Article on U.S. Rule to Require Banks to Identify Shell Company Owners (4/6/16)

Louise Story, U.S. Plans to Require Banks to Identify Owners of Shell Companies (NYT 4/6/16), here.  Excerpts:

The United States government is close to issuing a rule that will for the first time require banks and other financial institutions to find out the identities of people hidden behind shell companies. 

The rule is meant to close a major loophole in the American banking system that enables the sorts of secretive financial maneuvers that were thrust into the spotlight this week with the leak of millions of documents from a law firm in Panama. 

* * * * 

Under federal regulations, banks with American branches in the United States are required to “know their customers” who open accounts in the United States. But those rules have been significantly weakened because banks have not been required to know the identities of customers who set up accounts in names of shell companies. 

The government’s proposed customer due diligence rule, or C.D.D., is an attempt to close that loophole, a senior Treasury official said in an interview. 

“I don’t think everyone recognizes the connection between the C.D.D. and the Panama Papers,” said the official, Jennifer Shasky Calvery, director of the department’s Financial Crimes Enforcement Network. 

The new rule, she said, “would clarify and make absolutely clear to our financial institutions that they must know and understand the beneficial ownership of their customers,” she said. “We already know that they need to know their customer, but where that customer is a legal entity, we are clarifying that they need to know and understand the beneficial owner of that customer. Who is actually calling the shots? Who stands to gain?” 

The United States has been considered a laggard in the global push to shine light on the murky world of shell companies. 

For one thing, the United States allows its states to register limited liability companies and other structures without requiring the names of the actual people behind those companies. In addition, the know-your-customer loophole has let banks decide whether they will expend the resources to pierce the secrecy of shell companies that set up accounts. 

The new Treasury rule will require banks to find out the identities of any individuals who own 25 percent or more of corporate entities that open bank accounts, as well as any individuals exercising control over those entities.

Financial Secrecy in the U.S. - A NonTax Example Illustrating the Law Enforcement Problem (11/7/15)

I posted recently on a Tax Justice Network study ranking the U.S. 3rd in financial secrecy.  Tax Justice Network Study of Financial Secrecy with U.S. Third Most Opaque (Federal Tax Crimes Blog 11/14/15), here.  One of the issues is that opacity of U.S. entity structures.  The beneficial owners of corporations and other entities may simply not be known.  And states permitting such entities to be organized usually do not request any representations of ownership.  So, shady actors can easily fly under the law enforcement -- including tax enforcement -- radar screen.  Hence, the U.S. may facilitate evasion of other countries' taxes by offering foreign investors secrecy as to their investments in the U.S.

The New York Times has a related article on the use of such entities -- LLCs in this case -- that permit beneficial owners to hide.  Stephanie Saul, Real Estate Shell Companies Scheme to Defraud Owners Out of Their Homes (NYT 11/7/15), here.  The problem addressed is the use of LLCs to cheat unaware persons out of their properties through simple variations of fraud, with the lack of transparency as to ownership being a key factor in the fraud.  Here are some key excerpts:

“Sham LLCs are a huge problem in terms of their lack of transparency, in terms of who is behind the property and who is behind these schemes,” said Jennifer Sinton, a lawyer with South Brooklyn Legal Services * * * . 

A review by The New York Times of several dozen cases, and interviews with lawyers, prosecutors and others knowledgeable about fraudulent deed transfers, suggests they are accelerating even as officials struggle to address them. The city’s Department of Finance said it was investigating 120 cases, many of them hard to crack because of the role played by LLCs, officials said. Underscoring the rising alarm over the problem, the state attorney general, Eric T. Schneiderman, and the Brooklyn borough president, Eric L. Adams, held a forum last month to warn property owners about it. 

Deed thieves often scan legal notices for mortgages in arrears, typically targeting properties like Ms. Campbell’s that are in poor repair or abandoned. Vulnerable homeowners — including older and disabled adults — are sometimes tricked into signing over their properties, while believing they are getting financial relief.
In other cases, signatures are simply forged on deeds. The thieves, meanwhile, hide behind inscrutable mazes of limited liability companies, rented post office boxes and fake addresses. 

* * * * 

When LLCs are taken to court, those behind them often remain a step ahead — and impossible to find. “They’re shell companies,” said Jomo Gamal Thomas, a lawyer who has represented several deed fraud victims. “There’s no guarantee you’ll get your money back.” 

While this is a different law enforcement problem that encountered in the use of opaque entities to hide ownership of foreign accounts and other foreign assets in order to avoid paying U.S. tax, the theme is the same -- lack of transparency permitting laws to be skirted.  I don't know that there are easy solutions.

The article notes some limited administrative and proposed legislative solutions:

Saying he had been motivated in part by The Times’s findings, New York’s finance commissioner, Jacques Jiha, began last spring to require that all members of LLCs be disclosed to the city for tax auditing purposes when deeds were transferred. Mr. Jiha said that wealthy residents might be able to use a “veil of secrecy” to evade city taxes by claiming to live elsewhere. While the new rules went beyond what many jurisdictions require, experts called them imperfect, because some LLC members are nominees, meaning the true owners remain hidden. 

Mayor Bill de Blasio’s administration is sponsoring legislation in Albany intended to prevent deed theft. The bill’s provisions include a requirement that notaries public be fingerprinted. But the city recently removed a provision that would compel additional disclosure of LLC ownership in real estate transactions. While real estate interests had objected to the requirement, Sonia Alleyne, a spokeswoman for the Finance Department, said that was not why it was dropped. Instead, she said, city officials believed the new requirements imposed by Mr. Jiha had begun to work.