Shining Light In A Black Box: Can The U.S. Slow The Flow Of Dirty Money From The Ex‑U.S.S.R.?

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When Ukraine’s Privatbank filed a law­suit in the United States against its for­mer own­er Ihor Kolomoyskiy one year ago, it claimed the tycoon had used a slew of anony­mous shell com­pa­nies reg­is­tered in the U.S. state of Delaware to car­ry out what it called a “brazen” heist.

Kolomoyskiy and his part­ner Hennadiy Boholyubov used Delaware-based lim­it­ed lia­bil­i­ty com­pa­nies (LLCs) — which are pop­u­lar for their lack of ben­e­fi­cial own­er­ship dis­clo­sure require­ments — to acquire U.S. busi­ness­es and prop­er­ties worth hun­dreds of mil­lions of dol­lars with stolen funds, the Kyiv-based bank claimed.

The men “have gone through great lengths to con­ceal their own­er­ship and con­trol over U.S. assets,” the law­suit filed in Delaware’s Chancery Court on May 21, 2019, said.

Two new bills now on their way through the U.S. Congress could make it much hard­er to do that – and eas­i­er for U.S. law enforce­ment agen­cies to imme­di­ate­ly iden­ti­fy own­ers of shells, speed­ing up inves­ti­ga­tions.

Citing unnamed sources, the Daily Beast report­ed in April 2019 that the FBI has been inves­ti­gat­ing Kolomoyskiy and Boholyubov for poten­tial finan­cial crimes, includ­ing mon­ey laun­der­ing.

Lax reg­is­tra­tion rules in states such as Delaware, Wyoming, and New Mexico — which require less infor­ma­tion to cre­ate a com­pa­ny than to get a library card — have helped turn the United States into a lead­ing off­shore haven for crim­i­nals and cor­rupt offi­cials the world over, includ­ing from the for­mer Soviet Union.

Ihor Kolomoyskiy (above) and his part­ner, Hennadiy Boholyubov, “have gone through great lengths to con­ceal their own­er­ship and con­trol over U.S. assets,” a law­suit con­tends.
Ihor Kolomoyskiy (above) and his part­ner, Hennadiy Boholyubov, “have gone through great lengths to con­ceal their own­er­ship and con­trol over U.S. assets,” a law­suit con­tends.
The Tax Justice Network, a British-based advo­ca­cy group, ranked the United States sec­ond only to the Cayman Islands in its 2020 sur­vey of the nations “most com­plic­it” in allow­ing wealthy indi­vid­u­als and crim­i­nals to hide and laun­der mon­ey.

Now Congress is pur­su­ing leg­is­la­tion to cre­ate a fed­er­al data­base of ben­e­fi­cial own­ers of shell cor­po­ra­tions and LLCs to com­bat their abuse by crim­i­nal ele­ments and cor­rupt offi­cials. It comes amid a renewed glob­al push for greater finan­cial trans­paren­cy fol­low­ing the 2016 pub­li­ca­tion of the Panama Papers — a leak of reams of secret legal doc­u­ments and finan­cial data that high­light­ed a glob­al scheme to evade tax­es world­wide.

You can’t under­es­ti­mate some of the unin­tend­ed con­se­quences that some of this sun­light cre­ates.”
– Alexander Cooley, Columbia University’s Harriman Institute

The U.S. House of Representatives passed the Corporate Transparency Act in October, with a bipar­ti­san vote of 249–173. Representative Carolyn Maloney, a Democrat from New York who is one of the bill’s spon­sors, said in May that she is hope­ful it will pass Congress this year.

A sep­a­rate piece of leg­is­la­tion known by the acronym ILLICIT CASH – its full title is the Improving Laundering Laws And Increasing Comprehensive Information Tracking Of Criminal Activity In Shell Holdings Act — is cur­rent­ly in the Senate Committee on Banking, Housing, and Urban Affairs.

Cui Bono?

Both bills require ben­e­fi­cial own­ers of cor­po­ra­tions and LLCs with 20 or few­er employ­ees and $5 mil­lion or less in annu­al rev­enue to sub­mit their full name, date of birth, cur­rent home or work address, and the iden­ti­fi­ca­tion num­ber on their valid U.S. or for­eign iden­ti­ty doc­u­ment to the Financial Crimes Enforcement Network (FinCEN), an arm of the Treasury Department.

Such com­pa­nies would have to sub­mit an updat­ed list of ben­e­fi­cial own­ers each year. The House bill also requires for­eign ben­e­fi­cial own­ers to sub­mit a copy of their pass­port. A ben­e­fi­cial own­er is described as any­one who “exer­cis­es sub­stan­tial con­trol” or owns 25 per­cent or more of the com­pa­ny.

We’re the only advanced coun­try in the entire world that does­n’t already require dis­clo­sure of this infor­ma­tion. Frankly, it’s an embar­rass­ment,” Maloney said in a May 20 webi­nar on the leg­is­la­tion orga­nized by the Wilson Center’s Kennan Institute, a lead­ing U.S.-based cen­ter for research on Russia and Eurasia.

