Five Things The United States Can Do To Stop Being

The Pandora Papers reveal that the United States has much work to do to stop being a haven for the ill-got­ten gains of polit­i­cal elites from around the world, but there are steps the Biden admin­is­tra­tion and Congress can take to reverse this trend.

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The largest-ever leak of pri­vate finan­cial records, dubbed the “Pandora Papers,” has shown a spot­light on the role the United States plays as a secre­cy juris­dic­tion in enabling every­one from orga­nized crime syn­di­cates to world lead­ers to tax dodgers to hide their ill-got­ten gains. As Ian Gary of the Financial Accountability and Corporate Transparency coali­tion has explained, “the US is deeply impli­cat­ed, secret­ly shel­ter­ing bil­lions of dol­lars from out­side the US in places such as South Dakota and Nevada, and it is time for strong action by the Biden Administration and Congress.”

Here are five things that U.S. President Joe Biden, his admin­is­tra­tion, and Congress should do to stop the United States from being one of the world’s cen­tral nodes for dirty money.

BACK UP THE CORPORATE TRANSPARENCY ACT WITH TOUGH REGULATIONS

The Pandora Papers espe­cial­ly not­ed how the loose reg­u­la­tion of trusts in the United States can under­mine good gov­er­nance. Laws start­ing in the 1980s in states such as Alaska, Delaware, Nevada, South Dakota, and New Hampshire dra­mat­i­cal­ly expand­ed the dura­tion of trusts, lead­ing to what are termed “dynasty trusts.” Often these trusts can also be held anony­mous­ly. While there are plen­ty of legit­i­mate rea­sons for fam­i­lies to estab­lish trusts, the com­bi­na­tion of their multi­gen­er­a­tional dura­tion and anonymi­ty make them ripe for abuse. Regulations asso­ci­at­ed with the recent­ly passed Corporate Transparency Act (CTA) could sub­stan­tial­ly close these and oth­er loop­holes in pro­vi­sions to com­bat mon­ey laundering.

Passed as part of the Fiscal Year 2021 National Defense Authorization Act, the CTA includes near­ly 200 pages of reforms to U.S. anti–money laun­der­ing and bank secre­cy laws. Most notably, it requires many busi­ness­es to iden­ti­fy their true ben­e­fi­cial own­ers to the Treasury Department; the reg­istry of those own­ers will not be pub­licly avail­able but will be acces­si­ble to law enforce­ment and reg­u­la­to­ry agen­cies. The Treasury Department has start­ed the asso­ci­at­ed rule mak­ing, which is due by January 2022.

While the CTA did not address trusts, imple­ment­ing reg­u­la­tions could require trust clients to under­go sim­i­lar trans­paren­cy require­ments as lim­it­ed lia­bil­i­ty com­pa­nies, putting U.S. trust reg­u­la­tions in line with those of the EU. By “broad­ly inter­pret­ing” leg­is­la­tion on ben­e­fi­cial own­er­ship of “oth­er sim­i­lar enti­ties” to per­tain to shell com­pa­nies, foun­da­tions, char­i­ties, sole pro­pri­etor­ships, part­ner­ships, and oth­er busi­ness­es not explic­it­ly includ­ed in the leg­is­la­tion, such enti­ties could all come under the upcom­ing rules. Moreover, these rules should min­i­mize road­blocks for autho­rized users of the ben­e­fi­cial own­er­ship reg­istries to access this information.

IMPROVE U.S. FINANCIAL INTELLIGENCE CAPABILITIES

Documents and analy­sis from a 2020 leak of over 2,100 sus­pi­cious activ­i­ty reports (SARs) from banks—a trove known as the FINCEN Files—high­light­ed the weak­ness­es of U.S. finan­cial intel­li­gence capa­bil­i­ties. These leaks showed how lead­ing U.S. banks have allowed huge sums of cash to tra­verse the U.S. finan­cial sys­tem by indi­vid­u­als alleged­ly involved in cor­rup­tion, embez­zle­ment, sanc­tions eva­sion, fraud, and a host of oth­er crimes.

