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U.S. Must Do More to Tackle Phantom Firms on International Anti-Corruption Day

Joshua Simmons

This article was originally published by the Thomson Reuters Foundation.  

Monday was International Anti-Corruption Day, an occasion for those who work to fight bribery, money laundering, and illicit capital flight to reflect on the past year and set goals for the next. We have many reasons to celebrate 2013, but also plenty of work still to do in 2014. At Global Financial Integrity, our research shows that nearly $1 trillion leaves developing countries each year (many times the amount such countries receive in official development assistance) through illicit financial outflows, a devastating loss of capital facilitated by a shadow financial system more than happy to accommodate corrupt assets. Gains in tax information exchange and other areas this year will surely help curtail some of this moving forward, but there are many more policy changes needed before this economic scourge can be effectively addressed.

One ubiquitous component of the shadow financial system is the use of phantom firms—otherwise known as “anonymous shell companies,” legal entities with no physical assets or discernible owners—to open bank accounts and transfer money worldwide. Corrupt officials and criminals have used phantom firms for decades to evade detection, and—according to multiple international studies—the United States is one of the easiest countries in the world in which to establish one. The solution to this problem is conceptually quite simple: require legal entities to disclose the names and addresses of their “beneficial owners”—the real human beings behind them—so that law enforcement can follow the money trail when a company is used for nefarious purposes.

At this summer’s highly publicized G8 summit in Northern Ireland, British Prime Minister David Cameron led a welcome refocusing of the G8’s agenda toward issues of “trade, tax, and transparency.” As part of the landmark Lough Erne Declaration made at the summit, the G8 nations all agreed that “companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily.” After the summit, every G8 nation issued a national action plan for achieving this goal—including the United States, which pledged to work for “comprehensive legislation” on beneficial ownership transparency.

While most Americans were busy with turkey, stuffing, and football over the Thanksgiving holidays, U.S. diplomats were in Panama at the Conference of States Parties to the United Nations Convention Against Corruption (UNCAC), held biennially to discuss issues and methods of enforcing that global agreement to crack down on bribery. One of the resolutions passed at the conference, sponsored by the U.S. among other countries, declared that signatories to UNCAC should “ensure that reliable beneficial ownership information on companies is accessible onshore to law enforcement agencies and other relevant authorities.”

Finally, just last week, the administration released its Second National Action Plan for implementing the Open Government Partnership, an international initiative for transparency in government operations. The plan reiterated a commitment to “publicly advocate for legislation requiring disclosure of meaningful information at the time a company is formed, showing not just who owns the company, but also who receives financial benefits from the entity.”

This repetition is not simply wishful thinking by the Obama administration—it is a clear statement that the United States intends to meet what is now a global standard. Nor are these commitments a vague outline for future legislation—a bill already exists that would precisely fulfill this goal. The bipartisan Incorporation Transparency and Law Enforcement Assistance Act (S. 1465 and H.R. 3331)—sponsored by Sen. Carl Levin (D-MI), Sen. Chuck Grassley (R-IA), Sen. Tom Harkin (D-IA), Sen. Dianne Feinstein (D-CA), Rep. Carolyn Maloney (D-NY), Rep. Maxine Waters (D-CA), Rep. Gwen Moore (D-WI), and Rep. Michael Capuano (D-MA)—would require every company formed in the United States to disclose its beneficial owners at the time it is formed and provide such information to law enforcement.

It’s time for Congress to take action so that the U.S. can fulfill its international commitments and curb the flow of dirty money through American banks and American phantom firms. As the country responsible for creating the largest number of legal entities—over two million—annually, the United States should be a leader on this issue, not a follower. Passing the Incorporation Transparency and Law Enforcement Assistance Act would signal to the rest of the world that the United States is serious about tackling the continuing problem of corruption. Hopefully on next year’s International Anti-Corruption Day, this is one area in which we can celebrate an achievement rather than restate a goal.

Joshua Simmons is a Policy Counsel at Global Financial Integrity, a non-partisan, non-profit research and advocacy organization based in Washington, DC. 

Any views expressed in this article are those of the author and not of Thomson Reuters Foundation.

This article was originally published by the Thomson Reuters Foundation.  Any views expressed in this article are those of the author and not of Thomson Reuters Foundation.