June 26, 2020 | Insight

Will COVID-19 Motivate Congress to End Anonymous Incorporated? Our Financial and Collective Security Increasingly Depends on It.

June 26, 2020 | Insight

Will COVID-19 Motivate Congress to End Anonymous Incorporated? Our Financial and Collective Security Increasingly Depends on It.

The $10 trillion global stimulus to combat COVID-19 is already triple that spent for the entire 2008-2009 global recession. The fraud that is sure to follow will be larger than the entire GDP of some countries. Much of that fraud will not be discovered. For that which is, most of the money will be long gone. Ultimately, much of it will go to sophisticated malign actors who threaten our collective security – including transnational criminal organizations and corrupt elites that destabilize vulnerable countries and markets.

The financial get-away cars used to perpetrate such worldwide fraud will inevitably include anonymous companies incorporated in the United States. Simply put, this is how fraudsters and other criminal organizations get paid without disclosing who they are. We know this already because we have seen this movie before – just never at the scale we will be witnessing in the months and years ahead. We will keep seeing this script unless and until Congress adopts legislation prohibiting the creation of such anonymous companies. Next week, Congress will be deliberating such proposed legislation. The impending tsunami of COVID-19-related fraud is only the latest reason why Congress must act.

Anonymous companies are those created for or on behalf of unknown interests. The continual creation of such companies right here at home fundamentally weakens our ability to combat all forms of financial crime. Most recently, in March 2020, the U.S. Department of the Treasury published its National Strategy for Combating Terrorist and Other Illicit Financing. The first illicit financing vulnerability cited by Treasury was anonymous companies created in the United States.

Numerous high-profile investigative reports, events, and even movies – from publication of the Panama Papers to the 60 Minutes’ production of Anonymous, Inc. to Hollywood’s The Laundromat – present an increasingly public argument against allowing the ongoing creation of anonymous legal entities. The far more powerful argument lies in the cases that our own authorities tell us no one can track or see.

Law enforcement officials have long testified before Congress and other authorities about their consistent inability to pursue high-priority cases involving anonymous companies that present a dead end for investigators. Similarly, sanctions authorities and compliance officers in financial institutions worldwide struggle to track the myriad shadow companies ultimately created and controlled by designated national security threats whose identities are concealed or reinvented through lax company-formation laws.

For these and other reasons, it is entirely unclear just how pervasive the exploitation of anonymous companies is. What is clear is that the ability to pursue investigations implicating such companies is severely limited by incorporation practices in the United States.

Addressing this vulnerability requires congressional legislation to reform company-formation processes by requiring the identification of beneficial ownership – that is, those individuals who ultimately own or control companies created under laws in the United States.

In urging such action, it is important to recognize we have been here before. Through at least five consecutive administrations, various arms of the executive branch – including several law enforcement agencies and the Treasury Department – have called for Congress to prohibit incorporation of anonymous companies. Yet a generation of previous company-formation reform bills has died in various congressional committees. Why?

For some, the gravity of risk posed by anonymous companies may seem academic, episodic, or exaggerated. Others misconstrue what an anonymous company is and what it is not, thereby distorting the scope, objective, costs, and benefits of company-formation reform. For others still, the solution should lie elsewhere, whether in the form of greater due-diligence requirements for financial institutions, stronger law enforcement authorities, or better cooperation from foreign jurisdictions. Finally, for many, effective solutions seem prohibitively costly or unworkable, or workable solutions appear ineffective.

For almost two decades, we have become paralyzed by such thinking. Meanwhile, other financial centers have enacted legislation ending their creation of anonymous legal entities, and more of the global threats we face are now attracted to using companies incorporated in the United States to maintain their anonymity.

Enacting effective and workable company-formation reform is a complex challenge, but we have learned much throughout our decades of wrestling with this issue. Legislation currently under consideration by Congress imposes no greater disclosure requirements on businesses than those they must already meet to open a bank account in the United States. By requiring companies to report and maintain beneficial ownership to jurisdictional authorities, proposed legislation ensures that companies created in the United States will not gain anonymous access to the financial system by opening accounts at financial institutions abroad. Such legislation would also enable authorities to quickly ascertain the beneficial ownership of companies formed in the United States, without painfully trying to determine whether and where such companies may hold bank accounts in the United States.

Proposed legislation would ease burdens on financial institutions by familiarizing their prospective U.S. corporate customers with beneficial ownership disclosure requirements before seeking to open a financial account in the United States. Finally, such legislation would align U.S. practices and strengthen international cooperation with other countries allied against collective security threats.

Without company-formation reform, we will continue to fight financial crime and the collective security threats we face with one hand tied behind our back. U.S. and other financial institutions around the world will be burdened with heightened risk and additional liability from anonymous companies continually created under laws in the United States. And without U.S. leadership, company-formation reform in other countries will be absent, stillborn, or undercut.

As the coming pandemic of COVID-related fraud approaches, it is past time to end the ongoing creation of anonymous companies in the United States. Congress must adopt proposed legislation enacting company-formation reform. Our financial and collective security increasingly depends on it.

Chip Poncy serves as senior advisor to the Center on Economic and Financial Power (CEFP) at the Foundation for Defense of Democracies (FDD). He is the global co-head of Financial Crimes Risk & Compliance for K2 Intelligence Financial Integrity Network, a strategic and technical advisory and investigations firm. For more analysis from Chip and CEFP, please subscribe HERE. Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonprofit research institute focusing on national security and foreign policy.


COVID-19 Sanctions and Illicit Finance