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U.S. House Passes Corporate Transparency Act; FATF Issues Guidance on Identifying Entities’ Beneficial Owners

First Post in a Two-Post Series on Beneficial Ownership

As we often blog, the issue of the beneficial ownership of entities and the potentially pernicious role of shell companies in perpetuating money laundering is the primary anti-money laundering (“AML”) concern across the globe for both enforcement officials and the financial industry.

Consistent with this concern, and within a single week, both the U.S. House of Representatives and the Financial Action Task Force (“FATF”), an international and intergovernmental AML watchdog group, recently took notable steps in the fight against the misuse of shell companies. Specifically, on October 23 the House passed H.R. 2513, a two-part Act which sets forth in its initial section the Corporate Transparency Act, or CTA. If passed into legislation, the CTA would require certain, defined U.S. companies to report identifying information regarding their beneficial owners to the Treasury Department – so that such information would be available to both the government and financial institutions carrying out their own AML duties. Meanwhile, FATF has issued a detailed document entitled “Best Practices on Beneficial Ownership for Legal Persons,” (“Best Practices Guidance”) which urges countries to use multiple methods to identify accurately and timely the beneficial owners of legal entities, and sets forth some high-level recommendations.

Today, we will discuss the CTA. Tomorrow, we will discuss FATF’s Best Practices Guidance, which approaches the problem of beneficial ownership from a different angle – the Guidance and its recommendations represent an evaluation of historical efforts by the member countries’ approaches to the collection and maintenance of beneficial ownership information in countries that already create repositiories of such information for law enforcement, as envisioned by the CTA. Continue Reading Shell Company Update: Congress and FATF Target Beneficial Ownership

A Modest Proposal

The European Union (“EU”) recently has grappled with a series of massive money laundering scandals and strategized about how to more effectively combat international money laundering and corruption. Generally, the EU has continued to issue a series of reports identifying systemic vulnerabilities to money laundering and suggest process-based recommendations for how to address future threats. These recommendations typically mirror the same range of process-based improvements set forth in earlier reports: from enhancing cross-border information sharing to increasing resources for adequate implementation and enforcement of anti-money laundering (“AML”) and counter financing of terrorism (“CFT”) policies implemented by EU member states and financial institutions. Noticeably absent from these recommendations is one of the most powerful deterrents available – and a distinctly American approach – prosecuting the bad actors.

Although many of the recent EU money laundering scandals rest on conduct occurring years ago, the recurring waves of scandals strongly suggest that the EU – like the U.S. – has a serious problem with money laundering that is not going away any time soon. They likewise indicate that the EU’s financial system will continue to be abused by bad actors who appear to be unfazed by any potential consequences. The EU therefore should consider emulating – at least in part – the American approach of more aggressively investigating and prosecuting individuals, including the corrupt politicians, kleptocrats, drug dealers, fraudsters, and other criminals from around the globe who are laundering sometimes massive amounts of funds through European financial institutions.

Very recently, in a different but related context, the Chairman of the U.S. Securities and Exchange Commission (“SEC”), Jay Clayton, delivered a speech during which he bemoaned his perception that his foreign counterparts failed to rigorously enforce their own anti-corruption laws. Specifically, Chairman Clayton asserted the following:

Corruption is corrosive. We see examples where corruption leads to poverty, exploitation and conflict. Yet, we must face the fact that, in many areas of the world, our work may not be having the desired effect. Why? In significant part, because many other countries, including those that have long had similar offshore anti-corruption laws on their books, do not enforce those laws.

Granted, the above comments pertained specifically to enforcement of the Foreign Corrupt Practices Act (“FCPA”), and arguably the comments were in furtherance of a pro-American message regarding international competition between countries. The comments nonetheless exemplifies a certain American perception: the U.S. aggressively prosecutes individuals, whereas Europe does not. Obviously, this issue entails a lot of cultural baggage on both sides.

