Treasury Notes

 Op-Ed: Knowing Your Customer Must Mean Knowing the Real Owner

By: David S. Cohen

Editorial note: This op-ed was originally published in American Banker

At the Group of Eight summit meeting this week, President Obama and the other G-8 leaders committed to tackle tax evasion and money laundering by requiring companies to know and, critically, to allow law enforcement and tax authorities to find out, the real people who ultimately own, control and profit from companies – the companies' true "beneficial owners."

The leaders agreed to publish individual national action plans based on a set of core principles of corporate transparency that set out concrete steps each country will take to make it harder to use shell companies to evade taxes and further criminal activity.  This is a major step forward in combating the age-old practice of criminals hiding behind front companies to evade taxes and launder criminal proceeds.

In the United States, an estimated two million companies are formed each year. These companies run the gamut from small businesses run by hardworking men and women willing to take risks to new ventures by some of the world's most sophisticated corporations. Most new companies are created for entirely lawful purposes, and the ability to use the corporate form to give life to new ideas, inventions and investment is critical to the strength of our economy. We all benefit from the ease, flexibility, and stability of our efficient, state-based incorporation system.  

But this system can be exploited. Criminals and corrupt officials take advantage of state laws that do not require companies to disclose to the state – or even know for themselves – the individuals who actually own, control and profit from the companies that are formed. Moreover, shell companies are often used to cheat tax laws by hiding profits in shell companies. In fact, under the laws of many states, one corporation can be listed as the owner of another corporation, which owns another corporation, etc., without a real individual ever being identified as the beneficial owner.

Companies formed in the United States appropriately enjoy an air of legitimacy that facilitates access to the global financial system. The uncomfortable truth, however, is that some opaque U.S.-based companies have been used by drug cartels, international arms dealers, and corrupt officials to launder criminal proceeds. Certain shell companies incorporated here also have been used to skirt U.S. and UN sanctions on Iran and North Korea. As a result, law enforcement investigations are often stymied by the inability to obtain accurate beneficial ownership information on these companies.

This problem is not unique to the United States. All of our G-8 partners currently allow companies to be formed without ensuring that accurate beneficial ownership is available upon request to the competent regulatory and law enforcement authorities.

That must change. As we go about this work with our G-8 partners and others in the international community, we are all committed to the fundamental principle that companies should know the identity of the actual person who owns and controls them, and that this information should be current, meaningful and available to law enforcement and tax authorities.

This week, the G-8 committed to put that principle into practice. Demonstrating our commitment to do so, the United States published a "National Action Plan on Preventing the Misuse of Companies and Legal Arrangements."

This plan commits us to four initiatives. First, we will accelerate our active support for new legislation to require disclosure of accurate and up-to-date beneficial ownership information for legal entities and to create central repositories of this information in each state to ensure that it is accessible to law enforcement. Second, we will update our national risk assessment of major money laundering threats and vulnerabilities, including those posed by corporate entities. Third, we will strengthen customer due diligence obligations of United States financial institutions by requiring them to identify the beneficial owners of legal entity customers. And fourth, the U.S. will improve and expedite international cooperation, including legal assistance, to enhance the transparency of the international financial system.

It is time to put an end to the misuse of companies to evade taxes and advance criminal purposes. But it will take a concerted effort from the Administration, Congress, the private sector, and our partners around the world to do so. This week's G-8 commitment is an enormously important first step. The task ahead of us is to turn the commitment into reality, a goal we embrace and will urgently pursue.

David S. Cohen is the Under Secretary for Terrorism and Financial Intelligence at the U.S. Department of the Treasury.
Posted in:  Terrorism and Financial Intelligence
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