Back in the late 1980s, Dennis Lormel was an FBI agent, working a case concerning a large enterprise called the Bank of Commercial Credit International. BCCI for short, though it went by a different tagline.
“BCCI was referred to as the Bank of Crooks and Criminals International,” remembers Lormel, who went on to oversee terrorist financing at the bureau after 9/11, and now consults for businesses and government. The bank ultimately shut down, but it left pots of money scattered in corporate entities with no real names attached to them.
“That’s where we ran into a lot of roadblocks, where you couldn’t get past the shell companies,” Lormel remembers. “Our job was to identify and go after assets, but we were hamstrung by that whole network.”
In the wake of the scandal, then-Sen. John Kerry launched an investigation and concluded that law enforcement agencies had done a bad job communicating with each other — but also that they simply didn’t have the tools necessary to discover who actually owns a company, if the owners chose not to identify themselves. The commission issued a set of recommendations, some of which were aimed at solving those problems.
That was 20 years ago. Even after years of attempts at reform, during which the federal government has given itself vast new powers to pry into the private lives of individuals, has done little to change what non-public businesses have to disclose about who owns them. That allows money to flow through the global economy — to avoid taxes, sell illegal substances and fund wars — without law enforcement being able to effectively track it.
“If I break through two or three layers of information and I say, ‘I’m positive Dennis is the bad guy,’ and I do my best to build a circumstantial case,” says Lormel, using his own consultancy as an example, “there is such a maze to point me to Dennis with evidence that a good defense lawyer is going to cloud the maze.”
The implications of that legislative stasis are vast, according to the international anti-corruption advocacy group Global Witness, which released a report Thursday detailing 22 incidents in which “anonymous companies” have been used in America to sell fake equipment to the military, run insurance scams, operate a drug trade, fleece the elderly, embezzle public funds, take bribes, conceal political donations and engage in human trafficking –– to cite a few activities.
“One of the things we started to notice, in case after case after case, is that there’s usually some kind of anonymous corporate structure involved in how the money’s going missing,” says Stefanie Ostfeld, a senior policy adviser with Global Witness. (The organization’s founder, Charmian Gooch, received this year’s TED Prize for her work on the subject.) “If we can solve this problem, and get the real names of these people collected, it would be the solution to a whole host of other problems.”
So why is it taking so long to fix?
Let’s back up. Like, way up.
The idea of owning assets in someone else’s name isn’t new. It dates back at least to the Crusades in the 12th century AD, when knights would leave their estates in someone else’s name while they were out waging wars, and still be sure they could recover it when they returned. It further evolved in the 19th century, when companies learned to buy shares of other companies, in what became known as “trusts” — a useful vehicle to own assets collectively.
Over time, however, the right to own a company without putting your name on it came into use for another purpose: transferring large amounts of money across borders, quietly. The problems that causes have been extensively studied.
Globally, according to an analysis by the World Bank, perpetrators in 85 percent of large-scale corruption cases hid their proceeds with the help of companies whose owners couldn’t be found. The U.S. Treasury’s Financial Crimes Enforcement Network tallied $18 billion in suspicious activity reports — almost certainly a small sample of total activity — associated with shell companies between 1996 and 2005.
The privilege of anonymity has also shrouded elections; US PIRG found that 17 percent of business contributions to Super PACs were funneled through shell companies. In 2006, the international Financial Action Task Force criticized the United States for the weakness of its disclosure requirements. The same year, a Government Accountability Office report detailed how states don’t even ask who owns companies when they’re registered, citing worries that it could cost more to process and deter legitimate business.
Because of those concerns, even as law enforcement started pushing for greater power to police financial crime in the early 2000s — and got it — Congress never agreed on how to force companies to disclose the “beneficial owners” in control of their assets.
“Certainly the Patriot Act was a huge change for us. I know firsthand, because I was a beneficiary of it, how the landscape really changed,” Lormel recalls. “For whatever reason, here’s an area that’s a lot more challenging and difficult to deal with.”
It’s not for lack of trying. With the backing of transparency advocates and law enforcement groups, Sen. Carl Levin (D-Mich.) has introduced a bill every session of Congress since 2008 that would force states to collect the information. Every time, it’s been opposed by a strange political actor: the National Association of Secretaries of State, which maintains that states aren’t well equipped to collect that kind of information and that the Internal Revenue Service already does it, anyway.
“S. 1465 is trying to utilize the 50-state incorporation filing process for something it was never intended to do,” says NASS spokeswoman Kay Stimson.“It’s like taking a filing cabinet in your office and turning it into the security system by propping it against the front door.”
The state secretaries of state are a powerful bunch — they run elections, so politicians like to stay on their good side. And besides not wanting the headache of having to collect key information about the thousands of companies that are incorporated every year, some of their offices derive substantial revenue from that process. NASS’s committee on business formation regulation is co-chaired by the secretary of state of Delaware, which made $860 million in taxes and fees from absentee corporations in 2011, providing a quarter of the state’s total budget, the New York Times reports.
Global Witness emphasizes that transparency is good for business. “You want to be able to vet your supply chain,” Ostfeld points out. But business disagrees: The American Bar Association, National Association of Manufacturers and U.S. Chamber of Commerce have all complained that Levin’s bill imposes excessively onerous regulation. NAM, for example, protested the bill might force them to “expose secret business strategy,” particularly during acquisitions.
The bill has sat idle in the Senate Judiciary Committee for over a year; Judiciary Chairman Patrick Leahy’s staff says they’re waiting for the parties to reconcile their differences and come up with a compromise.
The slow progress has frustrated those for whom the damage wrought by anonymity is more apparent than the commercial advantage it conveys.
“The irony of the situation is that implementing property standards in this area are fairly cheap and practical,” says Jason Sharman, a professor at Australia’s Griffith University who co-authored a paper on global shell companies showing that corporate service providers in smaller, less developed countries actually comply more often with international rules than they do in places like the United States and Britain. “This is not pie-in-the-sky, billion-dollar reform. And the tax havens that are commonly stigmatized on this actually do a better job.”
After being in the lead on proposing reforms, the United States has fallen behind Europe in figuring out how to pull the veil off anonymous companies. UK Prime Minister David Cameron made it a centerpiece of his G8 summit in Northern Ireland last year, which spurred “action plans” from the member governments. The UK itself has committed to the most ambitious plan, which involves creating a public registry of corporate ownership.
Ultimately, real action on exposing beneficial ownership may come from the White House, which also participated in the G8 exercise with an action plan last June. It also included a legislative proposal to fix the problem in its 2015 budget request, which would require that the IRS collect information on the owners of all legal business entities organized in any state, and share the information with law enforcement. Meanwhile, Treasury has proposed requiring banks to “know and verify” the actual people who own the companies they serve.
All that means that action is still a long way away — maybe, or maybe not, soon enough to head off the next big scandal. Otherwise, it could take a long time to unwind. The books on the Bank of Commercial Credit International case, after all, only closed two years ago — and investigators still don’t know everything about all the companies used to pull off its operations in the first place.