Beneficial Ownership Rules Would Drag Criminals into Daylight

The old adage "It takes money to make money" still rings true today. But a more modern twist might be, "It takes money and anonymity to amass heaps of money."

Today's criminals have ample opportunities to hide their identities, whether by leveraging the anonymity associated with banking accounts at financial institutions across the globe or by using the cover of anonymous shell corporations to mask ownership of corporate entities and partnerships. For far too long, the American financial system and corporate structures have been exploited to enable the actions and transactions of the worst of the worst — think drug cartels, African warlords engaged in mass atrocities, and members of the wealthy elite seeking to dodge income taxes.

The United States needs to do more to address this issue. While banks are required to collect some basic information in order to adhere to know your customer and anti-money laundering rules, there is no mandatory rule in place that compels financial institutions to gather information on the so-called "beneficial owner" of accounts that are opened in the U.S. It is essential that banks know the identity of the living, breathing person who controls bank accounts rather than the corporate entity. Only with this information in hand can law enforcement disrupt the bloody business of illicit networks, corruption, tax evasion and sanctioned countries.

In 2013, the Senate Caucus on International Narcotics Control issued a report calling on the Obama administration to finalize a rule requiring financial institutions to determine the beneficial owner of accounts they hold as part of their customer due diligence. The Treasury Department's Financial Crimes Enforcement Network is finally taking steps to fix this regulatory gap by proposing new federal rules that would compel financial institutions to collect beneficial ownership information for all new customers. There is no known time frame for when Fincen will finalize the rules, however. And once finalized, the rules would not take effect for several years.

This is a basic due diligence measure. Yet the American Bankers Association has strenuously objected to the modest oversight proposal that Treasury has put forth, arguing that such rules will impose an undue burden and expense on banks.

But at least some financial institutions are willing to undertake large-scale subterfuge on behalf of their clients, as the recent treasure trove of documents exposing the efforts of HSBC's Swiss banking unit to help clients evade taxes revealed. How many U.S. financial institutions may be holding similar bank accounts and failing to monitor them effectively?

If past HSBC transgressions are any indication, the amount of corrupted cash flowing through U.S. financial institutions could be absolutely startling. The aforementioned 2013 Senate report noted that HSBC allowed over $200 trillion in wire transfers to enter the U.S. unmonitored over a three-year period, including $670 billion in wire transfers from Mexico and at least $881 million in laundered money from Mexican and Colombian drug traffickers. In December 2012, HSBC agreed to pay a $1.92 billion settlement to federal and state authorities for failing to maintain an adequate AML program.

The problem goes beyond financial institutions. The abuse of anonymous shell corporations to mask the true owners of entities is a serious problem in the United States. Bipartisan legislation to address this issue has been proposed four times in Congress, but has stalled because of objections from the American Chamber of Commerce and the American Bar Association — organizations that represent professionals who benefit from the lack of transparency in this field.

At least some business leaders understand the importance of beneficial ownership rules. A group of eminent businessmen including Mo Ibrahim and Richard Branson recently published a bold manifesto explaining why companies need to stand up for such efforts. The group argues that beneficial ownership rules are actually good for business because they would lead to reduced corruption and increased competitiveness. Beneficial ownership rules reduce risk by allowing banks and other companies to know who they are doing business with and minimize their financial exposure to others' misdeeds.

More leadership at home and abroad is necessary if we are to crack down on the misuse and the abuse of our financial system and corporate structures. American leadership is particularly instrumental in the global effort to improve transparency. Given the size of our financial system and the U.S. dollar's status as the international currency of choice, the U.S. needs to be at the forefront of setting and implementing standards to stay a step ahead of those who profit from violent criminality, terrorism, human rights atrocities and tax evasion.

Mary Beth Goodman is a senior fellow for the National Security and International Policy team at the Center for American Progress and a senior adviser for the Enough Project. Follow her on Twitter at @mbgoodman.