US closes key money-laundering, tax evasion channel

WASHINGTON (AFP) – A major avenue for global money laundering and tax evasion has been closed off by a new law requiring disclosure of owners of United States (US) shell companies used to hide billions of dollars.

The Corporate Transparency Act was included in the US defence appropriations bill passed into law by Congress late Friday, overriding US President Donald Trump’s veto.

The law forces “beneficial owners” behind shell companies to report their identities to the US Treasury’s Financial Crimes Enforcement Network, or FinCEN.

While the law still grants them protection from public knowledge – only the Treasury and law enforcement will be able to access the FinCEN database – transparency advocates said it is a huge step against kleptocrats,

organised crime and rich tax evaders who have been able to anonymously wash their suspect wealth through the world’s largest economy.

The US Treasury Department building in Washington. PHOTO: AP

“For years, experts routinely ranked anonymous shell companies… as the biggest weakness in our anti-money laundering safeguards,” said Ian Gary, executive director of the FACT Coalition, which lobbied for the legislation.

“It’s the single most important step we could take to better protect our financial system from abuse.”

The United Nations (UN) estimates that USD800 billion to USD2 trillion is laundered through the global financial system every years.

While much of the attention on has focussed on tax havens like Panama and the Cayman Islands, experts said that the size of the US economy, and its ability

to absorb billions of dollars without notice, has made it crucial for converting illicit funds into legitimate assets.

In early 2020 the Tax Justice Network ranked the Cayman Islands and the US as the global leaders in helping people conceal their finances from law and tax enforcement.

The US Director of Transparency International Gary Kalman said the Corporate Transparency Act was “foundational” for fighting money laundering.

Despite geopolitical tensions, he pointed out that money has flowed into the US from China and Russia because it was the easiest place to launder it, through properties, corporate assets, securities and art.

“We are the easiest place in the world to set up an anonymous company,” he told AFP before the law had passed. “We are the dream of any kleptocrat or criminal to hide money.”

By forcing company owners to divulge their identities, he said, the US is establishing a “global norm” for the world’s financial system.

“By choking off access to the advanced economies, you are making it much harder. You are upping the cost and the likelihood of getting caught,” he said.

The legislation sets penalties for not reporting a company’s beneficial owners of up to two years in jail and a USD10,000 fine.

FACT said the law could result in a sharp drop in all-cash business transactions, especially in real estate, a favoured way for outsiders to move large sums into the US economy.

FACT also said that anonymous companies underpin trade in counterfeit luxury goods, pharmaceuticals and industrial equipment.

The legislation isn’t perfect, said analysts. The FinCEN database will not be open to the public or media, whose efforts have produced the biggest stories about money laundering.

For example, the International Consortium of Investigative Journalists was behind the explosive release in 2016 of the Panama Papers, some 11.5 million documents detailing secret companies set up in the Central American country.

In that case, enforcement authorities around the world made use of the files made public by reporters, which showed prominent politicians, celebrities and business people hiding money offshore.

Although they will have all the new data, the US Treasury and law enforcement have limited capacity to comb through files themselves.

“We think that the database should be public,” said Kalman.