The U.S. Needs Parity on Anti-Money Laundering and Beneficial Ownership

January 10th, 2014

Last week, the Wall Street Journal reported that the U.S. Justice Department has indicated it will step up its enforcement of anti-money laundering (AML) rules among financial institutions and boost its efforts to safeguard U.S. banks from illicit financial flows. As the article points out, this comes as no surprise to those of us who have watched this issue—prosecutors in the United States have been bringing more cases against banks using the Banking Secrecy Act and DOJ has aggressively pursued both domestic and international banks for deficient money laundering controls.

The DOJ’s efforts are laudable, but unfortunately they expose a systemic deficiency in another area. In fact, while the United States has made commendable strides in many areas—and the Obama administration has repeatedly promised to crack down on financial secrecy—there is at least one, glaring hole in the progress: on beneficial ownership.

There are plenty of reasons for the United States (and indeed all countries) to strengthen rules on beneficial ownership, but one obvious reason is to enhance AML efforts. The connection between the two is fairly straightforward: criminals obscure their identities using anonymous shell companies (or “phantom firms”) to launder the proceeds of crime. Without knowledge of the “beneficial owner” (or the flesh in blood person) of an account, law enforcement officials are stymied in their efforts to trace illicit funds.

Yet despite the United States’ numerous promises to the contrary, the nation is still woefully behind in this realm.

Take a recent assessment by the Organization for Economic Cooperation and Development (OECD) on member countries’ performance in fighting illicit financial flows. As part of the report, the OECD assessed all member countries on their compliance with some key Financial Action Task Force (FATF) recommendations on money laundering. It found that the United States is non-compliant on FATF Recommendations 33 and 34, both on beneficial ownership. The United States was one of the few member nations that were non-compliant in both areas.

In 2012, the Treasury Department promised to “propose a regulation that would establish a categorical requirement for financial institutions to identify beneficial ownership of their account holders.” Nearly two years later, we’re still waiting for the rule. It might be released sometime this year—but no promises.

The regulation itself would hardly be a panacea. As the International Consortium of Investigative Journalists has pointed out:

The requirement would not affect state-level requirements for incorporation, and an individual wishing to form a shell company in Delaware or Nevada would not have to disclose any more information than under current rules. Owners would simply have to work to with foreign banks and money managers with more lenient disclosure requirements if they did not wish to reveal their identities to their financial institution.

The rule would, however, be a stride forward symbolically, if not practically. It would also be an important incremental step toward stricter rules on beneficial ownership, such as those contained in the Incorporation Transparency and Law Enforcement Act, which we are all still hoping Congress will get around to passing. Until then, at least we can keep our fingers crossed that 2014 will be the year Treasury will keep its promise on beneficial ownership.

Written by Ann Hollingshead

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