or those familiar with the offshore finance industry, the corruption revelations resulting from the October publication of the Pandora Papers by the International Consortium of Investigative Journalists (ICIJ) came as no surprise. Similar data leaks over the past few years, including the Panama Papers, the Paradise Papers, and others, have previously highlighted the fact that corrupt individuals, criminals, and terrorists, as well as prominent political figures, celebrities, and wealthy businesspeople, abuse the financial system to evade taxes, hide illegal proceeds, move illicitly acquired wealth undetected, and enrich themselves unfairly.
However, there are several notable differences that distinguish this latest disclosure of confidential documents from prior reports. For one, the Pandora Papers constitute the largest dissemination of private financial information to date, including nearly 12 million documents consisting of 2.9 terabytes of total data. Another significant difference is that, unlike the Panama Papers, which were associated with the now defunct Panamanian law firm, Mossack Fonseca, and unlike the Paradise Papers, which were tied to the Bermuda-based law firm, Appleby, the Pandora Papers aren’t associated with a single entity. Rather, the they have been linked to 14 different sources, including offshore law firms, wealth management firms, and corporate formation agencies. This is especially noteworthy because it exposes the ubiquitous role of professional intermediaries employed by such firms, including lawyers, accountants, and financial advisors, among others, who serve as enablers of corruption and facilitators of illegitimate activity.
The misuse of various legal and corporate structures and the exploitation of jurisdictional differences in laws and regulations runs the spectrum of unethical at the very least to illegal at worst. By providing the ultimate beneficial owners of trusts, foundations, and corporations with anonymity, such abuses permit nefarious individuals to access the global financial system and take part in a myriad of transactions that would otherwise be prohibited, all without any accountability. These are not victimless activities. Rather, the consequences are widespread and severe. Financial crime allows terrorists to finance deadly attacks, permits organized crime to flourish, furthers corruption, disrupts supply chains, undermines democracy, contributes to political instability, social division, and economic inequality, and even leads to environmental harms.
More so than in prior exposés, the Pandora Papers emphasized the role of the United States as a key destination for illicit funds. For example, the documents disclosed numerous trusts in Delaware, Florida, Nevada, South Dakota, and Texas that were linked to foreign interests. Leaked papers also revealed how high-end real estate in the U.S., along with U.S. shell companies, were used to hide illicit foreign wealth. The role of the U.S. as a tax and financial secrecy haven is consistent with the ranking of the U.S. on the Tax Justice Network’s Financial Secrecy Index, a politically neutral barometer which rates jurisdictions based on their levels of corporate secrecy and the amount of their offshore financial activities, and on which the U.S. has experienced a steady decline. These revelations starkly contradict the U.S. public stance against corruption and financial secrecy.
Although the U.S. was the first country to pass anti-money laundering (AML) legislation when it enacted the Bank Secrecy Act in 1970, and is generally considered to be a jurisdiction with a strong AML regime, customer due diligence rules and other related requirements presently apply only to U.S. banks and certain other U.S. financial institutions because they are seen as the entry point for illicit funds. Notably however, a group of professionals and businesses that often act as intermediaries between their clients and financial institutions are not subject to AML obligations, resulting in a huge gap in the current U.S. AML framework. This loophole allows unscrupulous individuals and other nefarious actors to take advantage of the services provided by these middlemen or “gatekeepers” who, either wittingly or unwittingly, aid their clients in gaining access to international financial and business markets, and even profit from them. This is accomplished through the provision of financial and tax advice and by setting up legal arrangements such as anonymous shell companies and trusts, which are often used as the primary vehicles to transfer and hide wealth from the government, law enforcement, creditors, victims, and others.
Perhaps surprisingly, the Pandora Papers prompted a remarkably speedy response from U.S. lawmakers resulting in the introduction of the new bipartisan kleptocracy bill called the Establishing New Authorities for Business Laundering and Enabling Risks to Security Act, also known as the ENABLER’s Act. The proposed bill brings several key professions within its scope. These include investment advisors, art and antiques dealers, attorneys involved in financial activity, accountants, third-party payment providers, public relations firms, and trust or company service providers, which include not only those businesses involved in establishing corporate entities and other legal structure such as partnerships, foundations, and trusts, but also those acting as registered agents, trustees, or nominees to be a shareholder, officer, director, secretary or other similar position. It also brings real estate professionals and sellers of luxury vehicles, including ships and aircraft, within scope as well as expands existing Geographic Targeting Orders to require all domestic title insurers to collect beneficial ownership information for all cash purchases of both residential and commercial real estate. Additionally, the law mandates the creation of a national security gatekeepers taskforce.
