For years, and starting long before President Donald Trump won election, the U.S. has acted as the world’s greatest haven for global dirty money.
As researchers and investigators alike have uncovered over the past few years — and as highlighted in a recent documentary on the Panama Papers — the U.S. has arguably surpassed the U.K. as the globe’s safest harbor for dirty money thanks to a confluence of factors, ranging from anonymous shell companies to anonymous trusts to anonymous real estate purchases in America’s massive luxury real estate markets. On top of that, while countries like the U.K. have moved forward with identifying those behind shell companies, the U.S. has been reluctant to close the door on people taking advantage of America as a haven for illicit finances.
While Washington has been mired in political infighting and unable to pass bipartisan legislation on the matter, a handful of states have taken steps to stop any federal efforts to crack down on financial anonymity. Wyoming, for example, is home of a sprawling anonymous company network, while South Dakota houses a burgeoning anonymous trust industry.
Along the way, while federal investigators have pried into financial secrecy havens in other countries, Washington has refused to offer the same financial transparency to allies and partners. And states like Delaware and Nevada, both pioneers in the world of anonymous shell companies, have attracted the exact same crooks and kleptocrats the United States has tried to track down elsewhere.
In addition to helping skyrocket cost-of-living rates for American cities across the country, these kleptocrats parking their money in the United States — lining the pockets of realtors, accountants, and public relations specialists — also pose a serious threat to America’s national security and interests abroad. These kleptocrats destabilize nations by gutting their own countries’ finances and treasuries, then funneling the loot into the system of U.S.-based offshore services. From Ukraine to Venezuela, the end result is domestic chaos, creating new security threats for Washington to deal with.
While Trump has shown no interest in pushing anti-kleptocracy policies, a raft of activists, civil society groups, and frustrated bureaucrats have barreled ahead, helping lead an effort to clean up America’s financial secrecy sector. As such, there’s momentum for Democrats, including the prospective 2020 presidential candidates, to jump aboard the anti-kleptocracy bandwagon.
Below are a number of policies experts recommend that lawmakers could push now, both because they stand a chance to excite voters and because America’s own role in internationalized kleptocracy is a pressing national security issue. Some measures are already in the works, such as policies to end anonymous shell companies. But they’re all necessary — and the sooner the better.
The low-hanging fruit
Some pro-transparency policy proposals are more easily accomplished than others. These three below, thanks to bills moving through Congress and regulations already introduced, present the quickest, most effective ways the U.S. can begin rolling back its role as a haven for dirty money.
1. Ban anonymous shell companies in the U.S.
The World Bank found in a 2014 study that the U.S., thanks to its sheer size, produces some ten times as many legal entities — such as anonymous shell companies — as the next 41 countries and jurisdictions combined. Led by states like Delaware, Nevada, and Wyoming, each of which have pioneered financial secrecy tools for anonymous shell companies, American states have proven willing time and again to allow anyone, regardless of background or concern, to open an anonymous shell company. Case in point: It is more difficult, according to research by financial watchdog group Global Financial Integrity, to get a library card in the U.S. than it is to set up an anonymous shell company.
But the U.S. could take a leading role in disrupting these illicit networks of money, if only it would take action. As a recent letter signed by more than 60 American national security experts noted, “By ending anonymous ownership of companies and encouraging other countries to do the same, the United States could turn a vulnerability into an advantage, disrupting illicit financial networks and pushing back against adversaries who seek to undermine the rule of law globally.”
Thanks to pro-transparency organizations like the FACT Coalition and growing bipartisan support in Congress, the U.S. stands closer than ever to forcing companies to identify their ultimate beneficial owners. Just this month, for the first time in American history, a bill eliminating anonymous shell company formation passed out of a House committee. The legislation is currently being scheduled for a vote in the full House — meaning that, by next year’s election, the United States may have already ended its role as a global leader in anonymous shell company creation.
2. End anonymous real estate purchases in the U.S.
For decades, anonymous shell companies didn’t simply provide a means of hiding ill-gotten gains from investigators and tax authorities: They also provided a means to park money in one of the safest (and most easily corruptible) financial shelters America could provide: luxury real estate, from Manhattan high-rises to San Francisco condos to Seattle mansions to Honolulu beach-fronts.
