Clearing up yacht ownership and other financial secrets
Even on the best records, a big problem remains: the ultimate controlling shareholder, also known as the beneficial owner, is often obscure. People who want to hide can all too easily use candidates from corporate secretarial agencies, or list the owner as a company or trust a secret haven like the British Virgin Islands or the Seychelles. This is where the trail often comes to a dead end.
Financial secrecy is again high on the political agenda, as are efforts to sanction Russian oligarchs accused of supporting President Vladimir Putin’s war in Ukraine. Real estate, yachts and other trappings of the super-rich can, like private businesses, often be owned by shell companies and trusts which make the true owner difficult to trace.
Now should be the time to take a big step to make life harder for criminals, kleptocrats and other disreputable individuals who want to hide money, though experts fear today’s political attention does not last. War, disaster or economic conflict can galvanize politicians to push through big changes. Much of today’s anti-money laundering rules in finance grew out of the attacks on New York and Washington in September 2001, when the United States waged a global crackdown on terrorist financing.
Two decades and a series of scandals later – from HSBC Holdings Plc allowing drug barons access to its Mexican branch to the more than $200 billion Estonian laundry of Danske Bank – it is clear that the supervision and the application need resources. Billions of dollars in fines show that the law is in action, but the fact that they keep coming shows that the problem is not solved. For example, ABN Amro paid nearly $600 million to Dutch authorities last year alone.
But as more and more efforts have focused on eradicating money laundering through the big banks, the industry of hiding money flows and asset ownership through shell companies and of trusts has developed. The US and UK remain big offenders on this front. Legislation is being strengthened – but slowly and with gaping holes.
The Financial Action Task Force, the intergovernmental watchdog on money laundering and terrorist financing, last month tightened its standards for registering beneficial owners. All countries should now put in place rules that meet them. They require that ownership of businesses, real estate and other assets be recorded accurately – it must be verified, up-to-date and accessible to at least law enforcement, tax and other so-called competent authorities.
Full public access would be preferable: it allows anyone interested to help review and verify anything that is filed. UK Companies House may be full of holes, but at least anyone can point them out and make a fuss.
Secrecy has long been a key selling point for Swiss banks, but the US-led crackdown on high net worth tax evasion after 2008 effectively ended that for international clients, at least for tax purposes, according to the Swiss Bankers Association. Its banks still potentially hold more than $200 billion in assets of wealthy Russians, the SNB estimates, although the banks quickly froze the accounts of those sanctioned.
But compliance and oversight in Switzerland is still questionable, says Maira Martini, global money laundering specialist at Transparency International. There are no visibility requirements for business ownership there and no requirement for lawyers to make suspicious transaction reports related to setting up businesses, she says.
Several countries are acting to shed light on ownership. The UK government has said it will tighten Companies House rules and it has just passed laws to force foreign owners of property to come forward. Canada is accelerating rules on corporate transparency, says Martini. New Zealand is too, although its efforts ignore its growing trust industry, she adds.
If any country can use its economic power and the offshore reach of its currency to adopt higher standards, it should be the administration of US President Joe Biden who has admitted that America has its own major money laundering failures. ‘money, but proposals to improve the rules are still not yet up to par.
The Corporate Transparency Act was passed by Congress in 2020, and the addition of a beneficial ownership rule was proposed last December by the Treasury’s Financial Crimes Enforcement Network. But there are so many restrictions and exemptions it should be called the Corporate Opacity Act, says Ross Delston, an independent US attorney and anti-money laundering expert based in Washington, DC.
Only law enforcement and banks will have access to it, while it currently does not apply to many types of companies or trusts, which are becoming a major source of financial secrecy around the world.
South Dakota, home to a booming secrecy industry, held more than $350 billion in opaque trusts, according to estimates by the Guardian newspaper. By comparison, the value of UK property held by offshore companies, another popular way to make money, has been estimated at more than 170 billion pounds ($223 billion).
U.S. trusts could still be targeted by FinCEN’s beneficial ownership rule, according to a briefing from a senior Treasury official. The rule is a work in progress, they said, and would go beyond what is contained in the proposal, although they could not give any specifics. Today’s events have mobilized public opinion and made financial secrecy the subject of much thought and focused conversation, they added.
But others fear the moment is running out: ownership and secrecy are too abstract for many voters.
The Russian invasion of Ukraine may not have the lasting impact on American or European voters of terrorism on their home soil. American voters may see value in punishing some Russians, but the oligarchs and Putin are not seen as directly attacking the United States, Delston says.
Those who profit from the financial secrecy trade find it easy to spark public debate with popular notions of freedom from authoritarian governments and privacy concerns. But it’s a pernicious industry that fosters large-scale tax evasion, theft and corruption. It helps states deploy secret money to fund attacks on other governments and people. It’s time to end it.
More from Bloomberg Opinion:
• You can’t just take a Russian oligarch’s townhouse in London: Chris Hughes
• The father of the Russian oligarchs will not be the last to leave: Clara Ferreira Marques
• Russia is exploiting two big holes in financial sanctions: Paul J. Davies
This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.
Paul J. Davies is a Bloomberg Opinion columnist covering banking and finance. He previously worked for the Wall Street Journal and the Financial Times.