The crackdown on shell companies is expected to bring much-needed transparency to US financial activity.
The US Congress has passed an amendment to the National Defense Authorization Act aimed at curbing corruption and money laundering.
– The legislation was passed with bipartisan support
– Biden has promised to take aim at corruption during his administration
– The amendment could prove to be a powerful tool for regulators, but executive decisions regarding resourcing will be crucial
ANONYMOUS NO MORE
On December 8, the National Defense Authorization Act for 2021 was passed by US lawmakers with bipartisan support despite protestations from the White House. The legislation is primarily concerned with matters of defence, but it also enacts new anti-corruption and anti-money laundering (AML) laws in the form of the Anti-Money Laundering Act 2020. The Act constitutes a robust amendment to the existing AML regime that will equip US intelligence, law enforcement and financial regulators with new powers to pursue corrupt officials, terrorists and organised crime at home and abroad.
To this end, the Act broadens the purview of the Bank Secrecy Act of 1970 to include national security concerns. It also strengthens compliance by increasing civil and criminal penalties and by delegating new powers and responsibilities to the Financial Crime Enforcement Network (FinCEN), a bureau of the Treasury that forms the Financial Intelligence Unit. However, the Act does not afford FinCEN additional resources despite the enormous volumes of suspicious activity reports that are filed with the bureau. What the Act does do is target specific methodologies utilised by money launderers, chief amongst them the abuse of anonymous shell companies. One salient feature of the Act that specifically targets these shell companies is the establishment of a Beneficial Ownership registry. This registry allows law enforcement and regulators to access the personal details of those who control these previously anonymous entities. Importantly, the Act also aims to increase international cooperation between the US and other nations and brings the US AML regime more in line with international standards, like those imposed in the EU.
A SHIFT IN VALUES
Whilst much attention is paid to ‘tax havens’ and international entities, a significant slice of the legal and financial institutions that facilitate the movement and obfuscation of illicit funds across the globe are based in the US. Highlighting the scope of the problem, previous work by researchers found that it is comparatively easy to set up anonymous shell companies in the US — an activity facilitated by a strong incorporation services sector in some US states. Looking past reputational harm, many in Washington also believe that the ease of access for bad actors poses a serious national security threat. Considering the laundry list of damaging incidents — like the purchase of a New York skyscraper by Iran using laundered funds worth $1 billion — it’s pretty clear why the Act has been passed as part of a larger, defence-focused spending bill.
By empowering regulators and closing some of the existing gaps, namely through the introduction of the Benefical Ownership (BO) registry, the new AML laws thwart many of the benefits and increase the cost of corrupt behaviour. Beyond the practical value of the BO registry, its introduction also sends a strong signal to domestic and international audiences. Previously hindered by privacy concerns and laissez-faire attitudes to economic activity, the BO registry has put industry on notice that these attitudes are becoming increasingly subordinate to a desire for regulation and notions of international responsibility — even if it can only be accessed by law enforcement and regulators. Washington almost certainly hopes that the BO registry will increase the effectiveness of its regulatory efforts, shore up its international image and serve as a deterrent against criminal activity.
BAD NEWS FOR KLEPTOCRATS
Considering the role that the US financial system has played in facilitating the theft of public funds by kleptocratic officials abroad, the new AML regime should deter US-based financial criminal activity as intended. Increased transparency and greater powers for financial regulators could sharply reduce the window of time that bad actors would otherwise be able to exploit. The establishment of the BO registry, for example, is likely to streamline the investigative process for US regulators and law enforcement and help them draw a clearer picture of who is moving dirty money and where it is headed. By arming these entities with greater powers, the Act should go a long way in reducing instances of global corruption — especially if Washington follows through on its plans to increase international cooperation.
Apart from the traditional AML methodologies that deal in fiat currency, shell companies and financial institutions, a crackdown on fintech and cryptocurrencies is also likely to follow. New US Treasury Secretary Janet Yellen has already outlined her belief that cryptocurrencies pose a security threat as an avenue for terrorist financing. Analysts have also pointed to the decentralised nature of cryptocurrencies and their opacity as being conducive to terror financiers. This reality, coupled with the desire for Washington to maintain the privileged position of the US dollar in the global financial system, means that we should expect the Act and its enforcers to look to regulate these novel technologies and their users. Due to the nature of distributed ledger technologies, this would most likely occur at the endpoint of transactions, where crypto users convert their digital wallets into more usable fiat currencies through financial institutions.
Looking at the wider political context, President Joe Biden has outlined that a big part of the US resuming its role as a global norm setter is going to involve Washington leading by example. In the fight against global corruption that the new administration has vowed to undertake, the application of the Act is likely to shore up Washington’s international image. In this way, closer cooperation with international bodies and partner countries could help to produce political goodwill, especially if US enforcement agencies demonstrate a willingness to pursue bad actors at home as well as abroad. Likewise, the establishment of foreign attaches should help partner countries to build their own expertise whilst increasing the US’s global influence.
The effectiveness of the Act will ultimately be determined by the resourcing decisions made by the executive. If the new administration significantly increases the financial and human resources of FinCEN, the Act should see greater effectiveness in curbing the movement and use of illicit funds across traditional and novel methodologies.