Crooks, terrorists, tax evaders: Can new shell company rule stop them?

[May 11, 2016]  By Elizabeth Dilts and Suzanne Barlyn
 
 NEW YORK (Reuters) - The U.S. Treasury Department wants to go after money launderers, tax evaders and terrorists by cracking open the shell companies they use to hide cash flows, but critics say a new agency effort to identify them could be easily evaded.

Treasury Secretary Jack Lew (R) delivers his remarks next to Federal Reserve Board Chair Janet Yellen (L) at the Oversight Committee hearing at the Treasury Department in Washington November 2, 2015. REUTERS/Gary Cameron/File Photo

Treasury last week issued a new rule, effective in 2018, requiring financial institutions to obtain the identities of "beneficial owners" of their client companies and at least one senior manager. Financial firms will have to verify their identities through documents such as passports - but will not have to confirm their ownership stakes in the companies.

That could allow criminals to provide false information with little risk of getting caught, critics say.

"If a company has criminal intent, they are probably not going to file that their beneficial owner is ISIS," said Anders Rodenberg, who oversees relationships with financial firms in North America at Bureau van Dijk, a beneficial-ownership data provider.

The Treasury Department says its rule – along with separate but related legislation it proposed to Congress – strikes the right balance between rooting out corruption and avoiding burdensome requirements on financial firms and legitimate clients.

But what if a customer lies?

"Then they are committing fraud," said Steve Hudak, spokesman for Treasury's Financial Crimes Enforcement Network.

Treasury and law enforcement officials can contact the person a company names as a senior manager if they want to investigate further, Hudak said.

The regulation - called the Customer Due Diligence rule - has been in the works since 2012. It comes at a time when President Obama and other world leaders are under pressure to respond to a string of recent reports known as the Panama Papers.

Distributed by a group of investigative journalists, the reports disclosed how rich and powerful people, including heads of state and convicted financial criminals, use shell companies to avoid paying taxes.

Treasury's rule will apply to banks, brokers, mutual funds and other financial firms. It will require them not only to collect data on owners and managers, but to update records with changes they discover during routine checks.

Legislation proposed by the agency, which requires congressional approval, would create a federal database and require companies to register either when they incorporate or transfer ownership to the U.S. from overseas.

Critics contend that the plan does not go far enough to unmask shell companies' true owners. They argue a criminal enterprise can, for instance, keep individual ownership stakes below 25 percent and list anyone as a point person, even if he or she has no real management responsibilities.

"You can only keep the honest people honest," said Steve Goldstein, chief executive of Alacra, which provides services to banks seeking to comply with current "know-your-customer" regulations. "I don't think it will be that hard for a bad-actor beneficial owner to avoid detection."

Industry groups ranging from the American Bankers Association to the American Bar Association have offered different criticism, arguing compliance with the rules will be too costly and time-consuming. James Richards, Wells Fargo & Co's <WFC.N> global director of financial crimes risk management, said it will be hard to meet new requirements because the information clients provide ranges widely in quality.

"We have to trust without being able to verify that the information they are giving us is accurate," he said. "The innocent will give us good information or sloppy, bad information by mistake. The guilty will give us bad information, and we won't be able to tell the difference."

WHO OWNS WHAT?

Having access to a central database maintained by the government could make a difference, Richards said. But as it stands, corporations are formed across 50 states, whose governments have resisted collecting beneficial-ownership data.

In April alone, more than 12 million ownership changes – 400,000 a day – took place at corporations worldwide, according to Orbis, a database of incorporation records owned by Bureau van Dijk. A few corporations may change ownership to hide from international sanctions, but most times it happens as a result of ordinary business practices like opening a foreign subsidiary.

The sheer volume of changes makes it difficult for even legitimate companies to track and report them.

For example, a tire company bought by private equity might know the name of its new owner, but not the investors who put money into the private equity fund. Likewise, the private equity company may not know the identities of the investors, who may have channeled money through family offices or other funds.

Rodenberg, of Bureau van Dijk, said the new rule is a "significant" step forward, but may ultimately provide little transparency.

"Companies all know who owns them and are notified if this ownership changes," he said. "However, often companies don't know the owners' owners – and even less the owners' owners' owners."

(Reporting By Elizabeth Dilts and Suzanne Barlyn in New York; Editing by Lauren Tara LaCapra and Brian Thevenot)

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