The United States Congress must take a leading role in requiring company formation agents, attorneys and other gatekeepers to capture beneficial ownership information at the creation stage to thwart criminals hiding behind anonymous, opaque ownership structures.

Congress as well may have to step in to strengthen oversight of the burgeoning and volatile virtual currency sector due to legislative and agency gaps leaving the door open to fraudsters, organized criminal groups and cyber hackers. One solution: requiring exchanges to implement more stringent customer identification provisions to tie real people to their unknown online monikers.

Those are just some of the issues discussed and outcomes analyzed at two Congressional hearings this week on how better corporate transparency in the U.S. could remove a major law enforcement stumbling block in complex, international financial crime cases and what are the current examination and fincrime vulnerabilities for the virtual currency sector.

To view the hearing on beneficial ownership and read witness statements, click here. To view the hearing on virtual currencies and related statements, click here.

These latest Senate hearings are a continuation of Congress in recent months more broadly looking at the country’s overall anti-money laundering (AML) framework.

The hearings – attended by current and former law enforcement, regulators and compliance officers – are attempting to find areas to improve detecting and prosecuting financial crime, in some cases allowing financial institutions to move from a system penalizing banks for missing minor regulatory compliance processes to a dynamic rewarding innovation and providing valuable intelligence to law enforcement.

In that same vein, U.S. banking and securities regulators are wrestling with how to classify, examine and grade the business practices and compliance controls of operations tied to virtual currencies, whether they are an individual trader, currency exchanger, a business exploring the blockchain or a firm engaging in an initial coin offering (ICO).


Major international cases spearheaded by the U.S. in recent years have revealed that criminal and terror groups and, particularly, cyber hacking gangs, are using the ease and anonymity of virtual value to better monetize stolen data and more easily get paid after ransomware attacks.

These illicit cyber groups – taking a cue from their brick-and-mortar brethren – also hide behind anonymous ownership structures, along with transacting in Bitcoin and other currencies.

The goal, not surprisingly, is to make it appear at first blush, a random currency trader has no connection to the cyber puppet master pulling the strings behind the scenes, increasing the challenge for investigators trying to follow a money trial that too often disappears down a digital rabbit hole.

More beneficial ownership battles ahead

The U.S. has to do something in the area of beneficial ownership as it is becoming one of the world’s largest secrecy havens, and is disappearing in being considered a world leader in counter-financial crime laws, enforcement and effectiveness, said Senate Judiciary Committee Chairman and Iowa Republican, Senator Chuck Grassley.

“Over the past few years, money has flooded into the United States as the United Kingdom and other European countries have enacted laws and regulations to improve beneficial ownership transparency,” he said in a statement.

Moreover, the international community “usually looks to the U.S. to be the leader in maintaining a robust criminal justice system; promoting transparency; and upholding the rule of law,” Grassley said.

But in the area of beneficial ownership, the U.S. has “fallen behind our friends overseas,” he said, noting a recent Financial Secrecy Index ranked the country second – behind only Switzerland – as the “most secret and nontransparent incorporation system in the world. As one expert put it, it’s easier to incorporate a company in the U.S. than it is to get a library card.”

That can’t be allowed to continue, said Chip Poncy, president and co-founder of the Financial Integrity Network and a prior top U.S. Treasury official who liaised with the Paris-based Financial Action Task Force, the world’s chief AML standards-setting body.

“Money laundering, tax evasion, grand scale corruption, sanctions evasion, fraud, and organized crime at large are regularly perpetrated or enabled on a worldwide basis through the systematic creation and use of anonymous legal entities,” he said.

Even as the United States continues to “enhance and expand its financial tools and power to combat various national security threats, these efforts are increasingly undermined by such exploitation of anonymous legal entities,” Poncy said.

“The continual creation of such legal entities right here at home may represent the most dangerous systemic vulnerability that the United States presents today to the global counter-illicit financing mission,” he said.

Current beneficial ownership bills ‘flawed’

But the current spate of bills, and similar ones put forth in the past decade, roughly requiring company formation agents to capture and publicize beneficial ownership data at the creation stage and require the company to make updates on a rolling, potentially real-time basis, are “flawed,” according to Brian O’Shea, senior director of the Center for Capital Markets Competitiveness at the U.S. Chamber of Commerce.