Even as banks filed SARs about these funds, there was almost no one to fol­low up: in 2019, banks filed over 5 mil­lion SARs in the United States, but there were only about 300 employ­ees to fol­low up at the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), the U.S. finan­cial intel­li­gence unit. That’s about the same size as Australia’s finan­cial intel­li­gence unit, even though Australia is far less cen­tral to the world’s finan­cial infrastructure.

FinCEN should also be giv­en more influ­ence and author­i­ties to assess and then help stop mon­ey laun­der­ing through the U.S. finan­cial sys­tem. A work­ing group of aca­d­e­mics, gov­ern­ment offi­cials, and indus­try actors (includ­ing this author) rec­om­mend­ed five ways to improve FinCEN’s effec­tive­ness. This includes a new National Anti-Money Laundering Data Center; a project on the new tech­nolo­gies need­ed to help stop mon­ey laun­der­ing; a new train­ing cen­ter so that law enforce­ment, pros­e­cu­tors, and reg­u­la­tors have the knowl­edge and tools they need; and a strate­gic analy­sis team to keep up to date on emerg­ing trends on the subject.

PLACE MORE FINANCIAL ENABLERS UNDER THE CORPORATE TRANSPARENCY ACT’S RULES

A 2015 under­cov­er inves­ti­ga­tion by Global Witness high­light­ed how lawyers can facil­i­tate the entry of illic­it mon­ey into the United States (even as no crimes were com­mit­ted and no mon­ey changed hands since the meet­ings involved were pre­lim­i­nary). Both the 2016 Panama Papers and this week’s Pandora Papers empha­size the role that lawyers, accoun­tants, cor­po­rate ser­vice providers, and oth­er finan­cial enablers play in facil­i­tat­ing mon­ey laun­der­ing through­out the United States. For instance, report­ing by the International Consortium of Investigative Journalists (ICIJ) showed that the U.S. law firm Baker McKenzie helped for­mer financier Jho Low set up a slew of com­pa­nies in Malaysia and Hong Kong. U.S. author­i­ties report­ed­ly allege that some of those firms were involved in help­ing move some of the $4.5 bil­lion that was stolen from the Malaysian sov­er­eign devel­op­ment fund known as 1MDB. (A spokesper­son for Baker McKenzie told inves­ti­ga­tors it con­ducts “strict back­ground checks on all poten­tial clients,” accord­ing to the ICIJ reporting.)

A bipar­ti­san bill intro­duced on October 6, 2021, enti­tled the Establishing New Authorities for Business Laundering and Enabling Risks to Security (ENABLERS) Act would close many of the loop­holes used by accoun­tants, pub­lic rela­tions firms, art and antiq­ui­ties deal­ers, invest­ment advis­ers, and some lawyers. 

This law would require these pro­fes­sion­als to con­duct at least basic due dili­gence on the sources of client funds and thus help align U.S. reg­u­la­tions with inter­na­tion­al best prac­tices. This is espe­cial­ly impor­tant when mon­ey for finan­cial trans­ac­tions does not go through opendemocracy banks, which already have due dili­gence require­ments. Congress should pri­or­i­tize this bill for consideration.

STOP EXEMPTING REAL ESTATE FROM MANY RULES TO COMBAT MONEY LAUNDERING

One of the best avenues to laun­der mon­ey is the real estate sec­tor, and the Pandora Papers high­light­ed how funds can be secret­ed into the United States for large real-estate pur­chas­es. The leaks show that Jordan’s King Abdullah II owns at least thir­ty-six shell com­pa­nies in var­i­ous havens; he bought at least four­teen lux­u­ry homes in the UK and the United States over a four­teen-year peri­od. Meanwhile, Jordan, a pover­ty-strick­en coun­try that is sur­round­ed by con­flict and hosts over 1 mil­lion refugees, received $1.5 bil­lion in aid from the United States and $281 mil­lion from the European Union last year. The king’s attor­neys denied to inves­ti­ga­tors that any impro­pri­eties were involved.