Not only were the properties smart investments, given how much property in the United States has appreciated over the past two decades, but the real-estate purchasing process actually favored anonymous shell companies. Thanks to a “temporary” exemption regarding checking funding sources for signs of money laundering — an exemption that has now lasted nearly two decades — realtors didn’t have any stringent requirements to identify the sources of funds behind the purchases.
That all began to change three years ago, when the Obama administration implemented Geographic Targeting Orders (GTOs), forcing title companies to identify the ultimate beneficial owners of shell companies snapping up property in certain major jurisdictions, such as Manhattan and Miami. The program only covers certain American cities and counties, but the Trump administration expanded the program geographically (it now includes Las Vegas, San Diego, and Chicago, among others) and financially (it has been expanded to encompass all transactions over $300,000 in those locales).
The GTOs have been, as both researchers and advocates attest, one of the greatest anti-kleptocracy success stories over the past few years. In the locations covered, anonymous real estate purchases collapsed. And there’s no reason the program couldn’t be expanded internationally, making sure to stamp out anonymous real estate purchases wherever they may take place.
3. Strengthen enforcement of the Foreign Agents Registration Act (FARA)
If there’s one thing the 2016 Trump campaign highlighted, it is just how easily Americans can circumvent Justice Department regulations regarding foreign lobbying — and how effectively foreign governments could abuse that lack of enforcement for their own ends. However, the Foreign Agents Registration Act (FARA), regulations first implemented in 1938 forcing foreign lobbyists to register with the DOJ, has seen a revival since the last presidential election.
The DOJ has dedicated a new task force dedicated to making sure registrations are filed on time, and tracking down those that aren’t. This task force could be significantly expanded — which would lead to that many more investigations — and the online database could and should be improved, both in terms of accessing filings and in cleaning up basic things like mis-spellings. (There doesn’t need to be five different spellings of Kyrgyzstan, for instance.)
Beyond that, loopholes allowing certain foreign lobbyists — such as those representing foreign companies close to foreign governments — to register with the less-transparent Lobbying Disclosure Act should be closed. After all, failure to enforce FARA is what allowed former Trump campaign chair Paul Manafort to remain free and continue to profit from illicit foreign lobbying for years, while an untold number of other lobbyists continued to freely push foreign governments’ interests in the U.S.
The necessary regulations
While banning anonymous shell companies and anonymous real estate purchases has generated a fair amount of news coverage over the past few years, a handful of less well-known measures would return the U.S. to the fore of the pro-transparency world, and could crack down on kleptocratic rot at the same time.
4. Transparency in the extractive industry
In one of his first official acts as president, Trump approved a measure stalling the implementation of a major piece of anti-kleptocracy regulation: Section 1504 of the Dodd-Frank Act, which would have forced major oil-and-gas companies like Exxon and Chevron to disclose payments to foreign governments. The Trump administration then announced it was pulling back from commitments to the Extractive Industries Transparency Initiative (EITI), a consortium pushing transparency in the international hydrocarbon and mining sectors.
“The U.S. went from supporting those [pro-transparency] efforts to actively working against them.”
Both moves were significant blows to pro-transparency efforts: The extractive sector is still widely considered the most corrupt industry in the world, both because it’s so lucrative and because so much of the actual extractive takes place in countries with weak governmental oversight. The EITI is still pushing ahead, despite Washington’s withdrawal, and Section 1504 is still technically on the books, awaiting implementation guidance from the Securities and Exchange Commission (SEC). Democrats should consider both rejoining EITI and pushing Section 1504 implementation — both because it would be relatively easy, and because it would set a broader tone for American anti-corruption efforts elsewhere.
“The U.S. went from supporting those [pro-transparency] efforts to actively working against them,” said Alexandra Gillies, an adviser at the Natural Resource Governance Institute who has a new book on corruption in the oil sector coming out later this year. “It’s such a disappointing and unnecessary place to be. We need to go back to leading on these issues.”
5. Expand the Foreign Corrupt Practices Act (FCPA)
For years, the Foreign Corrupt Practices Act (FCPA) has been regarded by pro-transparency activists as one of best pieces of anti-corruption regulations on American books. The FCPA was itself an outgrowth of Watergate-related investigations, criminalizing the payment of bribes from American officials and companies to foreign entities. It took some time for federal authorities to actually enforce the FCPA in any notable capacity — it wasn’t until the George W. Bush administration that FCPA violations were regularly prosecuted — but even with Trump previously referring to the FCPA as a “horrible law,” there’s no sign of any slow-down in tracking down Americans who push bribes across the world.
