The US should adopt the global norm of ending shell companies to fight corruption and other financial crimes.
Some good news for a change. In a rare display of bipartisanship, a bill was introduced in Congress this week to fight financial crimes by mandating companies incorporated in the United States to identify the physical persons who own and control them.
Corruption, tax evasion, arms trafficking, human trafficking, terrorism financing, sanctions busting, fraud, you name it: the trail of investigations into financial crimes often ends with an anonymous company. Nobody goes to jail because law enforcement officials cannot identify the people reaping the spoils behind the veil of shell companies.
Corruption is a plague stunting economic development of poor countries. Not only does it waste public resources that could otherwise fund schools, clinics and other social services, but it also discourages private investment and fosters distrust between citizens and their government, which makes countries ungovernable.
Almost a third of rich Africans’ wealth – about $500 billion – is estimated to be held offshore, which may cost African governments $14 billion a year, enough money to pay for healthcare to save the lives of 4 million children and to employ teachers and allow every African child to go to school.
Shell companies are usually associated with exotic tax havens. The Panama papers – leaks from a law firm in Panama that revealed the owners of a trove of shady companies – come to mind.
However, it turns out that the United States is the location of choice for shell companies. While you need identification to own a car or get a library card in America, it is not necessary to create a company. Acting under cover of shady intermediaries for a corrupt African minister, our colleagues at Global Witness have approached lawyers and demonstrated how easy it is to launder money in the United States.
US-based intermediaries setting up shell companies have a comparative advantage over exotic tax havens because US companies are protected by a strong rule of law and have access to a deep financial market, in addition to the veneer of good reputation that an American address provides. A World Bank review of 150 cases of grand corruption found that they involved 817 corporate vehicles, 102 of which were incorporated in the United States.
Paradoxically, the United States played a leading role in the aftermath of the terrorist attacks of 9/11 to step up the work of the Financial Action Task Force, a global body dedicated to setting standards to fight money laundering. Europe and many other nations are now collecting the names of the physical persons owning or controlling companies. The United Kingdom has even put their registry online, which can help investigative journalists track down corrupt officials in countries unwilling or unable to crack down on corruption.
The bill introduced in Congress this week follows a regulation of the Obama administration that mandated financial institutions to know the identity of the beneficiaries of bank accounts. The bill does not require public registries, but allows the federal government to collect beneficial ownership information from companies when states fail to do so, and to share that information with law enforcement authorities and financial institutions.
This bill has bipartisan support and is promoted by a wide coalition of public interest groups including clean government, taxpayers, human rights, international development as well as small businesses and law enforcement groups and even banks. In this climate of acute partisanship, Congress should demonstrate it can get things done.