In even the best registries, a big problem remains: The ultimate controlling shareholder, also known as the beneficial owner, is often obscure. People who want to hide can too easily use nominees from corporate secretarial agencies, or list the owner as a company or trust in a secretive haven like the British Virgin Islands or Seychelles. This is where the trail often hits a dead end.
Financial secrecy is high on political agendas again along with efforts to sanction Russian oligarchs accused of backing President Vladimir Putin’s war in Ukraine. Real estate, yachts and other trappings of the superrich can, just like private businesses, often be owned through shell companies and trusts that make the true owner hard to trace.
This should be a moment for a big step in making life tougher for criminals, kleptocrats and other unsavory individuals wanting to hide money, though experts worry that today’s political attention won’t last. War, disaster or economic strife can galvanize politicians to push through big changes. Much of today’s anti-money laundering rules in finance was born out of the attacks on New York and Washington in September 2001 when the U.S. led a global crackdown on terror financing.
Two decades and a string of scandals later — from HSBC Holdings Plc allowing drug lords access to its Mexican arm to Danske Bank’s $200 billion-plus Estonia laundromat — it’s clear that supervision and enforcement need resources. Billions of dollars in fines show the law in action, but the fact they keep coming shows the problem isn’t fixed. For instance, ABN Amro paid nearly $600 million to Dutch authorities only last year.
But as more efforts have focused on stamping out laundering through large banks, the industry of disguising money flows and asset ownership through shell companies and trusts has grown. The U.S. and U.K. remain big offenders on this front. Legislation is being bolstered — but slowly and with gaping holes.
The Financial Action Task Force, the intergovernmental money-laundering and terror-financing watchdog, last month strengthened its standards for recording beneficial ownership. All countries should now implement rules that meet these. They require that ownership of companies, real estate and other assets is recorded accurately — it must be verified, up-to-date and accessible at least to law enforcement, tax and other so-called competent authorities.
Full public access would be better: It allows anyone who is interested to help review and verify all that is filed. The U.K.’s Companies House might be full of holes, but at least anyone can point to those and make a fuss.
Secrecy has long been a key selling point for Swiss banking, but the U.S.-led crackdown on tax evasion by wealthy individuals after 2008 in effect ended that for international clients, at least for tax purposes, according to the Swiss Bankers Association. Its banks still have more than $200 billion of assets from rich Russians potentially, the SNB estimates, although banks have been quick to freeze accounts of those sanctioned.
But compliance and supervision in Switzerland are still questionable, says Maira Martini, a global money-laundering specialist at Transparency International. There are no visibility demands for company ownership there and no requirement for lawyers to make suspicious transaction reports related to setting up companies, she says.
Several countries are acting to shed more light on ownership. The U.K. government has said it will strengthen rules for Companies House and it just passed laws to force foreign owners of property to reveal themselves. Canada is accelerating rules on corporate transparency, Martini says. New Zealand is too, although its efforts ignore its growing trust industry, she adds.
If any country can use its economic power and the extraterritorial reach of its currency to lead tougher standards it ought to be the U.S. President Joe Biden’s administration has admitted that America has major money laundering failures of its own, but proposals to improve the rules still aren’t yet up to scratch.
The Corporate Transparency Act was passed by Congress in 2020 and adding a rule on beneficial ownership to this was proposed last December by the Treasury’s Financial Crimes Enforcement Network. But there are so many restrictions and exemptions that it should be called the Corporate Opacity Act, says Ross Delston, an independent American attorney and anti-money laundering expert based in Washington, D.C.
Only law enforcement and banks will get access to it, while it currently won’t apply to many kinds of companies, or trusts, which are becoming a leading source of financial secrecy globally.
South Dakota, home to a booming secrecy industry, had more than $350 billion in opaque trusts, according to estimates by the Guardian newspaper. For a comparison, the value of U.K. real estate owned by offshore companies, another popular way of socking away cash, has been estimated at more than 170 billion pounds ($223 billion).
U.S. trusts could yet be captured by FinCEN’s beneficial ownership rule, according to a background briefing from a senior Treasury official. The rule is a work in progress, they said, and would go beyond what’s contained in the proposal, although they couldn’t give any details. Today’s events have mobilized opinion and made financial secrecy the subject of a lot of focused thinking and conversation, they added.
But others worry the moment will pass: Ownership and secrecy are too abstract for many voters.
The Russian invasion of Ukraine may not have the lasting impact for U.S. or European voters of terrorism on home soil. U.S. voters may see the point in punishing some Russians, but oligarchs and Putin are not viewed as attacking the U.S. directly, says Delston.
Those who benefit from the business of financial secrecy find it easy to seed public debate with popular notions of freedom from heavy-handed government and privacy concerns. But this is a pernicious industry that aids tax evasion, theft and corruption on a huge scale. It helps states deploy secret cash to fund attacks on other governments and people. It is time to end it.
More From Bloomberg Opinion:
• You Can’t Just Take a Russian Oligarch’s London Townhouse: Chris Hughes
• The Father of Russia’s Oligarchs Won’t Be the Last to Go: Clara Ferreira Marques
• Russia Exploits Two Big Holes in Financial Sanctions: Paul J. Davies
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.