Although there are viable criticisms of the U.S. approach (both in theory and in practice), and although the EU’s strong focus on process and institutions’ AML and CFT systems is critical, any government’s enforcement “tool bag” must include targeted prosecutions of the people responsible for the laundering violations. Otherwise, few bad actors around the world will think twice about continuing to turn to EU institutions for their laundering needs. This blog post explores this idea. Continue Reading The EU’s Efforts to Combat Money Laundering, the Financing of Terrorism and Corruption Seem to Overlook a Very American Approach: Prosecute People

Testimony Supports Bill Requiring States to Collect Beneficial Ownership Information at Entity Formation

As we have blogged, the proposed Corporate Transparency Act of 2019 (the “Act”) seeks to ensure that persons who form legal entities in the U.S. disclose the beneficial owners of those entities. Specifically, the Act would amend the Bank Secrecy Act (“BSA”) to compel the Secretary of Treasury to set minimum standards for state incorporation practices. Thus, applicants forming a corporation or LLC would be required to report beneficial ownership information directly to FinCEN, and to continuously update such information.

If passed, the Act would build significantly upon FinCEN’s May 11, 2018 regulation regarding beneficial ownership (“the BO Rule,” about which we blog frequently and have provided practical tips for compliance here and here). Very generally, the BO Rule requires covered financial institutions to identify and verify the identities of the beneficial owners of legal entity customers at account opening. The issue of beneficial ownership is at the heart of current global anti-money laundering efforts to enhance the transparency of financial transactions.

On May 21, the U.S. Senate Committee on Banking, Housing and Urban Affairs, held a hearing entitled: “Combating Illicit Financing by Anonymous Shell Companies Through the Collection of Beneficial Ownership Information.” This hearing, which provided fuel for passage of the Act, featured the exact same trio of speakers who had appeared before the Committee during a November 2018 hearing on “Combating Money Laundering and Other Forms of Illicit Finance: Regulator and Law Enforcement Perspectives on Reform,” which pertained to a broader set of potential changes to the BSA. The speakers were:

  • Grovetta Gardineer, Senior Deputy Comptroller for Bank Supervision Policy and Community Affairs at the Office of the Comptroller of the Currency (“OCC”) (written remarks here)
  • Kenneth A. Blanco, Director of FinCEN (written remarks here); and
  • Steven D’Antuono, Acting Deputy Assistant Director of the FBI (written remarks here).

Unlike the broader November 2018 hearing, which featured some distinct tensions between certain positions of the OCC and those of FinCEN and the FBI, this hearing reflected close alignment amongst the speakers. Every speaker stressed the advantages to be reaped by law enforcement, regulators and the public if a national database of beneficial owners was required and created. Only the OCC acknowledged the need to consider the issue and sometimes competing concern of the regulatory burden imposed on financial institutions by the current BSA/AML regime, and even the OCC seemed to assume that a national database on beneficial ownership would represent only a boon to financial institutions, as opposed to yet more data – however helpful – to be absorbed and acted upon to the satisfaction of regulators. None of the speakers addressed some of the potential ambiguities and problems inherent in the current language of the Act, such as the fact that the Act lacks precision and fails to define the critical terms “exercises substantial control” or “substantial interest,” both of which drive the determination of who represents a beneficial owner. Continue Reading Senate Committee Hears from OCC, FinCEN and FBI on Risks Posed by Anonymous Corporate Structures

Proposed Legislation Creates Rewards Program for Whistleblowers of Foreign Government Corruption

Third Post in a Three-Post Series

Newly proposed legislation, if passed, will authorize a whistleblower program for individuals providing law enforcement with information leading to the seizure, forfeiture, and/or repatriation of foreign stolen assets that come within the possession or control of any United States person.

In early March, the House Financial Services Committee released three proposed bills to codify many of the suggested reforms discussed during ongoing conversation among financial agencies, law enforcement, financial institutions, and commentators regarding the Bank Secretary Act (“BSA”) and Anti-Money-Laundering (“AML”) and Combating the Financing of Terrorism (“CFT”) laws. The first two proposed bills are discussed here and here.