Over forty years after its inception, though, leading voices in the world of anti-kleptocracy have begun pushing for a significant expansion of the FCPA. Namely, pro-transparency advocates want to criminalize not only the act of offering bribes abroad, but even the act of soliciting the bribe in the first place. “Amending U.S. criminal law to cover bribe-receiving would bring the United States closer to international best practices, and would further the U.S. government’s efforts to stamp out transnational corruption,” wrote Tom Firestone, a partner at Baker McKenzie and noted expert on the FCPA. “But it would also protect honest businesses, which are increasingly faced with illegal demands from foreign officials in corrupt regimes and unscrupulous competition from companies, including state-owned enterprises in such countries.”
The U.S. hasn’t been shy about pursuing legal actions against foreign officials demanding bribes — see a recent indictment against the daughter of the former Uzbek president involved in nearly $1 billion in bribes, for instance — but there’s little reason the FCPA couldn’t be expanded to make it easier to pursue these crooked foreign officials, especially when they try to shake down American companies.
6. Crack down on state-sponsored doping fraud in international sport
Modern kleptocracy isn’t limited to crooked officials purchasing yachts and mega-mansions. After all, regimes ransacking their populations have to remain in power in order for their pocket-books to remain full. One way some regimes attempt to cement their legitimacy in order to stay in power is to host international sporting events — and to subsequently sponsor massive doping rings in order to take home the gold.
While plenty of examples of non-democratic host countries abound — say, the Beijing Olympics in 2008, or FIFA awarding Qatar the 2022 World Cup — there’s no better example of a regime pursuing a doping project than Russia, especially surrounding the 2014 Sochi Olympics. Russian officials, as we now know, oversaw a doping regime unprecedented in modern international sport. Russian hackers were even involved, unleashing assaults on anti-doping advocates and testing labs.
“For Russia, victory in international sporting events is a critical component of the state’s domestic and foreign policy agenda and is advanced by Vladimir Putin’s preferred political technique: the weaponization of corruption,” wrote Paul Massaro, a policy advisor at the Helsinki Commission, an independent U.S. federal agency focusing on human rights and pro-democracy policies. “It has become clear that doping fraud in sports is just one cog in a larger scheme of systemic international corrupt practices that include bribery, money laundering, and hacking, among other crimes.”
Legislation working through Congress offers a potentially permanent fix against state-sponsored doping regimes. The Rodchenkov Anti-Doping Act (RADA) — named after Russian doping whistleblower Grigory Rodchenkov — would allow U.S. courts to hear criminal doping fraud conspiracy cases relating to major sporting events, such as the Olympics or World Cup. The bill already has bipartisan support, and plenty of momentum behind it, with organizations like Major League Baseball recently coming out in support.
Major League Baseball released the following statement today regarding the Rodchenkov Act: pic.twitter.com/92VesOm1Vr
— MLB Communications (@MLB_PR) May 3, 2019
It wouldn’t take much legislative push to enact RADA, and to help convince rogue regimes abroad to think twice about state-sponsored doping regimes as a means of extending their corrosive corruption.
Go big or go home
Some of the recommendations above are already on their way to fruition, while some have recently gained enough traction that they’ve built up a momentum of their own. The ones below, though, are far heavier lifts, but equally worth pursuing.
7. Align U.S. and European Union anti-money laundering regulations
On most matters, U.S. and EU anti-money laundering and pro-transparency regulations are either largely in line, or at least inform one another as it pertains to best practices. But there are still massive gaps between the two, allowing the U.S. to be able to flourish as a global tax haven.
Take the U.S.’s 2014 decision to implement to Foreign Account Tax Compliance Act (FATCA), for instance. FATCA made foreign banks operating outside the U.S. disclose business with U.S. clients, and its language largely mirrored existing European regulations. But the U.S. has still refused to share all information about European clients doing business in the U.S. That disjointed relationship, as the Tax Justice Network wrote, “risks tearing a giant hole in international efforts to crack down on tax evasion, money laundering and financial crime.” It has, as one analyst quipped, made the U.S. “effectively the biggest tax haven in the world.”
