The Panama Papers revelations were just the beginning. Now the FBI is worried about terrorist financiers exploiting American shell companies.
- By Anne UsherAnne Usher is a Washington, D.C.-based journalist who has also worked in the Middle East and Asia.
In April, the leak of millions of financial and legal records from Panamanian law firm Mossack Fonseca exposed how the firm created hundreds of thousands of shell companies — by themselves, not illegal — to shelter money for wealthy and politically connected individuals and corporate entities. Much of that activity was directed at shielding money from taxes. A bigger problem, current and former senior law enforcement officials have said since then, is that criminals, corrupt officials, and some terrorist groups are increasingly using shell companies to hide assets and move money through the global financial system.
Even before the leak of some 2.6 terabytes of data, known as the “Panama Papers,” prompted widespread global investigations — leading to the resignation of Iceland’s prime minister and a Spanish minister — the United States faced the harsh glare of its partners in Europe and elsewhere for failing to force banks to do more due diligence to thwart this activity. In early May, a week before then-British Prime Minister David Cameron hosted U.S. Secretary of State John Kerry at an international anti-corruption summit in London, the White House announced that the Treasury Department had finalized a rule aimed at tightening banking requirements. Kerry told the gathering that with this rule finalized, the White House will now look to Congress to pass legislation aimed at lifting the veil on who actually owns companies when they set up shop in the United States. “We have to say no safe harbor anywhere,” he said.
Now, five months after the release of the Panama Papers triggered investigations into the dark corners of international finance, this pressure on Congress is growing. The White House is pushing for a law that would require any company, when it incorporates in the United States, to file accurate information on its true, or “beneficial,” ownership. This data would then be fed into a federal database that law enforcement agencies could access. Without it, Justice Department and Treasury officials argue that the United States will still have a significant impediment when it comes to international efforts to fight money laundering and terrorism financing.
U.S. banks have long been required to “know your customer” — meaning collecting basic information about a person or company when opening an account. Federal guidelines also require them to “take all reasonable steps to ensure that they do not knowingly or unwittingly assist in hiding or moving the proceeds of corruption.” This includes determining whether or not a customer is a foreign official or a relative or associate and filing a “suspicious activity report” if a customer transfers unusually large amounts of money — anything over $10,000 a day.
Those bank reports are sent to the Treasury’s Financial Crimes Enforcement Network (FinCEN), which the IRS, Drug Enforcement Administration, Secret Service, and FBI have access to. That information can be run against data that FinCEN has collected, and if a case is pursued and a grand jury subpoena is issued, the FBI can request that the banks identify other accounts a person might have.
The new Treasury rule requires banks to do yet more due diligence to unmask a company’s true owner at the time an account is set up. Banks will now be required to collect and verify the names of any person who owns more than 25 percent of a corporate entity, along with the identity of one “individual who controls” it. The Treasury has given banks and other financial institutions two years to comply.
Loopholes upon loopholes
Critics argue the measure doesn’t go far enough because it doesn’t address existing bank accounts. Shruti Shah, the vice president of programs and operations for the U.S. branch of Transparency International, a global anti-corruption organization, argues that it also conflates the definition of ownership with management. “If nothing, what the Panama Papers proved is that some of these people are mere figureheads,” she said. One Mossack Fonseca employee, Yvette Rogers, signed incorporation papers for some 20,000 companies, Shah pointed out.
Others say that the 25 percent threshold is too high, allowing a criminal network to simply nominate five people to agree to serve as “equity owners” to avoid having the name of a beneficial owner included in a bank’s records. As then-Sen. Carl Levin (D-Mich.) argued in a letter to the Treasury when it first proposed a similar rule in 2014, listing any percentage threshold “simply invites wrongdoers to arrange their affairs to come in below” the cap.
But without congressional action to buttress the Treasury’s move, the White House contends it’s trying to fight tax evasion and potentially more serious crimes with one arm tied behind its back. It’s looking to Congress when it reconvenes after Labor Day to pass a uniform disclosure requirement for companies setting up shop in the United States. Sen. Sheldon Whitehouse (D-R.I.) sponsored a bill in February that would do this. It requires corporations and limited liability companies (LLCs) registered in the United States to list a beneficial owner’s name, address, date of birth, and social security or passport number; forces them to keep that information up to date; and penalizes those that fail to comply. But the measure also exempts a range of businesses, including any company that employs more than 20 full-time employees, files taxes showing more than $5 million in gross receipts or sales, and has a physical office within the United States. A companion bill, sponsored by Rep. Carolyn Maloney (D-N.Y.), is currently before the House Financial Services Committee.
