contracting—a $550 billion-plus industry of which $358 billion is spent on Defense Department contracts. As Rachael Hanna has outlined, U.S.-registered shell companies enable foreign companies to pose as their American counterparts and bid on contracts reserved for domestic companies. Conversely, American companies use shell companies to “import counterfeit or compromised goods” that are then sold to the Defense Department. Anonymous corporate ownership can also compromise American national security by helping rogue countries evade sanctions, as the Iranian government did for decades through a concealed ownership stake in a Manhattan building; facilitating weapons trafficking, as in the case of the Russian arms dealer Viktor Bout, who used shell companies incorporated in Florida, Texas and Delaware to illicitly arm combatants around the world; and, in a combination of the two activities, enabling terrorist financing, with terrorists using shell companies to evade sanctions and fund their operations.

One approach to tackling this scourge of anonymous corporate ownership, whose secret owners or financial beneficiaries are known as beneficial owners, is through beneficial ownership transparency. Beneficial ownership transparency can take different forms, from requiring companies to disclose their beneficial owners only to government agencies for law enforcement purposes, to—as is increasingly becoming the global standard—requiring disclosures in publicly available and searchable registries.

Beneficial ownership registries have not existed long enough for there to be a systematic body of evidence for the ways in which they reduce corruption; the first public register, in the United Kingdom, launched only in 2016. However, lessons from academic research and practitioner experience suggest that beneficial ownership transparency initiatives, if combined with accountability and participation mechanisms and tailored to the individual context of each country, can move the needle on corruption reduction. For example, politicians responsible for developing and voting on legislation governing a sector may also hold ownership stakes in companies working in that sector—an entirely legal practice in many countries. If this ownership information is unknown, such conflicts of interest will never be scrutinized; however, if it is published in a beneficial ownership registry, citizens and civil society organizations can examine the politicians’ behavior to make sure they are working on behalf of the country and not themselves. While a pathway from disclosure to accountability may not appear in every context or case (for instance, in countries with reduced civic space where citizens are less able to hold their leaders to account), beneficial ownership registries can be a prerequisite to even knowing that a conflict of interest exists.

To date, 81 jurisdictions around the world have implemented beneficial ownership transparency laws, albeit to varying degrees of comprehensiveness and availability. Here, the United States is a global laggard: Not only does the country not have a public beneficial ownership registry, but it also does not collect beneficial ownership information in any capacity, leaving such information unknown even to law enforcement officials. Under the current U.S. legal regime, corporations are subject to state-level requirements in the formation process, and not a single state requires the collection of beneficial ownership information. Meanwhile, no federal system exists to supplement the information collected at the state level.

One major piece of legislation, the Corporate Transparency Act, passed the House of Representatives in October 2019. This bill would address the latter issue by requiring applicants seeking to form a corporation or limited liability company to file their beneficial owners with the Treasury Department’s Financial Crimes Enforcement Network. Companies that fail to do so or that submit false or incomplete information could be subject to civil and criminal penalties. Another bill introduced in the Senate in 2019, the ILLICIT CASH Act, would similarly require federal beneficial ownership reporting requirements accessible to law enforcement.

While undoubtedly a step toward greater transparency, even these laws—which have stalled despite overwhelming and bipartisan support—fall short of global standards. First, and most importantly, the disclosed information would be inaccessible to the public, which poses a foundational obstacle to any citizen-led efforts to hold corporations and governments to account. Second, both bills’ thresholds for what constitutes a beneficial owner is, at a 25 percent or more asset stake, significantly higher than the 5 percent or less threshold recommended by many experts to truly capture those who control or benefit from a company. Finally, the legislations’ other two categorizations of a beneficial owner as one who “exercises substantial control over a corporation or limited liability company” and “receives substantial economic benefits from the assets of a corporation or limited liability company” have been criticized by experts as overly vague.

Nonetheless, should beneficial ownership transparency legislation ever pass the Senate and be signed into law, it will help in combating the profound negative consequences of anonymous corporate ownership within the United States and beyond. The legislation would aid law enforcement investigations into money laundering, terrorist financing and other illicit practices currently aided by opaque ownership structures. Similarly, beneficial ownership transparency would make the U.S. a less attractive tax haven destination for corporations seeking to avoid taxation. It would also serve as an important step toward rejoining the international anti-corruption community, restoring elements of soft power leadership at a time when that is sorely needed. And, perhaps most important of all, beneficial ownership transparency would help ensure that American political leaders are working on behalf of the public they serve, and not using their political power for secretive personal enrichment.