If passed as currently written, the new law would require gatekeepers to comply with the same AML obligations placed on banks and other financial institutions, including the requirement to report suspicious transactions, establish AML programs, implement due diligences policies, procedures, and controls, and identify and verify account holders. Essentially, this means that affected businesses will have to verify that their clients are indeed who they say they are as well as conduct checks on their clients’ source of funds to obtain assurances that the money is legitimately derived. It also means that these businesses will have to scrutinize transactions for unusual or suspicious activity and, if detected, file suspicious activity reports with the government or otherwise face a penalty.
Most American professionals potentially impacted by the proposed legislation are law-abiding citizens who know their customers. Therefore, lawmakers claim that the bill will not be a significant burden. However, this proposal doesn’t mean that affected businesses won’t have additional work. Although the bill doesn’t mandate that businesses suddenly take on the role of law enforcement and become money laundering investigators, the requirement to screen and conduct due diligence on clients and client funds could sometimes feel that way. Furthermore, the onus to create, adopt, test, review, and maintain new AML policies, processes, and procedures may not be insubstantial to some. In fact, these requirements could be especially costly and time consuming for smaller firms, partnerships, and solo practitioners, who do not have the manpower and resources of larger firms and financial institutions. Furthermore, by requiring these professionals to report suspicious transactions, it would impose on the fiduciary duties many of these professionals owe to their clients, as well as potentially violate the attorney-client privilege.
The U.S. has been under domestic and global pressure for some time now to modernize its existing AML regime and to help combat international money laundering. In fact, legislators were finally able to usher the Corporate Transparency Act (an AML law which has languished in Washington for decades and which creates a federal database of beneficial ownership information), into the latest National Defense Authorization Act. Furthermore, President Joe Biden has described corruption as a threat to U.S. national security, promising to make it a priority and to take meaningful steps to combat it. In fact, he has already made fighting corruption a major part of the agenda for his upcoming Summit for Democracy, a gathering of world leaders whose first session is scheduled to be held in December.
The U.S. is a particularly attractive destination for ill-gotten gains due to its respected and transparent legal system and because of the strength and stability of the U.S. dollar. As a result, U.S. financial institutions play a major role in the global economy, as do those who are in the position to provide access to it. Therefore, legislation targeting the enabling professions has the potential to be an effective deterrent to financial crime, both domestically and internationally.
While the ENABLER’s Act winds its way through the lawmaking process, the bill can still change substantially. As currently written, it is sweeping in breadth and scope. Without a doubt, refinements are required so that the law doesn’t force an undue burden on lawful businessowners. This is especially the case regarding smaller businesses on whom the additional requirements would be redundant and costly. In the meantime, the swift introduction of the legislation is at least an outward showing that U.S. lawmakers are being responsive to the scandal. However, related AML measures have historically been slow and far between. Therefore, it will remain to be seen whether any significant changes are ultimately implemented. Legislators in Washington have long known that the U.S. attracts all types of foreign money, including legal as well as illegal wealth, and everything in between. It is generally the very same lawmakers who have the power to change the laws that are also the ones who most benefit from the status quo.
As is the case with any imposition of any federal regulations, this latest proposal is certain to face substantial pushback, especially from the strong lobbying groups of the professions and businesses it targets. Nonetheless, based on current international focus on kleptocracy and corruption and the Biden Administration’s publicly professed commitment to addressing these issues, it’s likely that some version of the ENABLER’s Act will make it through Congress eventually. But even when the law finally does pass, in whatever form it ultimately takes, it will not signal the end of the fight against financial secrecy.
Just as important as bringing U.S. AML laws into the 21st century, is the need for global uniformity in AML regulations. Specifically, this includes enhancing the ability to share relevant information, particularly information relating to suspicious activity and ultimate beneficial ownership, among jurisdictions as well as between the private and public sectors. Financial criminals capitalize on jurisdictional differences and thrive in areas where the law is unclear or inconsistent. As a result, criminals will continue to pick and choose locations that are most favorable to their goals. If the U.S. becomes an inhospitable environment for dirty funds, then dictators, launderers, and fraudsters will simply put their money elsewhere.
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U.S. Legislation Targets the Enablers of Money Laundering
Photo by Zachary Kadolph via Unsplash.