Both bills would eliminate a patchwork of state laws now on the books. Under existing laws in Delaware, Wyoming, and Nevada, for example, people forming new LLCs are not required to declare who the real owners are or show any identification. Investigations into Mossack Fonseca have shown that its lawyers took advantage of the relaxed requirements in these states to set up shell companies for clients — more than 1,000 in Nevada alone.
The American Bar Association (ABA) and the U.S. Chamber of Commerce, which helped defeat a similar bill that Maloney introduced in 2013, have both come out against the legislation. The ABA argues that it would undermine attorney-client privilege and that the House bill’s definition of “beneficial owner” is overly broad. Unlike the Treasury rule, it defines this as anyone who “exercises substantial control over” or “has a substantial interest in or receives substantial economic benefits from the assets of a corporation or limited liability company.”
Andres Gil, a director with the Chamber’s Center for Capital Markets Competitiveness, said the House bill — and any similar measure — “would impede capital formation, impose onerous notice and filing requirements on almost all businesses, weaken privacy protections for law-abiding citizens, and potentially criminalize even trivial paperwork violations for small-business owners and those that help them with their business affairs.”
Both lobby groups argue it would place costly burdens on legitimate businesses. The bill would make available up to $30 million from a Treasury asset forfeiture fund to help states put systems in place to meet the reporting requirements.
Law enforcement agencies have sought more transparency in banking and company incorporation laws for years as they increasingly work across governments to squeeze assets held by criminal and terrorist networks.
Busting the really bad guys
Patrick Fallon Jr., the head of the FBI’s financial crimes section, says the ease of setting up a company in the United States makes it more difficult to investigate money laundering and, by extension, to prosecute corrupt officials, drug kingpins, and terrorists. “We see this as a definite impediment to our work,” Fallon said.
Experts say the techniques exposed in the Panama Papers are not new. But their disclosures have shed some light on how global the problem is. “This activity is expanding. It’s in the trillions [of dollars],” said Scott Moritz, a former transnational crime specialist for the FBI who now assists companies with anti-money laundering programs at global consulting firm Protiviti. Getting behind a company’s listed ownership on paper, he said, is an essential part of cracking a case.
“These offshore vehicles make everyone’s job difficult,” Moritz said. “My earlier experience was exceedingly frustrating. If you were able to [identify] the director of an offshore account — that holder of assets — often it was only to find out that the shareholder of the company is actually just other offshore company in yet another opaque jurisdiction.”
Dennis Lormel, a retired FBI special agent, says shell companies have proliferated in recent years. He notes that after the 9/11 attacks, Washington instituted a more robust anti-money laundering system to detect suspicious activities. “So the bad guys needed to get more sophisticated” to mask their activities and ownership, he said. Years ago, the shell game was largely confined to “really good” white-collar criminals.
“There’s an unremitting demand for shell companies now,” Lormel said. And some have gotten progressively harder to track. “Some literally sit on a shelf and start to mature — so they don’t look like brand-new companies — and then people sell these companies and actually exchange shares.” When a buyer then comes in, that entity is now buying an existing company with more value. “So this is inventory that can be transferred into other people’s ownership,” Lormel explained.
Mossack Fonseca maintains that when it comes to the services it provided when its lawyers set up shell companies in the United States, Cayman Islands, British Virgin Islands, Bermuda, and the Seychelles, its hands are clean. The issue is how these entities can be abused, for instance, to launder criminal proceeds.
Experts say state funds siphoned by corrupt officials increasingly are finding their way into this international web of shady transactions. “These are some of the biggest money laundering cases in the world,” Moritz said.
Corrupt foreign officials
With Venezuela’s economy in tatters, the FBI is now examining outflows of state capital, some of which is being moved through Panama and Florida, a senior FBI official said. One of President Nicolás Maduro’s cousins is among those being investigated for such alleged maneuvers with taxpayer money. China, which has strict export rules on capital outflows, is also on the radar given evidence, the FBI source said, that corrupt officials are finding ways to channel money out of the country.
The FBI has long examined international facilitators as part of its efforts to identify threats that could cross into U.S. jurisdiction. Much of this “flight capital” transits outside the U.S. financial system. One well-known corridor for such money, and criminals’ cash, runs between Russia and Latvia, Moritz said. Money is laundered through Cyprus, where a cottage industry of hundreds of companies exists for the sole purpose of setting up these fronts. Bloomberg has also reported that the leaked data from the Panama Papers shows at least $2 billion in transactions involving people and companies with close ties to Russian President Vladimir Putin. “Money doesn’t stay in Russia for long,” Fallon said, adding that Russians looking to hide assets are also buying banks in developing countries, including in the Middle East. “It’s in the billions [of dollars],” he said. The Panama Papers also revealed the use of shell companies by officials in several African nations, including Nigeria. That money has found its way into luxury properties in New York City and Beverly Hills, California.