But it is not just for­eign poten­tates who have a pen­chant for American prop­er­ties. The U.S. Department of Justice is seek­ing the for­fei­ture of $100 mil­lion worth of com­mer­cial prop­er­ty owned via a net­work of shell com­pa­nies held by Ukrainian oli­garchs Ihor Kolomoisky and Gennadiy Bogoliubov. These prop­er­ties were alleged­ly used to laun­der bil­lions of dol­lars stolen from PrivatBank, one of Ukraine’s largest banks.

The real estate sec­tor is espe­cial­ly poor­ly reg­u­lat­ed when it comes to mon­ey laun­der­ing. This is in part because FinCEN grant­ed real estate pro­fes­sion­als a tem­po­rary exemp­tion from anti–money laun­der­ing and counter-threat finance require­ments that were part of the 2001 Patriot Act. The afore­men­tioned ENABLERS Act would lift that exemp­tion. FinCEN could, how­ev­er, choose to lift that exemp­tion even with­out this leg­is­la­tion. Another part of the ENABLERS Act would enhance report­ing require­ments for cer­tain real estate pur­chas­es, a reform long advo­cat­ed by law enforce­ment and anti-cor­rup­tion advo­cates. The cur­rent rules only require this enhanced report­ing for res­i­den­tial pur­chas­es in spe­cif­ic geo­graph­ic areas asso­ci­at­ed with mon­ey laun­der­ing; the new leg­is­la­tion would make this nation­wide and per­ma­nent, and it would also apply to com­mer­cial properties.

TREAT CORRUPTION LIKE A CORE NATIONAL SECURITY ISSUE

In June, the Biden admin­is­tra­tion offi­cial­ly declared that the fight against cor­rup­tion is a core U.S. nation­al secu­ri­ty inter­est in its National Security Study Memorandum‑1 (NSSM‑1). As part of the announce­ment, the admin­is­tra­tion not­ed that “cor­rup­tion threat­ens United States nation­al secu­ri­ty, eco­nom­ic equi­ty, glob­al anti-pover­ty and devel­op­ment efforts, and democ­ra­cy itself.” There are plen­ty of oppor­tu­ni­ties for the Biden Administration to demon­strate that it is seri­ous about this.

On December 9–10, 2021, the United States will host the Summit of Democracies; one of the summit’s three pil­lars is fight­ing cor­rup­tion. A bold announce­ment dur­ing the sum­mit that the United States will seek to thor­ough­ly reform itself to help stop dirty mon­ey would put teeth behind future pub­lic state­ments. For instance, this would be an ide­al time to announce the strongest pos­si­ble rules for imple­ment­ing the CTA along with a plan to rein­vig­o­rate FinCEN and bet­ter inte­grate the agency into the broad­er nation­al secu­ri­ty archi­tec­ture. New rules on gate­keep­ers and the real estate sec­tor could also be announced. The Treasury Department could also pre­pare a National Corruption Risk Assessment and announce that it will lead inter­na­tion­al efforts to end off­shore finan­cial secre­cy once and for all.

As part of NSSM‑1, an inter­a­gency review process is also due to be com­plet­ed in December, includ­ing the Department of Defense, the Department of State, the Central Intelligence Agency, and the National Security Agency. These nation­al security–focused agen­cies should be required to appoint an office to inte­grate efforts to fight cor­rup­tion and mon­ey laun­der­ing through­out their agen­cies. In addi­tion to learn­ing the lessons from the role that cor­rup­tion played in the fall of Kabul this sum­mer, the Defense and State Departments should be man­dat­ed to exam­ine how to min­i­mize cor­rup­tion in the arms trade and defense ser­vices sec­tors. The intel­li­gence com­mu­ni­ty should be tasked with how to improve its col­lec­tion and assess­ment of intel­li­gence asso­ci­at­ed with finan­cial crime.End of document

Jodi Vittori

Jodi Vittori is a non­res­i­dent schol­ar in the Democracy, Conflict, and Governance Program. She is an expert on the link­ages of cor­rup­tion, state fragili­ty, illic­it finance, and U.S. nation­al security.

Original source of arti­cle: Carnegie does not take insti­tu­tion­al posi­tions on pub­lic pol­i­cy issues; the views rep­re­sent­ed here­in are those of the author(s) and do not nec­es­sar­i­ly reflect the views of Carnegie, its staff, or its trustees.