In this post, we summarize the last of the three proposed bills, The Kleptocracy Asset Recovery Rewards Act (the “Bill”). The Bill allows the Department of Treasury to provide whistleblowers not only with monetary incentives but also protective measures, including asylum for the whistleblower and his or her immediate family. As we will discuss, the Bill proposes a unique whistleblower program focused on foreign corruption, and which differs in important ways from other, established government whistleblower programs. Continue Reading Proposed Kleptocracy Asset Recovery Rewards Act Adds Whistleblower Incentives and Protections

Proposed Legislation Would Require Beneficial Ownership Disclosure at Entity Formation

Second Post in a Three-Post Series

In early March, the House Financial Services Committee released three proposed bills to codify many of the suggested reforms discussed during ongoing conversation among financial agencies, law enforcement, financial institutions, and commentators regarding the Bank Secretary Act (“BSA”) and Anti-Money-Laundering (“AML”) and Combating the Financing of Terrorism (“CFT”) laws.  In this post, we summarize one of the proposed bills, The Corporate Transparency Act of 2019 (the “Act”), which seeks to ensure that persons who form legal entities in the U.S. disclose the beneficial owners of those entities.  Although such a law would have broad application, the Act does not  include “formation agents,”—i.e., those who assist in the creation of legal entities such as corporations and LLCs—in the definition of financial institutions subject to the BSA.

As we previously blogged, another proposed bill — entitled, “To make reforms to the Federal Bank Secrecy Act and anti-money laundering laws, and for other purposes” — seeks to reform the BSA and AML laws (the “BSA/AML Reform Bill”) and is divided into three main sections: Strengthening the Treasury; Improving AML/CFT Oversight; and Modernizing the AML System. In our final post in this series, we will summarize the last of the three related bills, the Kleptocracy Asset Recovery Rewards Act, which seeks to create an asset recovery rewards program to help identify and recover stolen assets linked to foreign government corruption.

The Purpose of the Act

The Act focuses on bolstering beneficial ownership disclosure, an issue repeatedly flagged by FinCEN, the U.S. Senate Banking Committee, and the FATF as key in combatting money laundering and terrorist financing. In response to a 2006 FATF report criticizing the United States for failing to collect beneficial ownership information, the federal government repeatedly urged the states to make their incorporation systems more robust by obtaining beneficial ownership information as part of the formation process. Having had little success with voluntary compliance, the Act would amend the BSA to compel the Secretary of Treasury to set minimum standards for state incorporation practices. Thus, applicants forming a corporation or LLC would be required to report beneficial ownership information directly to FinCEN, and to continuously update such information.

The Act defines a “beneficial owner” as a natural person who “(i) exercises substantial control over a corporation or limited liability company; or (ii) has a substantial interest in or receives substantial economic benefits from the assets of a corporation or limited liability company.” The Act’s definition is similar in some respects to that in the Customer Due Diligence Requirements for Financial Institutions Rule (the “Beneficial Ownership Rule,” about which we blog frequently and have provided practical tips for compliance here and here), but lacks the precision found in the Rule. In fact, the Act completely fails to define the terms “exercises substantial control” or “substantial interest.”

The purpose of the Act is to level the playing field by requiring beneficial ownership information no matter the state of formation. In this way, the Act could motivate states to enact more demanding formation systems, and demotivate persons from forming entities in states which require little information about beneficial ownership.

A Long Time in the Making

The Act has been through several incarnations over the years. Most recently, The Corporate Transparency Act of 2017 was introduced by Representatives Carolyn Maloney and Peter King of New York in June 2017. Subsequently, Senators Ron Wyden and Marco Rubio introduced companion legislation in the Senate. For more on the previous iterations of the Corporate Transparency Act, please refer to our two-part series published September 20, 2017 and September 21, 2017.

