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How to Stop Kleptocrats From Stashing Their Cash in America

New legislation in Congress aims to impose much-needed transparency on anonymous shell companies.

Sean Gallup/Getty Images

Convicted Russian national Viktor Bout spent years perfecting the art of international arms smuggling. At the height of his powers, he boasted a clientele that ranged from Central African dictators and their cronies, to warlords ransacking Libya, to the Taliban in Afghanistan. Bout’s trafficking rings ran circles around investigators, humanitarians—anyone trying to stem the tide of illicit arms drenching global pockets of instability. His blood-sotted trafficking business was infamous enough to make pop-cultural inroads, inspiring Nicolas Cage’s character in the 2005 romp Lord of War just a few years before Bout was finally arrested, convicted, and tossed into solitary in the United States.

Throughout his reign, there was one tool that Bout used to dodge any and all who would stymie his efforts: American shell companies. 

The U.S. has, in recent years, enabled some of the most notorious crimes associated with anonymous shell companies around the world. This is down to the fact that the formation of such companies has been left to individual states to oversee—and that states like Delaware, Nevada, and Wyoming have reaped untold profits setting up anonymous shell companies on a no-questions-asked basis. Snatching up an American shell company of your own remains easier than getting a library card. As Jason Sharman, an Australian academic and one of the leading researchers on financial anonymity recently wrote, there’s “strong reason to think” that the U.S. “is the worst in the world when it comes to regulating shell companies.” 

These anonymous shells are the perfect financial getaway vehicle for crooks and criminals of all stripes and nationalities. Former Panamanian law firm Mossack Fonseca—the offshore machine at the heart of 2016’s gargantuan Panama Papers leak—pointed its clients to American states like Nevada and Wyoming to set up their anonymous shell companies. It’s little wonder that the Tax Justice Network ranks the U.S. second globally for financial secrecy, just after Switzerland.  

Now, lawmakers are looking to curb this corruption. Earlier this summer, a first-of-its-kind bill that would effectively eliminate anonymous American shell companies was passed out of a House committee—a significant victory in the fight against kleptocrats, arms traffickers, and brutal regimes everywhere. 

Introduced by Democratic Representative Carolyn Maloney, and co-sponsored by several other Democrats along with Republican Representative Peter King, the Corporate Transparency Act would change the status quo—in which almost anyone with some spare change jangling around their corrupt pockets could set up an anonymous shell company, easily masking their ill-gotten gains from prying eyes—by forcing companies to identify their true, beneficial owners to American authorities. Tyrants and their cronies would neither be able to hide their assets behind the smiling façade of Nevada and Wyoming company formation agents, nor use Delaware shell companies to anonymously launder their funds through Cleveland skyscrapers or Houston high-rises or Boise bungalows. Organizations that failed to comply with the bill’s transparency standards would face federal charges and potential fines up to $10,000.

The legislation isn’t perfect. The roster of beneficial owners behind these companies would remain private, rather than becoming immediately publicly accessible, thus leaving investigators both at home and abroad reliant on responses from American authorities to access the information. And the bill is facing pushback from small business organizations, such as the National Federation of Independent Businesses, who chafe at the punitive measures the legislation would bring to bear on firms deemed out of compliance, as well as the regularity with which such businesses would have to provide the necessary transparency.  

While Republican Patrick McHenry, the ranking member of the Financial Services Committee, doesn’t seem to oppose the effort with significant vigor, he has expressed qualms over the privacy issues involved in what he calls “another new government database that will be collecting and housing personal identifiable information.” Maloney, in a recent amendment to the bill, attempted to address these concerns by adding additional “robust privacy safeguards” ensuring that the data collected would only be shared with law enforcement and the relevant federal oversight agencies. “I’ve heard from Democrats and Republican offices that they are concerned about the privacy of beneficial ownership information,” she says. “I took their concerns very seriously.”

It’s a stretch to conclude that making an effort to ensure one’s business is not in cahoots with human traffickers, narco-terrorists, and foreign dictators is some kind of undue regulatory burden. But those criticisms of the bill—many of which come from self-styled libertarians—emerge from the same rationale that allowed shell companies to flourish in the first place. The people opposed to this transparency would prefer to profit, rather than prod for answers about whether they’re helping unravel democracy and entrench extremist networks abroad. Looking the other way won’t change the fact that American shell company formation has done tremendous damage to countries already ransacked by savage regimes, from Russia to Kazakhstan to Equatorial Guinea—and by extension, American national security writ large. 

Ukraine is a fitting example of these ills. For years, former Ukrainian Prime Minister Pavlo Lazarenko acted as one of the most infamous kleptocrats not just in the country, but globally, earning his way onto the Transparency International list of the 10 most corrupt politicos, alongside monsters like Serbia’s Slobodan Milosevic and Indonesia’s Suharto. One of the keys to Lazarenko’s crooked offshore empire: a sprawling network of Wyoming shell companies, based out of a small house nestled in a bucolic Cheyenne neighborhood. (Amazingly, some Wyoming officials recently claimed they’d never heard of Lazarenko, and had no idea what the Panama Papers entailed—all the while claiming that Wyoming somehow stood at the fore of global transparency efforts.)

Thanks to Lazarenko’s malfeasance—and the American shell company agents who enabled it—Ukrainian domestic politics unraveled into multiple revolutions, setting the stage for Russian revanchism and the obliteration of a Malaysian passenger plane in Eastern Ukraine just over five years ago. Russian President Vladimir Putin and his intimates have erected their power base upon similar offshore networks—and may well remain reliant on American anonymity to help launder their dirty billions. Chavista kleptocrats in Venezuela have likewise followed suit, parking their ill-gotten gains via shells across the U.S. 

These are all, nominally, enemies of America, who nonetheless look to the U.S. to provide the very tools that threaten stability both at home and abroad. As a lawyer specializing in shell companies put it a few years ago, “It’s not entirely beyond the realms of possibility that ISIS could be operating companies and trust funds domiciled in Delaware.”

Lawmakers are beginning to recognize the threats posed by these anonymous shell companies, and the proposed legislation has energized supporters who’d like to clean up America’s kleptocrat-friendly loopholes, and end the financial anonymity that has destroyed democracies abroad while threatening our own strategic interests. Some of these allies come from surprising quarters, including officials in the tax-haven happy state of Delaware, whose native son, Joe Biden, has called for an end to anonymous shells—this, despite his three-decade stretch as Delaware senator that just so happened to coincide with the state’s transformation into an offshore mecca. 

According to those familiar with the Corporate Transparency Act, the current plan is to merge the legislation with another bill aimed at curbing money laundering and to hold a full House vote in the coming weeks. Companion legislation from the Senate is slated to be released later this week, as well. 

The effort to unwind America’s role as an offshore haven par excellence has wind at its sails at last. And it couldn’t come at a riper moment. The fact that America has been a bastion of anonymous shells is a blight on Washington’s claims to be fighting kleptocracy and grand corruption abroad. Not only have these companies undercut U.S. anti-corruption efforts elsewhere, but we’ve seen firsthand the fruits of their rot over the past decade. From an irredentist Kremlin trying to strangle Ukraine, to a savage regime in Caracas brutalizing its population, American shell companies have been a humanitarian nightmare—and a burgeoning threat to the global democratic order. Those inclined to vote against it might well consider if they truly want to keep company with the likes of post-Soviet cretins, Chavista barbarians, and Western enablers who’ve done nothing but profit from this corruption.