A strange thing occurred this month in the American political universe when a business organization wrote a letter to several key Congressmen advocating on behalf of a bill that would increase government oversight over companies. Yes, you read that right: companies are voicing their support for more government regulation.
The proposed law in question is the Incorporation Transparency and Law Enforcement Assistance Act, which would require persons who form corporations or limited liability companies in the United States to disclose the beneficial owners of those corporations. The letter came from The Clearing House Association, a group backed by some of the world’s largest banks including HSBC, Citigroup and Bank of America.
It’s well known that private banking institutions have traditionally favored discretion and confidentiality on behalf of their clients, so why are banks suddenly advocating on behalf of transparency?
Take a look at the history of corporate transnational regulation and a clearer answer begins to emerge as to why the private sector is now embracing increased transparency. Over the past forty years, U.S. companies have been subject to an ever-increasing litany of regulations aimed at tackling international economic and security concerns.
Laws passed by Congress like the Bank Secrecy Act, the Foreign Corrupt Practices Act, the Money Laundering Control Act, and the Patriot Act have all included various requirements aimed at preventing corporate involvement in such weighty international issues as terrorist financing, money laundering and public corruption. These laws have been bolstered by numerous protections for corporate whistleblowers and have resulted in trillions of dollars in fines and penalties against companies by the Department of Justice, the Securities and Exchange Commission and other enforcement agencies.
Today, many of these rules have been duplicated overseas and normalized through international conventions, like the United Nations Convention Against Corruption and the International Convention for the Suppression of the Financing for Terrorism.
All of this regulation has also led to an enormous increase in the cost of compliance for companies. Businesses must put in place preventative controls aimed at complying with their regulatory obligations, such as know-your-customer questionnaires, third party due diligence measures, and internal employee training. It’s no wonder, then, that larger businesses are embracing proposed corporate transparency rules that would shift the burden of compliance onto their customers and third parties to disclose their ownership structure.
Decades of international corporate regulatory enforcement have also shown that moral condemnation and criminalization are alone insufficient to stop economic crimes that cross international borders. No matter how much governments penalize illegal corporate activity, they will only be addressing part of the problem so long as sovereign governments continue to shelter criminal and terrorist organizations and maintain impunity for their corrupt public servants.
That’s why international non-profit organizations like Global Financial Integrity and TRACE International, for which I work, have long advocated for corporate transparency laws that would actually begin to address this international game of whack-a-mole. Corrupt politicians and criminal organizations make use of financial institutions to transfer their money across borders, leaning on the sophistication of shell companies and globalized banking to hide their assets in offshore accounts.
According to one 2012 academic study, out of 60 countries examined, the United States was found to be the second-easiest place in the world for criminals to incorporate an anonymous shell company for illegal activities. (Kenya was the easiest). Corporate transparency laws, like the one proposed by U.S. lawmakers, are aimed not at legitimate entrepreneurs, but at these would-be criminals.
For forty years, governments have worked towards eliminating economic wrongdoing such as public corruption and money laundering largely through targeting of the private sector. But despite increased coordination and cooperation among governments and law enforcement agencies, these crimes will remain difficult to suppress so long as their beneficiaries are able to continue to easily conceal their activities from regulators through offshore shell companies.
Recent global scandals such as the Panama Papers have galvanized public sentiment around the need for increased corporate transparency.
International businesses, too, now see the distinct potential that corporate transparency has for lowering compliance costs. A new paradigm shift in combating cross-border economic crimes is not only needed, but has finally become opportune.
Severin Wirz is based out of Nairobi and is a consultant for TRACE International, the globally renowned anti-bribery standard setting organization. TRACE recently launched TRACEpublic, the first global register of beneficial ownership information, which allows companies to share and search for beneficial ownership information at no cost