November 4, 2021
Can lawmakers overcome the burdens imposed by the ENABLER’s Act and close the loopholes that make the United States a prime destination for money laundering and a haven for illicit funds?
F
or those familiar with the offshore finance industry, the corruption revelations resulting from the October publication of the Pandora Papers by the International Consortium of Investigative Journalists (ICIJ) came as no surprise. Similar data leaks over the past few years, including the Panama Papers, the Paradise Papers, and others, have previously highlighted the fact that corrupt individuals, criminals, and terrorists, as well as prominent political figures, celebrities, and wealthy businesspeople, abuse the financial system to evade taxes, hide illegal proceeds, move illicitly acquired wealth undetected, and enrich themselves unfairly.
However, there are several notable differences that distinguish this latest disclosure of confidential documents from prior reports. For one, the Pandora Papers constitute the largest dissemination of private financial information to date, including nearly 12 million documents consisting of 2.9 terabytes of total data. Another significant difference is that, unlike the Panama Papers, which were associated with the now defunct Panamanian law firm, Mossack Fonseca, and unlike the Paradise Papers, which were tied to the Bermuda-based law firm, Appleby, the Pandora Papers aren’t associated with a single entity. Rather, the they have been linked to 14 different sources, including offshore law firms, wealth management firms, and corporate formation agencies. This is especially noteworthy because it exposes the ubiquitous role of professional intermediaries employed by such firms, including lawyers, accountants, and financial advisors, among others, who serve as enablers of corruption and facilitators of illegitimate activity.
The misuse of various legal and corporate structures and the exploitation of jurisdictional differences in laws and regulations runs the spectrum of unethical at the very least to illegal at worst. By providing the ultimate beneficial owners of trusts, foundations, and corporations with anonymity, such abuses permit nefarious individuals to access the global financial system and take part in a myriad of transactions that would otherwise be prohibited, all without any accountability. These are not victimless activities. Rather, the consequences are widespread and severe. Financial crime allows terrorists to finance deadly attacks, permits organized crime to flourish, furthers corruption, disrupts supply chains, undermines democracy, contributes to political instability, social division, and economic inequality, and even leads to environmental harms.
More so than in prior exposés, the Pandora Papers emphasized the role of the United States as a key destination for illicit funds. For example, the documents disclosed numerous trusts in Delaware, Florida, Nevada, South Dakota, and Texas that were linked to foreign interests. Leaked papers also revealed how high-end real estate in the U.S., along with U.S. shell companies, were used to hide illicit foreign wealth. The role of the U.S. as a tax and financial secrecy haven is consistent with the ranking of the U.S. on the Tax Justice Network’s Financial Secrecy Index, a politically neutral barometer which rates jurisdictions based on their levels of corporate secrecy and the amount of their offshore financial activities, and on which the U.S. has experienced a steady decline. These revelations starkly contradict the U.S. public stance against corruption and financial secrecy.
Although the U.S. was the first country to pass anti-money laundering (AML) legislation when it enacted the Bank Secrecy Act in 1970, and is generally considered to be a jurisdiction with a strong AML regime, customer due diligence rules and other related requirements presently apply only to U.S. banks and certain other U.S. financial institutions because they are seen as the entry point for illicit funds. Notably however, a group of professionals and businesses that often act as intermediaries between their clients and financial institutions are not subject to AML obligations, resulting in a huge gap in the current U.S. AML framework. This loophole allows unscrupulous individuals and other nefarious actors to take advantage of the services provided by these middlemen or “gatekeepers” who, either wittingly or unwittingly, aid their clients in gaining access to international financial and business markets, and even profit from them. This is accomplished through the provision of financial and tax advice and by setting up legal arrangements such as anonymous shell companies and trusts, which are often used as the primary vehicles to transfer and hide wealth from the government, law enforcement, creditors, victims, and others.
Perhaps surprisingly, the Pandora Papers prompted a remarkably speedy response from U.S. lawmakers resulting in the introduction of the new bipartisan kleptocracy bill called the Establishing New Authorities for Business Laundering and Enabling Risks to Security Act, also known as the ENABLER’s Act. The proposed bill brings several key professions within its scope. These include investment advisors, art and antiques dealers, attorneys involved in financial activity, accountants, third-party payment providers, public relations firms, and trust or company service providers, which include not only those businesses involved in establishing corporate entities and other legal structure such as partnerships, foundations, and trusts, but also those acting as registered agents, trustees, or nominees to be a shareholder, officer, director, secretary or other similar position. It also brings real estate professionals and sellers of luxury vehicles, including ships and aircraft, within scope as well as expands existing Geographic Targeting Orders to require all domestic title insurers to collect beneficial ownership information for all cash purchases of both residential and commercial real estate. Additionally, the law mandates the creation of a national security gatekeepers taskforce.