All 28 mem­ber states of the European Union are already required to main­tain reg­istries of the ben­e­fi­cial own­ers of com­pa­nies set up with­in its bor­ders and are mov­ing to make them pub­licly acces­si­ble to vary­ing degrees.

The tougher European stan­dards have dri­ven some crim­i­nals to move their mon­ey to the United States, Senator Chuck Grassley of Iowa, who is now the senior Republican in the Senate, said dur­ing a 2018 Congressional hear­ing.

Even off­shore havens like the British Virgin Islands (BVI), Cayman Islands, and Panama have intro­duced ben­e­fi­cial own­er reg­is­trars, KPMG, one of the world’s largest audit firms, said in a January post. The BVI and Cayman Islands are expect­ed to make theirs pub­licly search­able in 2023.

The U.S. data­base envi­sioned by the bills would only be avail­able to law enforce­ment agen­cies that have an actu­al inves­ti­ga­tion into relat­ed mat­ters and would not be pub­licly search­able. Financial insti­tu­tions would also be able to uti­lize the data­base, but only with the per­mis­sion of the com­pa­nies.

The bills have the back­ing of law enforce­ment orga­ni­za­tions and finan­cial insti­tu­tions.

What a lot of this is about is mak­ing it eas­i­er for law enforce­ment to cut through the lay­ers of own­er­ship and enti­ty struc­tures and iden­ti­fy the big fish at the top,” Lawrence Hamermesh, a pro­fes­sor at the Widener University Delaware Law School and a for­mer prac­tic­ing attor­ney, told RFE/RL.

It moves the nee­dle. If you are bent on crime, it rep­re­sents more of a deter­rent,” he said.

We’re the only advanced coun­try in the entire world that does­n’t already require dis­clo­sure of this infor­ma­tion. Frankly, it’s an embar­rass­ment.”
– Representative Carolyn Maloney (D‑New York)

Some experts believe the effects of the leg­is­la­tion may be under­whelm­ing

Lawrence Donahue, a prin­ci­pal at Law 4 Small Business, a New Mexico-based law firm that spe­cial­izes in set­ting up LLCs, told RFE/RL he did not think the bills would have much impact in com­bat­ing crim­i­nal activ­i­ties involv­ing anony­mous shell com­pa­nies.

Law enforce­ment agen­cies already have the abil­i­ty to dis­cov­er the ben­e­fi­cial own­ers of U.S. shells by sub­poe­naing tax and bank records, he said. Companies are required to dis­close ben­e­fi­cial own­er­ship to finan­cial insti­tu­tions when they open an account. And those bent on break­ing the law “are going to send in false infor­ma­tion in any case” to FinCEN, Donahue said.

Nelson Bunn Jr., exec­u­tive direc­tor of the National District Attorneys Association, dis­agreed, telling RFE/RL that the Internal Revenue Service (IRS) cur­rent­ly does not col­lect ben­e­fi­cial own­er­ship infor­ma­tion in a man­ner that would help inves­ti­ga­tors. Furthermore, obtain­ing IRS records for an inves­ti­ga­tion “is incred­i­bly com­pli­cat­ed” and would require the involve­ment of fed­er­al law enforce­ment and the fed­er­al judi­cia­ry, a time­ly and cost­ly pro­ce­dure.

This would sig­nif­i­cant­ly delay inves­ti­ga­tions, pre­cludes state and local inves­ti­ga­tors who do not have the resources to part­ner with fed­er­al law enforce­ment, and cre­ates a sig­nif­i­cant resource chal­lenge for all state and local pros­e­cu­tors to receive infor­ma­tion that may still lead to a dead end in the inves­ti­ga­to­ry process,” he told RFE/RL.

Implementation Issues

Ross Delston, a Washington-based attor­ney, cer­ti­fied anti-mon­ey laun­der­ing spe­cial­ist (CAMS) and for­mer bank­ing reg­u­la­tor, said Congress will need to expand FinCEN’s resources if the bill is to have any real impact.

Without a sub­stan­tial increase in bud­get and per­son­nel of FinCEN, this bill will fail for lack of imple­men­ta­tion,” he told RFE/RL.

FinCEN’s abil­i­ty to ver­i­fy infor­ma­tion about for­eign ben­e­fi­cial own­ers, such as those locat­ed in the for­mer Soviet Union, could be chal­leng­ing as some due dili­gence tools, includ­ing cred­it data, may not be avail­able, Delston said.

Several states allow peo­ple to form LLCs with­out dis­clos­ing pub­licly who the own­ers or man­agers are. The paper­work to set up LLCS can be com­plet­ed in min­utes and the process gen­er­al­ly costs just a few hun­dred dol­lars, depend­ing on the state.

