A bipartisan Senate bill, the Incorporation Transparency and Law Enforcement Assistance Act, and a companion House bill, would help end the secrecy surrounding shell companies. The legislation would require companies to disclose information about the real people who own or control them. Knowing the “beneficial owners” of such entities would better enable law enforcement to pursue terrorist cells, financial crime, and drug cartels.
Anonymous shell companies are vehicles easily used by corrupt government leaders to launder money into the U.S. that should instead be used to spur development and eradicate poverty. Some with inspiring names like “Beautiful Vision, Inc.,” “Unlimited Horizon, Inc.,” “Sweetwater Malibu, LLC,” and “Sweet Pink, Inc.” were allegedly used by the son of President Obiang of Equatorial Guinea to purchase and maintain a luxury lifestyle in the U.S. The Department of Justice has since moved to seize some of his assets, including a $30 million seaside mansion in Malibu, a $38 million Gulfstream jet, and over $1 million in Michael Jackson memorabilia, as part of an ongoing corruption investigation, although the case is still pending in Federal court.
Equatorial Guinea ranks among the most corrupt – and poverty stricken – countries in the world. Yet anonymous shell companies appear to have enabled the President’s son to legally disguise his identity in order to launder suspect money into the U.S. with ease.
They are also used by corrupt American government officials. Former Congressman William Jefferson (D-La.) employed anonymous shell companies, incorporated in Louisiana and Delaware, in his scheme to corruptly solicit bribes. According to the FBI, he advanced the interests of those who offered him bribes by using his position in Congress to promote “telecommunications deals in Nigeria, Ghana and elsewhere; oil concessions in Equatorial Guinea; satellite transmission contracts in Botswana, Equatorial Guinea and the Republic of Congo; and development of different plants and facilities in Nigeria.”
The large loophole afforded by anonymity facilitates other forms of illegal activity as well.
For instance, shell companies formed part of ING Bank’s scheme to move more than $2 billion through the U.S. on behalf of Cuba, Iran, and other countries on the U.S.’s sanctions list. In June 2012, the bank agreed to pay a $619 million fine, the largest to date for a sanctions violation.
Shell companies have also been used to defraud Medicare. A recent investigative report by Reuters revealed that anonymous shell companies were used in eight U.S. states to defraud Medicare of more than $1 billion since 2007. In October 2010, federal prosecutors indicted 44 members of an Armenian organized crime ring that used 118 anonymous shell companies in 25 states to defraud Medicare of more than $100 million.
Anonymous shell companies are a global problem. Yet, while critics often point blame at the corporate secrecy provided by places like the British Virgin Islands, Panama, and Lichtenstein, weak laws in many U.S. states make the U.S. an attractive place to establish anonymous shell companies. In fact, a study of 150 cases of large-scale corruption showed that American shell companies were used more often than those of any other country. And since the U.S. has a reputation for strong regulation and good governance, such companies automatically acquire an air of legitimacy, regardless of the potential illegitimacy of their activities.
The bill being considered by Congress won’t apply to anonymous shell companies based outside the U.S. But by passing this law, the U.S. can take the lead in pushing for an international standard that requires that anonymous shell companies disclose who owns or controls them, thereby removing the secrecy and legitimacy of these opaque, and often criminal, entities.
Rare is the Congressional bill whose upsides so lopsidedly outweigh its downsides. With one piece of legislation, Congress can make significant inroads to combat terrorism, drug trafficking, illegal arms deals, corruption, money laundering, and tax evasion.
It’s a no-brainer, and Congress should move quickly to pass it.
Kraus is program and development director at EG Justice and Ostfeld is a policy advisor with Global Witness.