At a recent hearing before the House Financial Services Committee, Treasury Secretary Steven Mnuchin called on Congress to enact legislation that would discourage criminal activity carried out behind the veil of anonymous shell companies in the United States. For more than a decade, lawmakers have rallied behind two bipartisan bills that would do just that.
Anonymous shell corporations (or secret companies) are corporations that are able to conceal their ownership because most states do not require disclosure of that information when a company is formed. In fact, it takes more information in most states to check out a library book than it does to start a corporation. Although secret companies are themselves legal, their owners have in many cases abused their anonymity to engage in a range of illegal activities. The primary way that secret companies function to facilitate crime is by providing a legitimate front to use to open bank accounts and transfer funds incognito, providing an easy way to launder money.
In one particularly prominent case of abuse facilitated by a secret company, a phantom firm stole more than $4.5 million of federal Medicare funds by establishing fake clinics in Florida. Other cases have exposed anonymous shell corporations for laundering drug money, financing terrorism, selling fraudulent credit cards to American consumers, and participating in human trafficking schemes. Because their owners are secret, law enforcement officials are blocked from being able to lock up criminals even when they can prove that a secret company has facilitated a crime. Worse, frequently one secret shell company owns another shell company, like nesting Russian dolls, further compounding the problems for law enforcement agencies.
The common thread in all of these examples is the corporate secrecy that made these crimes possible. Corporate formation is overseen by the states, not the federal government and almost universally, companies are not required to share ownership information with state government officials or law enforcement authorities. This lax regulation led a 2015 academic study to find that the United States is one the easiest countries in the world in which to form a secret company. The World Bank reports that one eighth of all anonymous shell companies incorporated between 1980 and 2010 were incorporated in the United States.
The solution to this problem is passage of legislation like the True Incorporation Transparency for Law Enforcement (or TITLE) Act that requires states to collect “beneficial ownership info”—a list of the real people who benefit from and manage the company’s business. This has to be the true owners, not a stand-in like a corporate formation agent. This is essential since currently these sorts of proxies are used frequently. We know from the Panama Papers disclosures, a single person was listed as “director” or “shareholder” for more than 10,000 different companies.
Given that lawmakers and groups like Public Citizen have been working for years to pass legislation that requires beneficial ownership information for companies to be collected at the time they are formed, it was great to hear Secretary Mnuchin tell lawmakers recently that they need to resolve this anonymous ownership issue within the next six months. Fortunately, lawmakers on both sides of the aisle have already backed legislation to counter illicit activity by secret shell companies by requiring companies to provide accurate information about their beneficial owners to government authorities. A little sunshine can go a long way toward dragging criminals out of the dark.
Tweet at Steve Mnuchin (@stevenmnuchin1) demanding that he work with lawmakers to pass bipartisan commonsense legislation that requires collection of corporate beneficial ownership information.