If passed as currently written, the new law would require gatekeepers to comply with the same AML obligations placed on banks and other financial institutions, including the requirement to report suspicious transactions, establish AML programs, implement due diligences policies, procedures, and controls, and identify and verify account holders. Essentially, this means that affected businesses will have to verify that their clients are indeed who they say they are as well as conduct checks on their clients’ source of funds to obtain assurances that the money is legitimately derived. It also means that these businesses will have to scrutinize transactions for unusual or suspicious activity and, if detected, file suspicious activity reports with the government or otherwise face a penalty.
Most American professionals potentially impacted by the proposed legislation are law-abiding citizens who know their customers. Therefore, lawmakers claim that the bill will not be a significant burden. However, this proposal doesn’t mean that affected businesses won’t have additional work. Although the bill doesn’t mandate that businesses suddenly take on the role of law enforcement and become money laundering investigators, the requirement to screen and conduct due diligence on clients and client funds could sometimes feel that way. Furthermore, the onus to create, adopt, test, review, and maintain new AML policies, processes, and procedures may not be insubstantial to some. In fact, these requirements could be especially costly and time consuming for smaller firms, partnerships, and solo practitioners, who do not have the manpower and resources of larger firms and financial institutions. Furthermore, by requiring these professionals to report suspicious transactions, it would impose on the fiduciary duties many of these professionals owe to their clients, as well as potentially violate the attorney-client privilege.
The U.S. has been under domestic and global pressure for some time now to modernize its existing AML regime and to help combat international money laundering. In fact, legislators were finally able to usher the Corporate Transparency Act (an AML law which has languished in Washington for decades and which creates a federal database of beneficial ownership information), into the latest National Defense Authorization Act. Furthermore, President Joe Biden has described corruption as a threat to U.S. national security, promising to make it a priority and to take meaningful steps to combat it. In fact, he has already made fighting corruption a major part of the agenda for his upcoming Summit for Democracy, a gathering of world leaders whose first session is scheduled to be held in December.
The U.S. is a particularly attractive destination for ill-gotten gains due to its respected and transparent legal system and because of the strength and stability of the U.S. dollar. As a result, U.S. financial institutions play a major role in the global economy, as do those who are in the position to provide access to it. Therefore, legislation targeting the enabling professions has the potential to be an effective deterrent to financial crime, both domestically and internationally.
While the ENABLER’s Act winds its way through the lawmaking process, the bill can still change substantially. As currently written, it is sweeping in breadth and scope. Without a doubt, refinements are required so that the law doesn’t force an undue burden on lawful businessowners. This is especially the case regarding smaller businesses on whom the additional requirements would be redundant and costly. In the meantime, the swift introduction of the legislation is at least an outward showing that U.S. lawmakers are being responsive to the scandal. However, related AML measures have historically been slow and far between. Therefore, it will remain to be seen whether any significant changes are ultimately implemented. Legislators in Washington have long known that the U.S. attracts all types of foreign money, including legal as well as illegal wealth, and everything in between. It is generally the very same lawmakers who have the power to change the laws that are also the ones who most benefit from the status quo.
As is the case with any imposition of any federal regulations, this latest proposal is certain to face substantial pushback, especially from the strong lobbying groups of the professions and businesses it targets. Nonetheless, based on current international focus on kleptocracy and corruption and the Biden Administration’s publicly professed commitment to addressing these issues, it’s likely that some version of the ENABLER’s Act will make it through Congress eventually. But even when the law finally does pass, in whatever form it ultimately takes, it will not signal the end of the fight against financial secrecy.
Just as important as bringing U.S. AML laws into the 21st century, is the need for global uniformity in AML regulations. Specifically, this includes enhancing the ability to share relevant information, particularly information relating to suspicious activity and ultimate beneficial ownership, among jurisdictions as well as between the private and public sectors. Financial criminals capitalize on jurisdictional differences and thrive in areas where the law is unclear or inconsistent. As a result, criminals will continue to pick and choose locations that are most favorable to their goals. If the U.S. becomes an inhospitable environment for dirty funds, then dictators, launderers, and fraudsters will simply put their money elsewhere.
