Opinion: True corporate transparency now: A new legislative tool will help fight fraud and terrorism, but we must go further

Jan 27, 2021
In The News

On New Year’s Day, as millions of Americans declared their resolutions, Congress passed its own bipartisan legislative “resolution” — the Corporate Transparency Act — to end the nationwide proliferation of anonymous shell companies. This anti-corruption measure, which was tacked onto the National Defense Authorization Act, represents a laudable first step in combatting the money laundering and financial fraud originating from these domestic and foreign shadow entities, but the problem’s massive scope demands bolder action.

As I’ve stated before Congress and on op-ed pages over the past decade, the secretive system of shell companies only serves to shield wealthy beneficial owners from responsibility for illicit behavior, and should not exist in the U.S. That’s why I celebrate the passage of the Corporate Transparency Act, which was sponsored by Rep. Carolyn Maloney of New York. The new law ends this secretive system and will prove an invaluable asset to law enforcement agencies as we “follow the money” to build major economic crimes cases. In addition, this law sends a clear message to our global allies that we are serious about preventing bad actors from stashing ill-gotten gains on American shores — a message that was not always lucid in recent years.

Prior to this new law, white-collar criminals, oligarchs, drug cartels and terrorist groups established anonymous shell companies in America without even having to provide the same personal information required to get a library card. Often, a lawyer, an agent or another associate appeared on a property’s title and the true owner, also known as the beneficial owner, was not disclosed. This absurd system all but guaranteed bad actors from across the globe would engage in hard-to-track money laundering, financial and tax fraud, and terrorism finance in the U.S., with relative impunity. This behavior has undermined our shared concept of equal justice, warped our city’s housing market and threatened our national security.

Prosecuting these cases is difficult enough to begin with. In my office, a straightforward tax evasion case against Christie’s auction house, which resulted in a fine of nearly $17 million last spring, required several years of painstaking efforts on the part of dozens of prosecutors and investigators — including investigators from the City of London Police — all just to follow money obscured behind shells.

Now, thanks to the new law, a beneficial owner must file paperwork with the Financial Crimes Enforcement Network (FinCEN), even if their state doesn’t require information about a beneficial owner. This means that in an office like mine, prosecutors and investigators can use subpoenas to get timely access to the names and birthdates of the true owners of the shell companies — simple facts that can be hard to come by and are of great significance in these cases. They won’t have to worry that in the time it takes to identify a beneficial owner, critical evidence and statutes of limitation will expire.

The new law is a big win. Now, there are two ways the Biden administration can go further to help prosecutors wage these battles.

One, the Treasury Department could promulgate due diligence rules for all gatekeepers to the financial system. Under these rules, gatekeepers would first need to confirm an individual’s identity before making an effort to verify suitability and risks. The Patriot Act gave the Treasury Department the authority to make these rules but so far it’s only been used on banks, and President Obama drafted “Know Your Customer” rules for private equity firms, but they were never finalized. These new rules should apply not only to private equity, but to the real estate industry, and to lawyers involved in large financial transactions. Some might suggest that small businesses can’t handle the complexity that comes with added due diligence. The truth is if a shell company can hire a lawyer to make it more complex, then it can hire a lawyer to figure out the complexity.

Secondly, the U.S. should make its Geographic Targeting Orders (GTOs) permanent and nationwide. Since 2016, GTOs have proven effective tools for rooting out money laundering schemes in a dozen metropolitan areas, including New York City, by identifying individuals behind shell companies used in all-cash purchases of residential real estate. Meanwhile, concerns that GTOs would decrease business in those markets have not materialized.

Members of Congress and advocacy groups, such as Transparency International, deserve credit for their monumental achievement on anonymous shell companies. The great thing about accomplishing so much on the year’s opening day is there’s nothing but time to achieve greater incorporation transparency in 2021.