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

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