An Important Change

Under previous iterations of the Act, “formation agents,”—i.e., those who assist in the creation of legal entities such as corporations and LLCs—would be considered financial institutions subject to the BSA’s AML and reporting obligations. As we blogged previously, this expanded definition of “financial institution” could encompass many individuals and businesses not previously subject to the BSA, including attorneys whose practices involve the formation of legal entities. This, the ABA has contended, “would undermine the attorney-client privilege, the confidential attorney-client relationship, and traditional state court regulation of the legal profession, while also imposing excessive new federal regulations on lawyers engaged in the practice of law.”

In an apparent win by the ABA and other stakeholders, however, the Act in its current iteration has removed references to the proposed “formation agents” classification. The Act, introduced by Representative Maloney, still would primarily serve to bolster the beneficial ownership identification requirements to prevent the use of shell companies for various illicit reasons, including facilitating tax and money laundering schemes as seen in the Panama Papers scandal.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.

Denmark Suffers Greatest Increase in Annual Risk Rating

The Basel Institute on Governance (“Basel Institute”) recently announced that the associated Basel Centre for Asset Recovery has released its seventh annual Basel Anti-Money Laundering Index (“AML Index”) for 2018, described by the Basel Institute as “an independent, research-based ranking that assesses countries’ risk exposure to money laundering and terrorist financing.”  The risk scores for each country in the AML Index “are based on 14 publicly available indicators of anti-money laundering and countering the financing of terrorism (AML/CFT) frameworks, corruption risk, financial transparency and standards, and public transparency and accountability.” The Basel Institute, which is associated with the University of Basel, describes itself as “an independent not-for-profit competence centre working around the world with the public and private sectors to counter corruption and other financial crimes and to improve the quality of governance.”

The public AML Index, which pertains to 129 countries, is here; an “expert edition” containing a full list of scores and sub-indicators for all 203 countries — available for cost to private persons or industry, or for free to academic, public, supervisory and non-profit organizations — is here.  A summary of the public AML Index is here.

As we will discuss, the AML Index bemoans a lack of progress in the global fight against corruption, and in particular cites lack of enforcement of existing laws and declining press freedom across the globe. The AML Index also underscores how countries with seeming low risk in fact have lurking problems. Continue Reading 2018 Basel AML Index Measures Risk and Cites Lack of Effective Enforcement and Declining Global Press Freedom

On April 19, 2018, the European Parliament (“EP”) adopted the European Commission’s (the “Commission”) proposal for a Fifth Anti-Money Laundering Directive (“AMLD5”) to prevent terrorist financing and money laundering through the European Union’s (“EU”) financial system. The Commission proposed this directive on July 26, 2016 to build upon and amend the Fourth Anti-Money Laundering Directive (“AMLD4”) – before all 28 member states even implemented AMLD4.

Under AMLD4, the EU sought to combat money laundering and terrorist financing by imposing registration and customer due diligence requirements on “obliged entities,” which it defined as banks and other financial and credit institutions. It also called for the creation of central registers comprised of information about who owns companies operating in the EU and directed that these registers be accessible to national authorities and obliged entities.  However, the European Central Bank warned that AMLD4 failed to effectively address recent trends in money laundering and terrorist financing, which have spanned multiple jurisdictions and fallen both within and outside of the traditional financial sector.  As a result, and in response to recent terrorist attacks in Europe and to the Panama Papers, the EP has adopted AMLD5 to more effectively keep pace with these recent trends.

Although AMLD5 contains several important provisions, including a proposed public registry of beneficial owners of legal entities, we focus here on how AMLD5 addresses, for the first time, the potential money laundering and terrorist financing risks posed by virtual currencies. Continue Reading The Fifth Anti-Money Laundering Directive:  Extending the Scope of the European Union’s Regulatory Authority to Virtual Currency Transactions

But Bank Customer’s Foreign Tax Evasion Scheme Still May Merit a SAR FilingThe Financial Crimes Enforcement Network (“FinCEN”) recently advised that a financial institution is not required to file a Suspicious Activity Report (“SAR”) based solely upon a customer’s inquiry into or participation in a foreign tax regularization program.  FinCEN issued this statement on February 21, 2018 in response to Florida International Banker’s Association’s request for guidance (“FIBA Request”) in 2016, which initiated the request because a number of its members expressed an interest in tax regularization programs and sought clarification on the AML implications of such programs.

