When Ukraine’s Privatbank filed a lawsuit in the United States against its former owner Ihor Kolomoyskiy one year ago, it claimed the tycoon had used a slew of anonymous shell companies registered in the U.S. state of Delaware to carry out what it called a “brazen” heist.
Kolomoyskiy and his partner Hennadiy Boholyubov used Delaware-based limited liability companies (LLCs) -- which are popular for their lack of beneficial ownership disclosure requirements -- to acquire U.S. businesses and properties worth hundreds of millions of dollars with stolen funds, the Kyiv-based bank claimed.
The men “have gone through great lengths to conceal their ownership and control over U.S. assets,” the lawsuit filed in Delaware’s Chancery Court on May 21, 2019, said.
Two new bills now on their way through the U.S. Congress could make it much harder to do that – and easier for U.S. law enforcement agencies to immediately identify owners of shells, speeding up investigations.
Citing unnamed sources, the Daily Beast reported in April 2019 that the FBI has been investigating Kolomoyskiy and Boholyubov for potential financial crimes, including money laundering.
Lax registration rules in states such as Delaware, Wyoming, and New Mexico -- which require less information to create a company than to get a library card -- have helped turn the United States into a leading offshore haven for criminals and corrupt officials the world over, including from the former Soviet Union.
The Tax Justice Network, a British-based advocacy group, ranked the United States second only to the Cayman Islands in its 2020 survey of the nations “most complicit” in allowing wealthy individuals and criminals to hide and launder money.
Now Congress is pursuing legislation to create a federal database of beneficial owners of shell corporations and LLCs to combat their abuse by criminal elements and corrupt officials. It comes amid a renewed global push for greater financial transparency following the 2016 publication of the Panama Papers -- a leak of reams of secret legal documents and financial data that highlighted a global scheme to evade taxes worldwide.
You can’t underestimate some of the unintended consequences that some of this sunlight creates.”-- Alexander Cooley, Columbia University's Harriman Institute
The U.S. House of Representatives passed the Corporate Transparency Act in October, with a bipartisan vote of 249-173. Representative Carolyn Maloney, a Democrat from New York who is one of the bill’s sponsors, said in May that she is hopeful it will pass Congress this year.
A separate piece of legislation known by the acronym ILLICIT CASH – its full title is the Improving Laundering Laws And Increasing Comprehensive Information Tracking Of Criminal Activity In Shell Holdings Act -- is currently in the Senate Committee on Banking, Housing, and Urban Affairs.
Both bills require beneficial owners of corporations and LLCs with 20 or fewer employees and $5 million or less in annual revenue to submit their full name, date of birth, current home or work address, and the identification number on their valid U.S. or foreign identity document to the Financial Crimes Enforcement Network (FinCEN), an arm of the Treasury Department.
Such companies would have to submit an updated list of beneficial owners each year. The House bill also requires foreign beneficial owners to submit a copy of their passport. A beneficial owner is described as anyone who “exercises substantial control” or owns 25 percent or more of the company.
“We're the only advanced country in the entire world that doesn't already require disclosure of this information. Frankly, it's an embarrassment,” Maloney said in a May 20 webinar on the legislation organized by the Wilson Center’s Kennan Institute, a leading U.S.-based center for research on Russia and Eurasia.
All 28 member states of the European Union are already required to maintain registries of the beneficial owners of companies set up within its borders and are moving to make them publicly accessible to varying degrees.
The tougher European standards have driven some criminals to move their money to the United States, Senator Chuck Grassley of Iowa, who is now the senior Republican in the Senate, said during a 2018 Congressional hearing.
Even offshore havens like the British Virgin Islands (BVI), Cayman Islands, and Panama have introduced beneficial owner registrars, KPMG, one of the world’s largest audit firms, said in a January post. The BVI and Cayman Islands are expected to make theirs publicly searchable in 2023.
The U.S. database envisioned by the bills would only be available to law enforcement agencies that have an actual investigation into related matters and would not be publicly searchable. Financial institutions would also be able to utilize the database, but only with the permission of the companies.
The bills have the backing of law enforcement organizations and financial institutions.
“What a lot of this is about is making it easier for law enforcement to cut through the layers of ownership and entity structures and identify the big fish at the top,” Lawrence Hamermesh, a professor at the Widener University Delaware Law School and a former practicing attorney, told RFE/RL.
“It moves the needle. If you are bent on crime, it represents more of a deterrent,” he said.
We're the only advanced country in the entire world that doesn't already require disclosure of this information. Frankly, it's an embarrassment.”-- Representative Carolyn Maloney (D-New York)
Some experts believe the effects of the legislation may be underwhelming
Lawrence Donahue, a principal at Law 4 Small Business, a New Mexico-based law firm that specializes in setting up LLCs, told RFE/RL he did not think the bills would have much impact in combating criminal activities involving anonymous shell companies.
