Shell corporations pose a major risk to our national security

Shell corporations pose a major risk to our national security
© Greg Nash

There is growing recognition of the link between corruption and national security. Corruption, especially of the transnational variety, poses a major threat to democracy throughout the world. Rogue nations, terrorist organizations and arms traffickers have exploited the global financial system. This is part of a strategy to weaken American institutions, provoke conflict in unstable regions, and erode public faith in elections and the rule of law in fragile democracies.  

Let’s start with the example of Victor Bout. A former Soviet military officer, Bout turned international weapons trafficker, conspiring to sell arms to FARC insurgents in Colombia and allegedly smuggling supplies to Liberian strongman Charles Taylor, the Taliban and others in conflict zones around the world. Bout used a series of anonymous U.S. shell companies to launder money and facilitate his smuggling.

Iran also has proved adept at hiding financial moves, even under conditions of strict economic sanctions. The Iranian-controlled Bank Melli bought property in New York City through a series of anonymous companies. Tenants unwittingly paid rents totaling millions of dollars that likely were used to support Iran’s nuclear program.

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The common feature in these cases is the abuse of companies created in the U.S. with anonymous ownership. The U.S. is one of the largest and most stable economies in the world. But according to a recent study out of University of Texas, we also are easy prey to the corrupt use of anonymous companies.

Our lax regulatory policies mean that the U.S. is unwittingly complicit in the spread of the corruption that is an important factor in the global decline of democracy. According to Freedom House, democracy around the world is in a recession that has lasted for 13 years. A growing plague of corruption is a driving force behind freedom’s decline. Corruption is a particular curse in new and fragile democracies where political leaders and international criminals enrich themselves at the expense of the public good. 

Anonymous companies have become the vehicle of choice for terrorists and other criminals to hide corrupt cash. Investigators often are frustrated when their efforts lead them to an anonymously owned company with no paper trail. Cases are dropped and dangerous criminals remain free to exploit American financial structures to harm our interests and undermine our national security.

Although the problem is complex, the solution is not. Today, anyone can set up a company in the U.S. without listing the real owner. An offshore company can own a U.S. company to mask the identity of the actual person who controls the entity. Lawyers and others who help form companies can legally list themselves on the incorporation papers. To address the abuses without overly burdening honest businesses, Congress can require that companies provide the name of the true owner. The Corporate Transparency Act of 2019 (H.R. 2513) would do just that. 

This modest, but critically important, reform would disrupt the current money-laundering systems used by rogue actors. When the Treasury Department’s Financial Crimes Enforcement Network began collecting ownership information in certain metropolitan areas for high-end, cash-financed real estate transactions made in the name of companies, these types of transactions dropped in Miami by 95 percent. A comprehensive, national approach is needed to prevent the money from simply shifting to another jurisdiction.  

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Those who would threaten the U.S. have created modern, sophisticated financial networks. Mounting evidence suggests they have fashioned their structures to exploit weaknesses in our own financial systems.

We are faced with a multitude of complicated challenges to our national security, but ending anonymous companies is a comparatively easy fix. This would bolster the sanctity of our financial system and strengthen American security. It also would strengthen democracy by checking one of the techniques employed by autocracies such as Russia and Iran to expand their global reach.

The Corporate Transparency Act will be voted on in the U.S. House of Representatives later today. House members should vote yes, and the Senate should adopt the bill without delay once it clears the House. We should not allow corrupt actors to take advantage of the United States and exploit our financial system.

Michael Chertoff was secretary of the Department of Homeland Security from 2005 to 2009. He is executive chairman of The Chertoff Group, a security and risk-management advisory firm, president of the board of directors of the independent watchdog organization Freedom House, and author of  “Exploding Data: Reclaiming Our Cyber Security in the Digital Age.”