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Report roundup: EU calls U.S. a ‘secrecy haven,’ GAO highlights commercial owner opacity, and more

Thursday, March 16, 2017   (0 Comments)
Posted by: Brian Monroe
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By Brian Monroe
bmonroe@acfcs.org
March 16, 2017

This week’s Report Roundup has a common theme running through hundreds of pages of reports: the risk of opaque ownership structures and how, in the United States and beyond, the inability for countries to collect beneficial ownership information is a magnet for bad actors.

In the U.S., that means a major ally in the European Union (EU) calling out a longstanding gap in the country’s anti-money laundering (AML) defenses: the federal government allowing certain states like Delaware to sell corporate secrecy as a service – an ultimate irony as this country aggressively chases and chastises other jurisdictions for doing the same thing, according to the report.

That vulnerability is made doubly dangerous when it intersects the international trading sector due to the knowledge that organized criminal groups, corrupt kleptocrats and terror financiers currently hide, funnel and legitimize trillions of dollars in illicit gains, per estimates, through a myriad of trade trickery, including under and over-invoicing items, falsifying documents and other tactics.

In that same vein, U.S. government watchdog group the Government Accountability Office (GAO) noted in a report that because this country doesn’t broadly require ownership information to be made available, that can open the door to national security risks when government operations are housed in buildings owned by foreign entities who may or may not be a shell for prying, spying eyes bent on espionage.

Lastly, another report by United Nations Security Council highlighted that the issue of anonymous shell companies globally allows rogue regimes like North Korea to flout international sanctions and get access, as analysts prognosticate, to banned technology and weapons systems on its path to wreak worldwide havoc by creating weapons of mass destruction.

Here are some more critical excerpts from the reports:

U.S. hypocritical in fight against tax evaders

The U.S. is “seen as an emerging leading tax and secrecy haven for rich foreigners, when in parallel it has reprimanded other countries for helping rich Americans hide their money offshore,” according to the EU report, released earlier this month, adding that the U.S. loses an estimated $100 billion a year due to offshore tax abuses.

“The United States provides a wide array of secrecy and tax-free facilities for non- residents, both at a federal level and at the level of individual states,” according to the missive from the EU Parliament, done with the objective of analyzing EU-US trade and investment relations and the resultant effects on tax evasion, money laundering and tax transparency.

Moreover, by “resisting new global disclosure standards, it provides an array of secrecy and tax-free facilities for non-residents at federal and state levels, notably in Nevada, Delaware, Wyoming, and South Dakota.”

The parliament believed it wise to undergo an assessment of trade from various vantage points, including financial crime compliance and exposure points, as the “EU and US economies are highly intertwined, generating together half the world’s gross domestic product and more than 30 % of global trade.”

But that blossoming relationship could also open the door all the more to criminal groups due to the U.S. tolerating states like Delaware or Nevada of highly and their roster of “secretive anonymous shell companies,” a dynamic that results in a “race to the bottom between individual states on standards of disclosure and transparency.”

The irony comes into relief when viewed in the totaling of U.S. efforts to create harsh regulations, such as the Financial Account Tax Compliance Act (Fatca), which requires foreign banks in certain circumstances to report on the accounts of U.S. clients, but that the country does not abide by a global version of Fatca modeled on the law itself, dubbed the Common Reporting Standard (CRS).

“Unlike virtually all of the other developed countries in the world, the USA has not signed up” to the OECD’s CRS, which requires, like Fatca, countries to pass laws to allow tax authorities to collect and share the details on the citizens of foreign countries back to their home country’s tax authority.

The beneficial ownership issues in the United States has also thrown a wrench into the works of a larger agreement between both countries to foster more extensive trade and investment, according to the report.

“While some progress was made on the ongoing negotiation of the Transatlantic Trade and Investment Partnership (TTIP), which also aims to establish regulatory cooperation between the EU and the USA on financial services, progress has been below expectations.”

GAO concerned lax ownership data undermines national security

The risks of not having beneficial ownership information at-the-ready reared up in a January GAO report looking at national security and foreign espionage risks tied to available information on the ownership of General Services Administration (GSA) leased space that “requires higher levels of security protection based on factors such as mission criticality and facility size.”

