A new US anti-money laundering rule targeting shell companies could have a big impact on Latin American crime groups if authorities can overcome resource constraints and other limitations to its effectiveness.
The new regulation, known as the beneficial ownership rule, will require companies operating in the United States to tell federal authorities who actually owns and controls the corporation and its resources.
The rule is a key part of the Corporate Transparency Act, which the United States passed in 2021 to curb tax evasion and money laundering by making it harder to establish a company in the country while keeping its real owners anonymous. Corporations are created at the state level, and most states do not require information about the actual owners. Usually, registration only requires a point of contact for legal matters.
The act is “the most important, consequential, transformative anti-money laundering and anti-corruption law in about a generation in the United States,” Scott Greytak, the advocacy director for Transparency International’s US office, told InSight Crime.
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Intergovernmental bodies like the Financial Action Task Force (FATF) and the World Bank have argued that beneficial ownership requirements cut down on the misuse of corporate vehicles for money laundering and tax evasion. And independent anti-money laundering advocates have long pushed governments across the globe to adopt such requirements.
But the United States has lagged behind other key financial centers like the United Kingdom and European Union member nations, as well as major Latin American economies like Argentina and Brazil, which have required beneficial ownership disclosure for years.
The new regulation will bring the US anti-money laundering framework into line with these recommendations. However, the agency charged with implementing the rule, the US Treasury Department’s Financial Crimes Enforcement Network (FinCEN), faces funding shortfalls. And questions remain over who will be able to access the data, and under what conditions.
A Murky Outlook
The United States is a major global financial hub for organized crime, with an estimated $300 billion laundered in the country every year, according to the US Treasury Department. Although exactly how much of that money is hidden in anonymous shell companies is impossible to calculate, US law enforcement officials have consistently pointed to the lack of a national beneficial ownership registry as a significant loophole.
US Treasury Secretary Janet Yellen has said that “unmasking shell corporations is the single most significant thing we can do to make our financial system inhospitable to corrupt actors.”
Latin American criminal organizations have used the anonymity of these so-called shell companies to set up multimillion-dollar laundering schemes in the United States. Examples include Mexico’s Zetas hiding drug profits amid the cash flows of a horse-breeding business, and criminal operators tied to the Venezuelan government laundering ill-gotten cash to buy luxury cars.
Collecting beneficial ownership information in a centralized national database could make it harder for money launderers to use anonymous companies to hide links between criminal actors and their profits.
Resource Constraints
While the new rule will target a key area exploited by money launderers, implementing it will likely prove a major challenge.
FinCEN expects to receive beneficial ownership filings from more than 32 million companies next year. But the agency’s staff only numbers around 300 people, with a total budget of less than $200 million per year. The relative lack of resources has led some experts to doubt FinCEN’s capacity to handle the influx of new information.
“We have serious gaps,” Greytak said. “We are not up to snuff and where we should be, given the size and the role of the US financial system.”
FinCEN has requested tens of millions of dollars in extra funding from Congress to implement the beneficial ownership rule and other provisions of the Corporate Transparency Act. The agency said in its latest budget request that it has the funding for a “minimum viable product,” but it needs more money and staff to accomplish everything lawmakers intended when they passed the law.
The agency has already conducted a limited experiment requiring beneficial ownership reporting for certain real estate transactions, but that small-scale program has shown little evidence of disrupting organized crime, according to Matt Collin, an economist who has studied beneficial ownership requirements in the United States and Europe.
“It’s about whether or not FinCEN is going to really be able to take that information and leverage it in a way to use it to detect and then prosecute crime. And I’m just a little bit hesitant to say that,” Collin told InSight Crime.
Access Limitations
FinCEN plans to share the beneficial ownership information it collects with law enforcement, security, and intelligence officials as well as financial institutions like banks and investment firms.
Given FinCEN’s resource constraints, cooperation with these partners will be crucial. Still, the agency has yet to finalize the details of its information-sharing guidelines, though a spokesperson told InSight Crime that more details are coming soon. And pursuant to the provisions of the Corporate Transparency Act, the database will be off-limits for members of the general public, including journalists, researchers, and other independent investigators.
While restricting access to the information alleviates privacy concerns, it may limit the effectiveness of the reporting requirements.
“It’s easier if you have a lot of journalists looking at the data and they’re able to spot discrepancies between what people submit and what the truth is,” Collin said.
Moreover, it could take up to a year for many companies to actually hand over their beneficial ownership information. Companies that already exist have until the end of 2024 to file with FinCEN, while those established after the new year must report within 30 days.
“A year is supposed to give companies time to comply,” Collin said. “But that’s also a year that companies have time to potentially submit different information or get a new story straight before submitting it.”
Further Measures Needed
The new rule could cut off a major avenue for money laundering by criminals from Latin America and beyond. But it may be difficult to measure exactly how much money laundering the new rule prevents. At the same time, if the number of newly created companies declines after the reporting requirements take effect, that could indicate criminals are wary of the new requirements.
“If there’s not a big change in behavior, then I think that would probably not be a great sign,” Collin said.
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Crime groups may also find ways around the new rules, especially through partnerships with ostensibly legal actors. Many kinds of financial intermediaries will still be able to conduct transactions on behalf of companies with no legal requirement to check the backgrounds of their business partners or to report suspicious behavior to the government.
“We call these service providers writ large the enablers of corruption,” Greytak said. “We have to plug these holes.”
