Financial Transparency Coalition

Last week, almost one month to the day after the Panama Papers came to light, President Obama announced new rules to help combat the abuse of anonymous shell companies to evade taxes and launder money. While it’s certainly welcome that the President of, by some accounts, the ‘world’s favorite new tax haven‘, is taking measures to combat illicit financial flows, it’s important to read the fine print. 

As part of President Obama’s announcement, the Treasury Department vowed to enact a ‘customer due diligence’ rule, which would require banks to identify the beneficial owners behind companies that open accounts with them. The beneficial owners are the real person or people that are ultimately benefiting from or in control of the company. Without this requirement, it’s far too easy for criminals and the corrupt to hide behind anonymous companies.

But, as an article out today in Quartz points out, there seems to be a fairly concerning loophole in the proposed rule.

From Quartz:

Most glaring? The internationally accepted definition of beneficial owner—the actual human being who truly gains from the company’s equity—is altered in the law. Under the new rules, anyone who owns less than 25% of the company need not be reported, and the appointed president of a shell company can be listed as the beneficial owner.

“That’s kind of the opposite of what the term as has always meant,” Elise Bean, the former chief counsel of the Senate Permanent Subcommittee on Investigations, told reporters last week. “At Mossack Fonseca, they could say, ‘I’m appointing my law firm employee the president of the shell company, and now under US rules, I can name my employee the beneficial owner of that company.’ That just doesn’t make sense.”

Heather Lowe, the general counsel at the NGO Global Financial Transparency, notes that the US Securities & Exchange Commission requires people to report 5% ownership of companies, even as the US Treasury Department argues that reporting anything less than 25% is an undue burden.

A release issued last week from our colleagues at the FACT Coalition echoed a similar sentiment:

“While we appreciate the Administration’s recognition of the importance of collecting ownership information, the measure includes a loophole that could well perpetuate the problem of anonymous shell companies. The loophole is dangerous if exploited by terrorists, human traffickers, and corrupt foreign dictators to launder their money through the U.S. financial system,” noted Gary Kalman, the executive director of the FACT Coalition.

But even with a loophole-free Treasury rule, more transparency is needed. The U.S. could take cues from the U.K, South Africa, the Netherlands, and other members of a growing list of governments that have decided to create public registers of the beneficial owners of all companies incorporated within their borders.

The U.K’s register will come online in June, and European Union member states are in the midst of implementing their own national-level beneficial ownership registers, though some of these won’t be fully public.

There’s a bipartisan bill already working its way through U.S. Congress that would require beneficial ownership information to be collected for companies incorporated in all 50 states. Read more about it here.