Beneficial ownership transparency is supported by senior FBI officials, the National Sheriffs’ Association, the Federal Law Enforcement Officers Association and dozens of national security experts. This support is not incidental: The opacity surrounding beneficial ownership information has stopped many law enforcement investigations in their tracks. As Steven D’Antuono, then acting deputy assistant director of the FBI’s Criminal Investigative Division, noted in a 2019 statement:

The burden of uncovering true beneficial owners can often handicap or delay [criminal and national security] investigations, frequently requiring duplicative, slow-moving legal processes in several jurisdictions to gain the necessary information. This practice is both time-consuming and costly. The ability to easily identify the beneficial owners of these shell companies would allow the FBI and other law enforcement agencies to quickly and efficiently mitigate the threats posed by the illicit movement of the succeeding funds.

D’Antuono cited a range of FBI investigations hindered or thwarted by an absence of beneficial ownership transparency, including an investigation into $4.5 billion in funds allegedly misappropriated by the Malaysian government; the use of American-incorporated shell companies in the notorious “Panama Papers” investigation, which implicated 140 politicians and several heads of state in more than 200,000 offshore holdings; an investigation into child prostitution via the prostitution advertising site Backpage; and an international Medicare fraud ring that cost the U.S. government more than $1 billion. It is, therefore, perhaps not a surprise that the National Sheriffs’ Association and its ilk should find common cause on this issue with good government and civil society groups across the United States.

As the sheer range of investigations stymied by anonymous corporate ownership suggests, beneficial ownership opacity helps criminals evade detection for all manner of crimes. This opacity also has financial implications that are often perfectly legal. In its 2020 Financial Secrecy Index, the Tax Justice Network ranked the United States as second in the world for financial secrets, enabled by beneficial ownership opacity and ranked behind only the Cayman Islands. This accounts for more than 20 percent of the global market in offshore financial services.

While incorporating companies raises money in fees at the state level, and sometimes quite a lot—in Delaware, among the worst corporate secrecy offenders, incorporation has generated around $1.3 billion annually—the amount that the U.S. as a whole loses in tax avoidance nonetheless towers over the savings. One 2014 analysis of Fortune 500 companies’ use of tax havens found that at least 362 of those companies used nearly 8,000 tax havens to avoid paying an estimated $90 billion in taxes to the U.S. government. The amount of untaxed corporate profits from American businesses is estimated to be more than $2.1 trillion. Every untaxed dollar stashed away in offshore tax havens is a dollar that the U.S. government cannot spend on education, health care, social welfare, national security or any other public good.

These practices also have reputational implications for the United States. The country was once a global anti-corruption leader, dating back to the passage of the Foreign Corrupt Practices Act (FCPA) of 1977, which was the world’s first piece of domestic legislation governing transnational bribery. The FCPA kicked off the global anti-corruption movement, which has grown to include treaties, regional instruments, initiatives within international financial institutions and domestic anti-corruption statutes the world over. More recently, the U.S. played a pivotal role in the founding of the Open Government Partnership—a multilateral accountability and citizen engagement initiative—in 2011.

Unfortunately, when it comes to beneficial ownership, the U.S. has not just ceded this leadership role to the United Kingdom and others with publicly accessible registries; it has proved an enabler of anonymous ownership for companies in the United States and beyond. This is yet another blow to the United States’s reputation and its ability to lead at a time when the world’s views of the U.S. and its leadership are at historic lows.

Finally, corporate anonymity poses a threat to American democratic governance itself. The idea that politicians should represent the interests of their constituents, rather than their friends, family or self, is foundational to the idea of democracy. President Trump, of course, is the poster child for this threat, with more than 3,400 documented conflicts of interest; opaque real estate deals linking him financially to unknown numbers of foreign governments, companies, or individuals; and, as the New York Times recently revealed in bombshell reporting on his tax returns, key personal financial connections with Turkey, the Philippines, Azerbaijan and a whole host of private companies that conduct business with, lobby or are regulated by the federal government.

The problems of political conflicts of interest are not, however, limited to one man, no matter how powerful. As Sarah Chayes documents in her essential new book “On Corruption in America: And What Is at Stake,” sophisticated and corrupt networks of actors in government (including members of both political parties, regulators and law enforcement), the private sector, and outright criminals formulate rules and procedures that enrich and protect themselves at the expense of the American public and, ultimately, at the expense of American democracy.

Of course, beneficial ownership transparency will not solve this problem, which Chayes describes as “an existential threat not just to the democratic principles we claim to revere, but to the very survival of our society.” Indeed, neither the ILLICIT CASH Act nor the Corporate Transparency Act will fully solve even the problem of anonymous corporate ownership, let alone the far greater problems of money laundering, tax evasion, terrorist financing, drug cartels and political conflicts of interest that threaten American democracy.

Nonetheless, beneficial ownership transparency is a step in the right direction—toward combating these ills, not obscuring them.