The report uncovered that as of March 2016, the GSA is leasing high-security space from foreign owners in 20 buildings. The GSA is an independent agency created in 1949 to help manage and support the basic functioning of federal agencies, overseeing some $66 billion in procurement annually.

Looking more closely, the 26 tenant agencies in foreign-owned leases use the space, in some cases, for “classified operations and to store law enforcement evidence and sensitive data,” according to the GAO, noting that the spaces include six FBI field offices and three DEA field offices.

But even with its extensive and renowned investigative capacities, GAO was not able to gauge the risk of some foreign owners due to ownership hurdles.

GAO determined that the high-security space is owned by companies based in countries “such as Canada, China, Israel, Japan, and South Korea,” according to the report.

GAO, however, was “unable to identify ownership information for about one-third of GSA’s 1,406 high-security leases as of March 2016 because ownership information was not readily available for all buildings.”

At issue as well is that the GSA is geared more to looking at liquid dollars and cents issues when assessing office space, rather than deeper ownership and criminal connections.

“When leasing space, GSA is required, among other things, to determine whether the prospective lessor is a responsible party, but foreign ownership is not one of the factors that it must consider,” according to the report.

“As a result, tenants may be unaware that they are occupying foreign-owned space and not know whether they need to address any security risks associated with such foreign ownership,” noted the GAO, adding that the risks can also come from a hidden, criminal beneficial owner laundering money through a building housing government law enforcement agencies.

The report also hit upon a still unresolved threat of AML regulations tied to the real estate sector going back more than a dozen years.

In 2002, FinCEN temporarily exempted certain financial institutions, including persons involved in real estate closings and settlements, from the requirement to establish an AML program that includes “verifying customer identities.”

The exemption is “still in place,” much to the chagrin of financial transparency advocacy organizations, such as Global Financial Integrity, Global Witness, and the FACT Coalition, which as recently as 2015, exhorted FinCEN to remove the exemption.

In conclusion, GAO recommended that GSA “determine whether the beneficial owner of high- security leased space is a foreign entity and, if so, share that information with the tenant agencies for any needed security mitigation. GSA agreed with the recommendation.”

North Korea flouts sanctions with impunity with array of front companies, agents

The U.N. Security Council also has recommendations of its own, in the form of more sanctions and members being more aggressive, intuitive and creative in uncovering the web of front companies, agents and foreign financial institutions aiding North Korea in evading sanctions.

The council noted ruefully that even though it has “significantly strengthened” the sanctions against North Korea, the implementation by member states “remains insufficient and highly inconsistent,” the group stated in the 300-plus page report. “All Member States should reaffirm their commitment to rigorous enforcement of United Nations sanctions.”

As to how North Korea is weaving around sanctions, there are a plethora of tactics to choose from, according to the council.

North Korea is “flouting sanctions through trade in prohibited goods, with evasion techniques that are increasing in scale, scope and sophistication,” according to the document, adding that investigators uncovered a scheme which “highlighted the country’s ability to manufacture and trade in sophisticated and lucrative military technologies using overseas networks.”

In another interdiction, of the vessel Jie Shun, the council was eventually a part of the “largest seizure of ammunition in the history of sanctions against” North Korea, revealing the use of new “concealment techniques, as well as an emerging nexus between entities trading in arms and minerals.”

Going further, the council’s investigations “revealed previous arms trading…and cooperation in Africa, including hitherto unreported types of cooperation on a large scale.”

Designated entities and banks have evaded sanctions by “using agents who are highly experienced and well trained in moving money, people and goods, including arms and related materiel, across borders,” relying on numerous front companies and non-nationals as facilitators.

North Korean diplomats, missions and trade representatives “systematically play key roles in prohibited sales, procurement, finance and logistics,” according to the report.

Banks in the recalcitrant regime are equally creative.

“Despite strengthened financial sanctions in 2016, the country’s networks are adapting by using greater ingenuity in accessing formal banking channels, as well as bulk cash and gold transfers,” according to the report.

North Korean banks “maintain correspondent bank accounts and representative offices abroad and partner with foreign companies in joint ventures,” making the conjoined entity appear legitimate.

Banks “make use of broad interwoven networks to undertake procurement and banking activity. Their ability to conceal financial activity by using foreign nationals and entities allows them to continue to transact through top global financial [centers].”


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