Individuals reg­is­ter­ing LLCs in Delaware have to sub­mit just the name and address of a per­son who can be a com­mu­ni­ca­tions con­tact for author­i­ties. The con­tact does not have to be a mem­ber or man­ag­er of the new­ly reg­is­tered shell com­pa­ny and does not have to reside in the United States.

While oth­er U.S. states may require slight­ly more infor­ma­tion to reg­is­ter a com­pa­ny, none of them ver­i­fy the data sub­mit­ted, allow­ing for poten­tial abuse. Furthermore, LLCs in states requir­ing more trans­paren­cy can be owned by anony­mous LLCs reg­is­tered in Delaware, Wyoming, or New Mexico.

Clint Coons, a found­ing part­ner at Anderson Law Group, which spe­cial­izes in asset pro­tec­tion strate­gies that include LLCs, said the only way to pre­vent crim­i­nals from abus­ing the sys­tem is to require every ben­e­fi­cial own­er to val­i­date their iden­ti­ty through a gov­ern­ment-issued ID that is kept on file.

That would solve it, but no one has the band­width or the mon­ey to do that,” Coons said.

Bad Company?

Viktor Bout, the Russian arms traf­fick­er who is serv­ing a 25-year sen­tence in a U.S. prison after being con­vict­ed in 2011 of con­spir­ing to kill U.S. nation­als and sell weapons to ter­ror­ists, had used a dozen shell com­pa­nies to hide assets in the United States, includ­ing in Delaware.

Former Ukrainian Prime Minister Pavlo Lazarenko, who served a prison term in the United States for mon­ey laun­der­ing, made use of a web of enti­ties around the world, includ­ing anony­mous shell com­pa­nies reg­is­tered in Wyoming.

Former Ukrainian Prime Minister Pavlo Lazarenko
Former Ukrainian Prime Minister Pavlo Lazarenko
LLCs are now reg­u­lar­ly used to acquire U.S. real estate, espe­cial­ly high-end prop­er­ties in New York City and Miami, to allow own­ers to main­tain pri­va­cy.

But crim­i­nals and oth­ers seek­ing to laun­der mon­ey, though, have abused the prac­tice, buy­ing real estate through LLCs in all-cash trans­ac­tions. The Treasury Department has begun tar­get­ing such trans­ac­tions in select cities while New York has been tak­ing steps to col­lect more own­er infor­ma­tion.

Denis Katsyv, son of a for­mer Moscow Oblast trans­port min­is­ter, used LLCs to dis­guise his all-cash acqui­si­tion of a $6.25 mil­lion con­do­mini­um in Manhattan par­tial­ly with mon­ey that the U.S. Justice Department said was stolen from the Russian bud­get.

Should one of the bills pass, its impact might be felt not only in Manhattan and Miami but also abroad, includ­ing in Moscow, Kyiv, and oth­er cen­ters of pow­er in the for­mer Soviet Union, where some of the $300 bil­lion in annu­al ille­gal pro­ceeds mov­ing through the United States orig­i­nates.

Alexander Cooley, direc­tor of Columbia University’s Harriman Institute and the author of a book on Central Asian mon­ey laun­der­ing, said tighter U.S. con­trols could dis­place some mon­ey seep­ing out the region to the Middle East and Asia but that America will con­tin­ue to remain an attrac­tive des­ti­na­tion.

However, he said U.S. leg­is­la­tion to set up a reg­is­ter of ben­e­fi­cial own­er­ship could have indi­rect effects on the region by rein­vig­o­rat­ing the process of set­ting bet­ter glob­al anti-mon­ey-laun­der­ing stan­dards, which would put pres­sure on oth­er juris­dic­tions to improve their own leg­is­la­tion.

You also can’t under­es­ti­mate some of the unin­tend­ed con­se­quences that some of this sun­light cre­ates,” Cooley said.

Regional rulers and their fam­i­lies “don’t like to have this cos­mopoli­tan lifestyle out there and on dis­play, and I think that is real­ly key,” he said, point­ing to a British inves­ti­ga­tion into the wealth of for­mer Kazakh President Nursultan Nazarbaev’s grand­son, which has attract­ed atten­tion in the Central Asian coun­try.

Matt Rojansky, direc­tor of the Kennan Institute, said dur­ing the May 20 webi­nar that the nations that emerged from the Soviet col­lapse may have devel­oped dif­fer­ent­ly had their lead­ers not been able to eas­i­ly “squir­rel away” state mon­ey in the West.

Imagine the way in which they would have to gov­ern their own coun­tries dif­fer­ent­ly if they have to keep their ill-got­ten gains at home,” Rojansky said. “Wouldn’t they want a lit­tle bit more rule of law at home to pro­tect that mon­ey rather than being able to rely on export­ing it to juris­dic­tions like ours, right here in the United States?”

Todd Prince is a senior cor­re­spon­dent in Washington, D.C., for RFE/RL.

Original arti­cle source: RFE/RL

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