“While these proposals may be well-intentioned, they are poorly designed and fundamentally flawed,” he said. “Their overly broad and vague definitions, unworkable requirements, and severe penalties would do far more to impede law abiding small and medium-sized business than to hamper the use of so-called ‘shell companies’ to facilitate illicit activity.”

Such bills constitute an “unprecedented, ongoing regulatory and paperwork nightmare for law abiding business owners and undermine the privacy rights of millions of American citizens whose names, driver’s license numbers, and addresses would likely be in the public domain if” certain bills become law.

Another speaker, Clay Fuller, from the American Enterprise Institute, took a more balanced approach, noting that while criminals do use corporate anonymity to cloak and legitimize illicit funds, there are risks in too quickly and completely publishing beneficial ownership data, particularly allowing the data to be viewed by the general public.

“Because of anonymous ownership, it is highly likely that most people, businesses and institutions connected to illicit finance have no idea they are connected to illegal activities,” he said. “Therefore, we must move slow and cautiously in order to protect and preserve rights to privacy. But the severity of the costs of continuing to allow anonymity requires proactive legislation.

On that note, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) May 11, 2018 deadline is fast approaching for its weaker beneficial ownership solution to come into play, requiring banks to capture these details.

But there are a host of potential U.S. legislative fixes, including:

  • Senators Grassley and Whitehouse introduced True Incorporation Transparency for Law Enforcement (TITLE) Act in June. To read a copy of the bill, click here.
  • Representatives Maloney and Royce introduce Corporate Transparency Act. To read a copy of the bill, click here.
  • End Secret Holdings and Ethical and Legal Loopholes Act in House. To read a copy of the bill, click here.
  • Aircraft Ownership Transparency Act in House. To read a copy of the bill, click here.

Virtual currency vitriol, fears

U.S. regulators are also worried about crypto currencies flying too high, and then crashing, with little oversight to determine if these rapid fluctuations are due to market conditions or illicit activity, according to Jay Clayton, chairman of the Securities Exchange Commission (SEC).

One of the problems is that, currently, many of the U.S.-based cryptocurrency exchanges are regulated as a money services business (MSB), a class of financial institutions including money remitters, fiat currency exchangers and precious metals dealers.

However, traditionally, from an oversight perspective, these “predominantly state-regulated payment services have not been subject to direct oversight” by the SEC, Commodities Futures Trading Commission or other government bodies.

Historically, MSBs don’t offer anything close to securities, but virtual currencies, however, do move up and down, with some companies treating those valuation changes as a securitized asset – something regulators have a problem with.

“In short, the currently applicable regulatory framework for cryptocurrency trading was not designed with trading of the type we are witnessing in mind,” Clayton said, adding that the SEC “does not have direct oversight of transactions in currencies or commodities, including currency trading platforms.”

He is urging Congress to consider legislative or policy proposals to bring “clarity and fairness” to this space and to determine what regulators would review which companies in what ways, including AML rules.

That is an issue because some trading firms allow payments to be made in virtual currency, putting extra pressure on brokers to determine if the source of customer funds is clean or not.

Already, in the last two months, large banks and credit card companies have instituted new policies, preventing or restricting individuals from buying crypto currencies with their credit cards, both to prevent consumers from being saddled with unrepayable debt and make it harder for criminals to monetize stolen card data.

One top banking official, however, has gone even further to vilify the virtual currency sector.

Bitcoin and other virtual value stores were “probably not sustainable as money” and failed the “basic textbook definition” of being a currency, said Agustin Carstens, general manager of the Bank for International Settlements, what some refer to as the “Central bank’s central bank.”

“There is a strong case for policy intervention,” he said, speaking at Frankfurt’s Goethe University, according to Reuters, and acknowledging that Bitcoin, for example, soared more than 1,000 percent last year, but has tumbled as much as 50 percent in the face of regulatory and regional clampdowns.

Bitcoin is not a stable store of value, but is a “combination of a bubble, a Ponzi scheme and an environmental disaster” due to the incredible power requirements for computers to mine for new Bitcoins, Carstens said, according to reporters in attendance.