Things haven’t improved under Trump. Recently, the EU listed a handful of American jurisdictions, including Puerto Rico, Guam, and American Samoa, as dirty money havens, which led to a spat between American and European officials. It was a setback for further attempts to align anti-money laundering policies. “Presenting a united front against illicit finance would empower the EU, the U.S. and other democratic allies to address the darker aspects of globalization and push back against a rising tide of authoritarian abuse and transnational criminality,” Nate Sibley wrote in World Politics Review in April.
8. End anonymous trusts in the U.S.
As seen with the explosion of anonymous shell companies, a substantial part of the U.S.’s transformation into a global offshore tax haven has been driven by state-level governments. When it comes to anonymous trusts — trusts that allow crooks and kleptocrats to hide their assets and pass them along to next generations without any scrutiny — no state has led the charge like South Dakota.
“We have a tax haven in our midst.”
Over the past few years, thanks to South Dakota’s legalization of “perpetual trusts,” or trusts that never expire, the trust industry has exploded across the state, with total holdings in South Dakota trusts now topping nearly $250 billion as of 2016. The trusts are entirely anonymous; the public, in South Dakota and elsewhere, has no idea who’s taking advantage of these anonymous set-ups, stashing millions (or more) in hideaways in Sioux Falls or Pierre.
And people pouring their money into South Dakota don’t even need to show up in the state to take advantage. As Bloomberg reported, “The families needn’t actually move to South Dakota, or deposit their money at a local bank, or even touch down in the private jet. Little more than renting an address in Sioux Falls is required to take advantage of South Dakota’s tax-friendly trust laws.” Along the way, trust industry leaders have grown so close to state legislators that they’re helping write the rules and regulations nominally meant to monitor the trust industry, with both legislators and industry heads manning the “Trust Task Force” to recommend laws cementing the anonymity.
As with anonymous shells, of course, that anonymity isn’t just to hide from prying eyes of gossip magazines or inquisitive relatives. It’s also a perfect vehicle for throwing investigators — both Americans and non-Americans alike — off the financial scent when looking for dirty money. Not only is it effectively impossible to track those who use South Dakota trust companies, but American authorities have thus far refused to comply with requests from foreign governments to examine whether their citizens have stashed their loot in South Dakota trusts. As USC law professor Edward McCaffery said, when it comes to South Dakota, “We have a tax haven in our midst.”
There’s one clear solution: registration. Andres Knobel, an analyst for the Tax Justice Network and one of the leading researchers on anonymous trusts, wrote that “[I]f you want to obtain trust-based privileges and protections from society, then transparency is a minimal price to pay.” And as with anonymous shell companies in the U.S., transparency for these anonymous trusts can’t come a moment too soon. Assets stored in South Dakota trusts has already reached into the hundreds of billions — and other states, like Alaska and Nevada, have started to follow suit, threatening to turn these types of trusts into a nationwide phenomenon.
9. Create a database of cross-border payments
From anonymous companies to anonymous trusts, much of the future of anti-kleptocracy efforts centers on pro-transparency databases available to law enforcement officials in order to track illicit funds. But what if we could broaden those databases beyond just Delaware companies and South Dakota trusts? What if there was a database that could, at its core, highlight all of the cross-border payments that allow foreign crooks and criminals to move their money into the U.S. in the first place?
Given the marriage of technology, big data, and pro-transparency momentum, it’s not nearly as far-fetched an idea as it sounds. As Joshua Kirschenbaum and David Murray wrote last December with the German Marshall Fund, a pro-democracy organization, “U.S. banks process trillions of dollars in payments per day, including about half of cross-border funds transfers worldwide.” A database highlighting these payments would not only help reduce regulatory burdens on banks, but would stymie kleptocrats who purposely use multiple jurisdictions to hide their tracks.
The good news is that Congress has already granted the Treasury Department authority to create just such a database. And while Treasury has dragged its feet in actually constructing the database, it wouldn’t take much to finally bring it to fruition. Canada and Australia have already implemented comparable databases, and, as Kirschenbaum and Murray wrote, “technology would make an international payments database straightforward and cost-effective.” Combating kleptocracy and saving money while doing it present, in short, an easy policy win for those looking for anti-kleptocracy solutions.