This issue, perhaps seemingly esoteric, involves a basic question of increasing practical importance, particularly in light of the Panama Papers related international scandals, and global criticism of the U.S. as a potential haven for foreign tax cheats and money launderers: does the possibility of foreign tax evasion by a bank client necessarily trigger the need to file a SAR? Foreign tax evasion can represent potential violations of U.S. law, such as the federal mail or wire fraud statutes, which in turn may support a prosecution theory that related financial transactions involving foreign tax evasion and the U.S. financial system represent potential U.S. money laundering violations (for a detailed article on this issue, please see here). Continue Reading FINCEN Advises That Participation in a Foreign Tax Regularization Program By Itself Does Not Trigger SAR Filing Obligation

I am honored to be part of a panel on March 1, 2018 at the Florida Tax Institute in Tampa, Florida regarding potential money laundering risks, reporting obligations and related ethical issues facing U.S. tax professionals with foreign clients bringing money and assets into the United States.  The panel, entitled Working with Inbound Investors & Businesses – Some Things You May Not Think About May Hurt You, will be moderated by Fred Murray of the University of Florida Levin College of Law and also will include attorneys Jeffrey A. Neiman, A. Brian Phillips and Shawn P. Wolf.

This is a key topic with real-world implications. We previously have blogged about potential AML and money laundering issues facing U.S. lawyers, who are under increasing scrutiny in light of: evolving international standards on professionals as AML gate keepers; global criticisms of the United States as a possible haven for money launderers and tax cheats; and scandals — such as the Panama Papers — involving legal professionals as the alleged facilitators of laundering and tax evasion by their clients.

Specifically, both the Financial Action Task Force (“FATF”) and the European Parliament have called for U.S. lawyers to meet higher standards in performing due diligence to detect clients’ potential money laundering, and found U.S. lawyers to be “non-compliant” with entity transparency standards. Further, the U.S. Congress has tried to enact legislation over the years to address the issue of beneficial ownership and the role of lawyer (see our discussion of the Corporate Transparency Act here). More recently, and as we have blogged, the ABA’s Task Force on the Gatekeeper and the Profession has prepared and discussed a new ABA Model Rule of Professional Conduct that would impose basic “client due diligence” requirement on lawyers.  The panel should be interesting.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. To learn more about Ballard Spahr’s Anti-Money Laundering Team, please click here.

The Office of Foreign Assets Control (“OFAC”) wrapped up 2017 by issuing a series of high-profile designations generally prohibiting U.S. persons from conducting financial or other transactions with the identified individuals and entities, and freezing any assets which these individuals and entities may have under U.S. jurisdiction. Specifically, OFAC, acting in conjunction with a new Executive Order issued by the President pursuant to the Global Magnitsky Human Rights Accountability Act (“Magnitsky Act”), sanctioned on December 21 a list of alleged international bad actors, including Dan Gertler, a billionaire and international businessman from Israel who has been involved in, among other notorious ventures, alleged corruption in the mining of diamonds and copper in the Democratic Republic of the Congo. The next day, OFAC then sanctioned individuals and entities allegedly associated with Thieves-in-Law, an alleged and unapologetically-named Eurasian criminal entity; according to the U.S. government, Thieves-in-Law originated in Stalinist prison camps and has grown over time into a “vast criminal organization” stretching across the globe and into the United States. Continue Reading OFAC Designates Diamond Mining Billionaire, “Thieves in Law,” and Many Other International Targets as Subject to U.S. Sanctions and Asset Freezes