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End anonymous shell companies to protect national security

After several delays, the first trial of Najib Razak, the former Prime Minister of Malaysia, began on April 3rd. He is accused of plundering the Malaysian Sovereign Wealth fund, 1Malaysia Development Berhad (1MDB), which he set up to drive the development efforts in Malaysia. This represents a stunning reversal in fortune for Najib Razak who after ruling for nearly a decade was handily defeated in the elections last year amid allegations of massive corruption.

The 1MDB case became global news when the U.S. Department of Justice brought the largest ever civil complaint seeking to forfeit and recover over $1 billion in assets involving Malaysia’s 1MDB. The lawsuit left “Malaysian Official 1” unnamed but the new Malaysian Government later confirmed that the individual was Razak.

The co-conspirators were allegedly able to siphon off more than $4 billion in 1MDB funds through a series of complex transactions using fraudulent shell companies with bank accounts located in the Singapore, Switzerland, Luxembourg and the United States to conceal the origin, source and ownership of the funds.

Corruption also leads to devastating human development outcomes. Venezuela is a prime example. The man-made humanitarian crisis unfolding in Venezuela has plunged a once-prosperous country to the brink of destitution and complete ruin. Here too, shell companies have enabled corruption. In 2013, Reuters reported that shell companies account for about 40 percent of buyers of dollars through Venezuela’s currency control system. This massive fraud cost the nation billions of dollars. Last year, a banker plead guilty in a Miami federal court in a $1.2 billion Venezuela money laundering case regarding embezzled funds from the state oil company for the stepsons of an unnamed Venezuelan government official. News reports later identified this individual as President Nicolás Maduro.

It is increasingly common to see the use of anonymous companies to enable corruption. Almost every large corruption scandal in the last few years (FIFA, Petrobras) has included actions taken by anonymous companies. All kleptocrats need to move their illicitly obtained wealth to avoid scrutiny and they do so by opening companies in places where it is possible to hide the real owners, so-called anonymous shell companies. Given this widespread problem, collecting information about the natural persons who control anonymous companies or derive economic benefits from them (beneficial owners) is key to reducing opportunities for corruption. 

Ignoring the problem that anonymous companies pose allows kleptocrats to easily move their funds and lets corruption flourish. We as a nation and as citizens have a responsibility to tackle corruption because of its devastating impact on human rights, development and American national security. The U.S. Department of State’s anti-corruption webpage  recognizes the strong link between corruption and national security. This link exists because corruption is inherently destabilizing. It perpetuates weak governance and institutions, which allow extremist ideologies to thrive. In this atmosphere, democracy and the rule of law cannot be effective. 

The problems associated with anonymous companies do not only threaten the governments and institutions of foreign countries. Anonymous companies provide the veil necessary to obfuscate identities of foreign nationals or governments who engage in election meddling, which directly challenges American democracy.  The recently released Mueller report investigating Russian interference in the 2016 Presidential election contains several references to anonymous/shell companies including shell companies associated with St. Petersburg-based Internet Research Agency and the shell companies associated with Michael Cohen and Paul Manafort.

Paul Manafort was sentenced to 7.5 years in prison for a variety of crimes including money laundering, failing to register as a foreign lobbyist, filing false tax returns, bank fraud, failure to report foreign assets and obstruction.  He used shell companies to get millions for his work for Ukrainian politicians and then used the shell companies to buy cars, real estate and other luxury goods while hiding the money from the government. In addition to his prison sentence, Manafort had to forfeit millions to the federal government and pay restitution to banks.

In an ironic twist, prosecutors now claim that Manafort may be using a shell company registered in Nevada to save some money from forfeiture by faking a $1 million loan. Prosecutors cannot tell if the beneficial owner of the Nevada registered company is Manafort himself because the U.S. does not collect that information.

The United States has suffered from years of inaction on legislation to promote transparency of ultimate ownership of anonymous companies but there is increased momentum building. The Clearing House, which is an association of the largest banks, supports legislation to collect ultimate ownership information upon incorporation. Several companies support more transparency of anonymous companies. And so does law enforcement. Encouragingly in March 2019, the Subcommittee on National Security, International Development, and Monetary Policy (Committee on Financial Services) held a hearing on “Promoting Corporate Transparency: Examining Legislative Proposals to Detect and Deter Financial Crime.” 

The hearing included reviewing a draft of the Corporate Transparency Act introduced by Representative Maloney which would require the Financial Crimes Enforcement Network (FinCEN) to collect beneficial ownership information upon incorporation and would give law enforcement access to the information to conduct complex money laundering investigations. There is bipartisan support for having FinCEN collect the information. FinCEN has a strong track record of securely handling information and working with law enforcement to get them the information they need in a timely fashion. Law enforcement opposes alternative approaches like having the IRS collect the information. 

It is shocking that to renew a public library card in Arlington,Virginia an individual needs to provide their driver’s license showing their current address or a utility bill when less is needed to open an LLC in some states in the U.S. We can do better.

The time for Congress to act is now. End anonymity of shell companies. 


Shruti Shah, pictured above left, is a contributing editor of the FCPA Blog. She’s the President and CEO of the Coalition for Integrity (formerly Transparency International-USA). She can be contacted here.

Michael Hershman, above right, is a member of the Board of Directors of the Coalition for Integrity and a co-founder of Transparency International. He is also is the founder of the International Anti-Corruption Academy and serves as the Chair of the International Advisory Board. He was the senior staff investigator for the Senate Watergate Committee, and a chief investigator for a joint Presidential and Congressional commission reviewing state and federal laws on wiretapping and electronic surveillance.

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1 Comment

  1. Ending anonymity of shell companies may be a bit difficult since it includes foreign country's also but getting a law which allows the cost of finding out the owners and beneficiary to be carried by said owners and beneficiary may be possible. And since it means cost to the owners and beneficiary regardless of unlawful actions… far more likely to aid investigators.

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