Global Financial Integrity

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Updating Incorporation Transparency Laws

Raymond Baker

This article was originally published by The Huffington Post.

The United States Justice Department recently announced the arrest of 1,200 individuals on narcotics charges as part of the four-year, multi-agency law enforcement investigation targeting Mexian drug cartel La Familia known as “Project Coronado.” In addition to arrests, law enforcement agents confiscated $3.4 million in U.S. currency, 729 pounds of methamphetamine, 62 kilograms of cocaine, and 967 pounds of marijuana.

What will follow in the months ahead is the arduous legal process of building cases against the La Familia operatives arrested. There are street level thugs, traffickers, mules, and distributors who will see jail time for sure. But what about the captains, the bosses, and the kingpins? What about all the rest of La Familia’s massive and entrenched operation?

The answer is: probably nothing.

After all, what’s a $3.4 million loss in a business worth billions? And what is the incarceration of a few hundred low-level thugs as long as those at the top remain beyond the reach of justice?

In the war on drugs the most powerful ammunition law enforcement has is information. Whoever calls the shots is usually the same person who sits atop the money pyramid and while law enforcement may know who these persons are, they have a much more difficult time proving guilt and securing convictions.

Much of the blame for this lies in the calamitous state of justice and rule of law in Mexico. The rest though, lies squarely with the United States, which for far too long has maintained a dangerously laissez-faire attitude about what is permissible conduct in its domestic financial practices.

One such practice is company formation. Every year some two million corporations and limited liability companies (LLCs) are formed within the U.S. under a patchwork of state-by-state laws that require a surprisingly scarce amount of information from those seeking to incorporate. In many states, starting a company is easier than obtaining a library card. The most glaring omission in the company formation process is a lack of requirement for disclosure of beneficial ownership. In other words, when forming a company it is not necessary to disclose who the primary beneficiary and controller of the newly formed entity will be.

Operating in this shrouded process, these U.S. corporate entities serve as fiscal engines for some of society’s worst crimes, both on U.S. soil and abroad. For criminals, this presents a tantalizing opportunity for money-laundering-usually by forming a multi-tiered structure of shell companies and dummy corporations.

For law enforcement officials, such as those who will now be working to put La Familia members in jail, this means that it is a lot more difficult to successfully investigate crimes because the money trail too often dead ends far short of those at the top of the chain.

As the Senate Homeland Security and Governmental Affairs Committee considers legislation aimed at strengthening reporting requirements and enhancing law enforcement access to crucial beneficial ownership information, cases such as the La Familia drug cartel should be kept in mind.

Just this month, a second hearing for the Incorporation Transparency and Law Enforcement Act (S. 569), was held in the Committee. A favorite of law enforcement groups, S. 569 would amend the company formation process to resemble that of motor vehicle registration. In the same way a person registering a car provides a title of ownership and is assigned a license plate number, so would a newly formed company provide a beneficial owner and be assigned a corporate identification number.

At the first hearing back in July, numerous law enforcement groups, including the Federal Law Enforcement Officers Association, National Narcotic Officers’ Associations Coalition, the Fraternal Order of Police, and the National Association of Assistant United States Attorneys voiced staunch support for the bill. Representatives from the New York District Attorney’s office, and U.S. Immigration and Customs Enforcement gave examples of how investigations were hampered by lack of information about beneficial owners of companies and cited cases closed for lack of evidence.

The arguments in favor of Incorporation Transparency — more effective law enforcement, greater capacity to investigate crime, and higher rates of success in prosecution of crimes outweigh the main argument against the bill — that it will be burdensome to fill out an extra few lines on applications.

While it is impossible to calculate La Familia’s total assets, it is safe to assume that a portion of it is in fact stashed within the United States or has been laundered through our financial system. It is not enough to catch the small fish and be content with a few million seized in an industry whose profits rival the GDP of many small countries.

It is time to update our anachronistic and unsafe laws of incorporation and strike back at criminals that for too long have been able to use our financial system for their gain to our own detriment.

Raymond Baker is the Director of Global Financial Integrity, a research and advocacy organization promoting increased transparency in the international financial system.