Corporate Transparency more tortoise than hare.

Shell companies—specifically, of the illicit sort—have so long been entangled with the concept of money laundering that one term often evokes the other. But after decades of acknowledging the problems associated with anonymous corporate ownership, and with little to show in the way of preventing the misuse of shell firms, some of the world’s largest economies are now signaling that they’re ready to act more forcefully, though not in the same ways or at the same speed. 

For one example of this, see the UK’s Companies House.

In May, the registrar published a consultation seeking input on proposed reforms that would require either a third-party business or the government to verify the registered identities of company officers, individuals who submit registration data and anyone wielding “significant control” over a registered corporate entity.  Rather than operating as a passive recipient of data, under the proposed plan Companies House would become an active body empowered in certain cases to request additional information from businesses that undergo certain changes, such as significantly increasing share capital or filing for exemptions from public disclosures. The proposal would also separately seek to protect sensitive data while permitting officials at Companies House to cross-check the information they’ve has received with other authorities in an effort to better detect criminal behaviour.

“The potential reforms set out in this consultation would amount to the biggest changes to the UK system for setting up and operating companies since the UK company register was created in 1844,” according to a statement by UK Minister and Member of Parliament Kelly Tolhurst. These reforms will play an important part in safeguarding the well-earned reputation of the UK’s business environment,” said a Companies House spokesperson. “We are ranked as one of the top countries worldwide for tackling economic crime, and these proposals will  make protections for businesses and consumers even stronger.” But while UK anti-corruption groups have characterized the proposal as a step in the right direction, the devil may be in the largely absent details. The consultation describes many of its proposals as “principled, rather than specific measures aimed at limited liability companies.” The current proposal as it stands is far from finalized, with much work likely ahead before real reform is implemented, according to Naomi Hirst, a senior campaigner at Global Witness, a nongovernmental organization that advocates for anti-corruption initiatives. How the plan might ultimately be implemented will depend on how the new UK government prioritizes and shapes it, she said. The proposal may also face skepticism over whether it would effectively reduce financial crime without overburdening, or potentially scaring away, businesses that view the requirements as overbearing. But such concerns are likely mitigated by the fact that the EU’s Sixth Money Laundering Directive is slated to be transposed into national law by December 2020, Hirst noted. Under the 6th directive, EU member-states would be required to ensure that companies and other legal persons can be held directly liable in instances when poor supervision or controls makes possible the commission of money laundering benefiting the corporation or its employees. The proposal is “actually going to be more helpful to businesses and ease their burden when they deal with other businesses if Companies House has proper verification, resources and powers,” said Hirst. 

Formed in the USA

Across the pond, US lawmakers are considering legislation that would also require greater disclosures on the beneficial owners of legal entities formed under various state laws. If that sounds familiar, it’s probably because more than a half dozen corporate transparency bills have previously been introduced into committee, only to die quietly without floor consideration. In its 2016 mutual evaluation report, FATF found that “lack of timely access to adequate, accurate and current beneficial ownership information remains one of the fundamental gaps in the U.S. context.” The intergovernmental group went on to note that money launderers use “complex structures to hide ownership” of legal entities. Earlier this summer, legislators in the Senate and House introduced measures intended to answer FATF’s criticism directly. In June, four members of the Senate Banking Committee—Sens. Mark Warner (D-VA), Tom Cotton (R-AR), Doug Jones (D-AL) and Mike Rounds (R-SD)—introduced The Illicit Cash Act, which among other provisions would obligate businesses and other corporate entities to submit information on their beneficial owners to a comprehensive federal database, which would be accessible to federal and local law enforcement officials. That same month, Rep. Carolyn Maloney (D-NY) and a bipartisan group of nine cosponsors asked the House Committee on Financial Services to consider passage of The Corporate Transparency Act, which would require corporations and limited liability companies to report beneficial ownership data to the Financial Crimes Enforcement Network (FinCEN) at the point of formation. The required disclosures include beneficial owners’ names, dates of birth, current addresses and the numbers of driver’s licenses and non-expired passports. Businesses would also be obligated to report on their owners on an annual basis, including any ownership changes that occurred during the previous year. Although an earlier iteration of the bill had previously failed to garner support in 2017, House lawmakers voted in June to advance the bill out of committee, marking a significant and rarely crossed milestone for financial crime legislation. The legislation is also the first of its kind to receive support of a wide range of stakeholders, according to Lakshmi Kumar, a policy director for Global Financial Integrity. The bill has been endorsed by 108 nongovernmental groups, more than 60 national security experts, real estate trade associations, human rights organisations and a law enforcement body. 

“Support for such legislation has been growing and has a lot to do with how it has been framed,” said Kumar. “Initially, it was framed as ‘money being lost from the developing world,’ but [this didn’t help get] broad support because it wasn’t seen as a US issue.”

Over the last few years, however, the narrative has shifted so that money laundering is discussed as a “serious national security concern for the US,” according to Kumar, who cited Iran’s ownership of the 650 5th Avenue skyscraper in Manhattan as an example of how the lack of corporate transparency can facilitate sanctions violations. Federal financial regulators have previously sought to improve corporate transparency, though amendments that took effect in 2016 place the onus on banks to obtain beneficial ownership data from their corporate clients. Such looseness in US beneficial ownership disclosures is shocking given the fact that the United States held the FATF presidency for much of 2018 and 2019, according to Kumar. 

“In the US, we’re still trying to get legislation to say we have to collect beneficial ownership information. In other places, they have moved on to second and third generation laws,” she said.

Incorporating in Canada 

North of the US border, legislation intended to improve corporate transparency also made headway over the summer.  Amendments to the Canada Business Corporations Act (CBCA) took effect in June, obligating corporations to maintain internal registers of the individuals who wield significant control over them. Violators can face fines or even imprisonment under the law, which also requires that the data be made available to law enforcement agencies and the Canada Revenue Agency upon request. The revisions are a big step forward, according to Sasha Caldera, the beneficial ownership project manager at Canadians for Tax Fairness.

“The idea behind the amendment was to harmonise changes [across the country], so the CBCA would require federally incorporated companies to hold an internal record of this information and then provinces would amend their own provincial statutes,” he said. But it remains unclear which provinces have plans to amend their provincial statutes, he added. Pressure on Canadian officials to do more to prevent the exploitation of shell companies has been building since the Group of 20 committed to greater corporate transparency in 2014. FATF’s 2016 mutual evaluation report on the country, as well as a leaked 2017 exchange between UK and Canadian officials acknowledging Canada’s vulnerabilities to money laundering, have only strengthened calls for the government to better shield the nation from financial crime.  More recently, various investigative reports have revealed that regulatory loopholes have likely led to the influx of billions of dollars in dirty money, much of which is believed to have been invested in Canada’s largest housing markets. 

“The Toronto and Vancouver real estate markets have been artificially inflating at a rapid rate, and last year both markets had some of the biggest bubbles globally, which was shocking,” said Caldera. “A lot of that was attributed to speculative capital and also money laundering.”

As a result, ordinary would-be home owners have found themselves priced out of the market while housing purchased via shell corporations often remains vacant, he said. Because of such developments, efforts to tamp down on financial crime are likely to maintain momentum. Federal and provincial officials are currently weighing additional steps to establish a public register of corporate owners and are considering the publication of best practices to fight money laundering more broadly. Despite such efforts, Canada is still “way behind the pack” when it comes to corporate transparency, according to Caldera, who noted that the CBCA amendments still bar Canada’s national financial intelligence unit, Fintrac, from accessing beneficial ownership data.

Credit: Hiba Mahamadi via KYC360