A major avenue for global money laundering and tax evasion has been closed off by a new law requiring disclosure of owners of U.S. shell companies used to hide billions of dollars.
The Corporate Transparency Act was included in the U.S. defense appropriations bill that Congress passed into law late Friday, overriding President Donald Trump's veto.
The law forces "beneficial owners" behind shell companies to report their identities to the U.S. Treasury's Financial Crimes Enforcement Network, or FinCEN.
While the law still grants them protection from public knowledge — only the Treasury and law enforcement will be able to access the FinCEN database — transparency advocates say it is a huge step against kleptocrats, organized crime and rich tax evaders who have been able to anonymously wash their suspect wealth through the world's largest economy.
"For years, experts routinely ranked anonymous shell companies ... as the biggest weakness in our anti-money-laundering safeguards," said Ian Gary, executive director of the FACT Coalition, which lobbied for the legislation.
"It's the single most important step we could take to better protect our financial system from abuse," he added.
The United Nations estimates that $800 billion to $2 trillion is laundered through the global financial system every year.
While much of the attention has focused on tax havens like Panama and the Cayman Islands, experts say that the size of the U.S. economy, and its ability to absorb billions of dollars without notice, has made it crucial for converting illicit funds into legitimate assets.
In early 2020 the Tax Justice Network ranked the Cayman Islands and the United States as the global leaders in helping people conceal their finances from law and tax enforcement.
Property and art
Gary Kalman, the U.S. director of Transparency International, said the Corporate Transparency Act was foundational for fighting money laundering.
Despite geopolitical tensions, he noted, money has flowed into the United States from China and Russia because it was the easiest place to launder it, through properties, corporate assets, securities and art.
"We are the easiest place in the world to set up an anonymous company," he told AFP before the law had passed. "We are the dream of any kleptocrat or criminal to hide money."
By forcing company owners to divulge their identities, he said, the U.S. is establishing a global norm for the world's financial system.
"By choking off access to the advanced economies, you are making it much harder. You are upping the cost and the likelihood of getting caught," he said.
Law isn’t perfect
The legislation sets penalties for not reporting a company's beneficial owners of up to two years in jail and a $10,000 fine.
FACT said the law could result in a sharp drop in all-cash business transactions, especially in real estate, a favored way for outsiders to move large sums into the U.S. economy.
FACT also says that anonymous companies underpin trade in counterfeit luxury goods, pharmaceuticals and industrial equipment.
The legislation isn't perfect, analysts said. The FinCEN database will not be open to the public or media, whose efforts have produced the biggest stories about money laundering.
For example, the International Consortium of Investigative Journalists was behind the explosive release in 2016 of the Panama Papers, some 11.5 million documents detailing secret companies set up in the Central American country.
In that case, enforcement authorities around the world made use of the files made public by reporters, which showed prominent politicians, celebrities and businesspeople hiding money offshore.
Although they will have all the new data, the U.S. Treasury and law enforcement have limited capacity to comb through files themselves.
"We think that the database should be public," Kalman said.