Law enforcement agencies already have the ability to discover the beneficial owners of U.S. shells by subpoenaing tax and bank records, he said. Companies are required to disclose beneficial ownership to financial institutions when they open an account. And those bent on breaking the law “are going to send in false information in any case” to FinCEN, Donahue said.
Nelson Bunn Jr., executive director of the National District Attorneys Association, disagreed, telling RFE/RL that the Internal Revenue Service (IRS) currently does not collect beneficial ownership information in a manner that would help investigators. Furthermore, obtaining IRS records for an investigation “is incredibly complicated” and would require the involvement of federal law enforcement and the federal judiciary, a timely and costly procedure.
“This would significantly delay investigations, precludes state and local investigators who do not have the resources to partner with federal law enforcement, and creates a significant resource challenge for all state and local prosecutors to receive information that may still lead to a dead end in the investigatory process,” he told RFE/RL.
Ross Delston, a Washington-based attorney, certified anti-money laundering specialist (CAMS) and former banking regulator, said Congress will need to expand FinCEN’s resources if the bill is to have any real impact.
"Without a substantial increase in budget and personnel of FinCEN, this bill will fail for lack of implementation,” he told RFE/RL.
FinCEN’s ability to verify information about foreign beneficial owners, such as those located in the former Soviet Union, could be challenging as some due diligence tools, including credit data, may not be available, Delston said.
Several states allow people to form LLCs without disclosing publicly who the owners or managers are. The paperwork to set up LLCS can be completed in minutes and the process generally costs just a few hundred dollars, depending on the state.
Individuals registering LLCs in Delaware have to submit just the name and address of a person who can be a communications contact for authorities. The contact does not have to be a member or manager of the newly registered shell company and does not have to reside in the United States.
While other U.S. states may require slightly more information to register a company, none of them verify the data submitted, allowing for potential abuse. Furthermore, LLCs in states requiring more transparency can be owned by anonymous LLCs registered in Delaware, Wyoming, or New Mexico.
Clint Coons, a founding partner at Anderson Law Group, which specializes in asset protection strategies that include LLCs, said the only way to prevent criminals from abusing the system is to require every beneficial owner to validate their identity through a government-issued ID that is kept on file.
"That would solve it, but no one has the bandwidth or the money to do that," Coons said.
Viktor Bout, the Russian arms trafficker who is serving a 25-year sentence in a U.S. prison after being convicted in 2011 of conspiring to kill U.S. nationals and sell weapons to terrorists, had used a dozen shell companies to hide assets in the United States, including in Delaware.
Former Ukrainian Prime Minister Pavlo Lazarenko, who served a prison term in the United States for money laundering, made use of a web of entities around the world, including anonymous shell companies registered in Wyoming.
LLCs are now regularly used to acquire U.S. real estate, especially high-end properties in New York City and Miami, to allow owners to maintain privacy.
But criminals and others seeking to launder money, though, have abused the practice, buying real estate through LLCs in all-cash transactions. The Treasury Department has begun targeting such transactions in select cities while New York has been taking steps to collect more owner information.
Denis Katsyv, son of a former Moscow Oblast transport minister, used LLCs to disguise his all-cash acquisition of a $6.25 million condominium in Manhattan partially with money that the U.S. Justice Department said was stolen from the Russian budget.
Should one of the bills pass, its impact might be felt not only in Manhattan and Miami but also abroad, including in Moscow, Kyiv, and other centers of power in the former Soviet Union, where some of the $300 billion in annual illegal proceeds moving through the United States originates.
Alexander Cooley, director of Columbia University's Harriman Institute and the author of a book on Central Asian money laundering, said tighter U.S. controls could displace some money seeping out the region to the Middle East and Asia but that America will continue to remain an attractive destination.
However, he said U.S. legislation to set up a register of beneficial ownership could have indirect effects on the region by reinvigorating the process of setting better global anti-money-laundering standards, which would put pressure on other jurisdictions to improve their own legislation.
“You also can’t underestimate some of the unintended consequences that some of this sunlight creates,” Cooley said.
Regional rulers and their families “don't like to have this cosmopolitan lifestyle out there and on display, and I think that is really key,” he said, pointing to a British investigation into the wealth of former Kazakh President Nursultan Nazarbaev’s grandson, which has attracted attention in the Central Asian country.
Matt Rojansky, director of the Kennan Institute, said during the May 20 webinar that the nations that emerged from the Soviet collapse may have developed differently had their leaders not been able to easily “squirrel away” state money in the West.
“Imagine the way in which they would have to govern their own countries differently if they have to keep their ill-gotten gains at home,” Rojansky said. “Wouldn’t they want a little bit more rule of law at home to protect that money rather than being able to rely on exporting it to jurisdictions like ours, right here in the United States?”