This movement of taxpayer money out of countries by corrupt officials into the international financial system is one reason why law enforcement officials and diplomats say the United States has been under pressure to tighten U.S. banking due diligence requirements and enact laws that make it harder to set shell companies up.
The issue has taken on an added layer of urgency due to concerns over blocking flows of money by terrorist organizations. A Treasury report released last year on terrorism financing noted investigations by the FBI into people with alleged ties to Hezbollah and Hamas over a “wide variety of money laundering activity within the U.S. financial system.”
“Hezbollah has been a king at this forever,” said Lormel, citing past investigations. He said there were indications years ago that Syria helped the group set up the infrastructure to move money through shell companies. It was “a lot of money,” he added.
“The speed and ease with which funds can be moved within the international financial system allows terrorists to move funds efficiently and effectively and often without detection between and within jurisdictions,” stated a 2008 report by the Financial Action Task Force (FATF), an intergovernmental body dedicated to combating money laundering and terrorist financing. It added that offshore shell companies exacerbate this, giving terrorists the cover they need to conduct transactions and launder money.
This year, as part of its regular review of members, the task force is looking at the United States, comparing how well its laws and regulations stack up against those of other countries. A report is due in October. “We expect it will note the vulnerability of the U.S. There is an issue with our beneficial-ownership rules,” Fallon said.
Does Congress care?
Indeed, an official at the International Monetary Fund said although the Treasury move is a positive step, a “complete solution” requires legislation — like Sen. Whitehouse’s measure — to address the gaps. Fallon noted that under a one-year pilot, British banks are sharing intelligence with law enforcement officials who can cross-check transactions in real time. “I would never expect that here, but we want to see more,” he said.
Tax officials in five European countries — the United Kingdom, Germany, France, Italy, and Spain — have also banded together to share beneficial-owner information in an effort to curb tax evasion. Meanwhile, in the United States, the Treasury has asked Congress to enact legislation that would require U.S. financial institutions to provide the same amount of information to other jurisdictions as foreign companies report to the IRS.
Moritz says banks have come a long way in systematizing ways to fight money laundering, by focusing on the highest-risk products and customers. But they face an “enormous” challenge. “Most illicit money transits through the banking system,” he said. “It’s unrealistic to think you can prevent your institution from knowingly or unknowingly participating in money laundering. Sometimes it’s not that overt: An introduction is made, or the people doing this are well above average in terms of moving out of the range of tax authorities. Institutions are vessels, and you can’t see what’s in people’s hearts. And they, to a certain extent, take at face value what customers say.”
That customer could be an attorney for a hidden entity, said Brian Berntson, a retired IRS investigator who helped create the Global Illicit Financial Team, an IRS-led task force that targets organized crime. A group looking to hide, such as a cartel, will often nominate someone with a clean background and set him or her up in an office in another location, he said. “They can then go and conduct financial transactions and make representations — like, ‘We’re selling widgets.’” But if banks looked at sales, they might spot red flags: “Why are they selling widgets to Iran? Or selling to some country that doesn’t use those widgets?”
Moritz has observed that some banks suffer from poor coordination between private bankers on one side — who are trying to offer a range of sophisticated services — and compliance officers on the other. “If you’re fighting crime over there, but right over here you can walk right into one of these brass-plated financial institutions and open an account and no one questions the legitimacy — that’s a problem,” he said.
Henry Komansky, a former FBI special agent who now advises clients in Bermuda, thinks the new Treasury rule will make a significant difference, more closely aligning the United States with FATF standards. “There will be teething pains, and smart lawyers will exploit loopholes,” he said. ”It won’t be perfect — but it’s a big step and significantly better than the current regime.”
The ABA said it has not yet taken a position on the legislation. The two-year period before the Treasury rule takes effect, it said, along with “manageable expectations for customer and beneficial-ownership identification,” alleviates some of the potential burden of implementing it. In the meantime, the state of New York finalized an anti-money laundering rule on June 30 requiring financial institutions to set up programs to monitor and filter transactions for any potential violations of anti-money laundering regulations.
Those looking to peel back the layers of ownership behind the shell companies buying real estate or laundering money say they will be hampered until all countries require more transparency.
“If you can’t get the world to sort of follow a common set of standards that require that you don’t lie, that you can’t have someone act as your representative, you’re not going to fix this,” Moritz said.
Fallon declined to comment on specific legislation but said a uniform beneficial-ownership disclosure requirement for entities incorporating in all states would “absolutely” help close gaps in current investigations.
“The status quo is not acceptable,” he said. “Other countries have put laws in place. Why can’t the U.S.?”
Photo credit: JOHN THYS/AFP/Getty Images