Secrecy Is a Scourge on Finance. How to Bring Hidden Wealth Into the Light.

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About the author: Raymond W. Baker is the founding president of Global Financial Integrity, a think tank in Washington, D.C.

Drug traffickers, counterfeiters, corrupt government officials, and tax evaders all have one thing in common: they know how to hide their money in shell companies and secret accounts. Estimated in the trillions, this hidden wealth is often invisible to government authorities, threatening their ability to control what goes on within their borders, and even the very functioning of democracy itself.

In recent decades, secrecy has rivaled profit as the main motive in the way we practice capitalism. An entire financial secrecy system—comprising tax havens, secrecy jurisdictions, disguised entities, falsified trades, and more—has been built to conceal revenues, hide wealth, abet crime and corruption, and avoid taxes. A key building block of this secrecy system is anonymous companies. These entities with unknown beneficial ownership number in the millions. More have been created in the United States than in any other country. 

The U.S. government has taken modest steps to address the problem. The U.S. Treasury’s Financial Crimes Enforcement Network, known as FinCEN, proposed new regulations in 2016 requiring U.S. financial institutions to identify beneficial owners of legal entity customers. The 2016 action came at the end of a tortuous five-year period of exchanges by the Treasury Department with the banking industry, which tried to water down the impending due diligence requirements. The requirements came into effect in 2018. They are an improvement but still deficient. Beneficial interests need be recorded only for owners of 25% or more of the entity opening the account, meaning that five equal owners could avoid revealing their identities. Even more worrisome, banks have to confirm only that the identified individuals are in fact real people, not that they are related to the account. Concentration accounts, such as those maintained by law firms on behalf of multiple customers, are not covered under beneficial ownership requirements. Trust accounts are also not covered. The rules allowed many customers of U.S. banks to remain in secrecy.

In 2020, Congress passed the Corporate Transparency Act. The law requires information to be reported to the Treasury Department on each beneficial owner of most companies. Beneficial ownership is defined as holding an ownership interest of 25% or more or having substantial control over the company. Companies with more than 20 employees, more than $5 million in revenues, and that operate from a physical office in the United States are exempted. Information filed with the Treasury Department under the new rules remains primarily for government, not public, use. The legislation leaves out several types of entities including trusts, partnerships, some hedge funds and private equity funds, money service businesses, and more; and does not stop foreign shell companies from doing business with the United States.

Requiring beneficial ownership to be made public is the single most important step in moving toward transparency and accountability in capitalism. It would not be technically difficult. Nor would it be unprecedented to ban a key element of the financial secrecy system. After the Sept. 11, 2001, attacks, the United States government immediately went after terrorist financing. And it worked. Movements of money by terrorists outside the United States have been largely—not quite completely, but largely—pushed out of the legitimate financial system. This success well demonstrates what can be accomplished with political will and dogged determination. 

A key part of the success was the anti-money-laundering legislation included in the Patriot Act, which gave the U.S. new tools to fight money laundering. Among these measures is a flat-out ban on transactions through foreign shell banks, which functioned in the thousands without identifying their owners. The Patriot Act says that no U.S. bank can receive money from a foreign shell bank, defined as a foreign bank that does not have a physical presence in any country, and no other financial institution in the world can send money to the United States that it has received from a foreign shell bank. These prohibitions apply even to wire transfers that might hit New York correspondent banking accounts for a split second before flitting off somewhere else. If any such transfers intentionally or accidentally occur, the money can be seized from the foreign bank’s correspondent account. Instantly, shell banks went out of business all over the world. Thus, a major element of the financial secrecy system was almost completely taken off the table.

The same should be done with disguised corporations no matter who owns them. Whether structured as anonymous companies, shell companies, shelf companies, cell companies, portfolio companies, moneybox companies, intermediary accounts, or any other iteration, we must end this practice. Most shell companies can be eliminated in the same way with legislation based on the Patriot Act: No U.S. financial institution could receive money from a shell company, and no financial institution in the world could send money to the United States that it received from a shell company. All owners with 5% or more of shares or ownership rights should be identified, which is consistent with requirements of the U.S. Securities and Exchange Commission for identifying owners of listed companies. There would be no burdensome investigations or mounds of paperwork. Instead, financial institutions would simply require accountholders to provide the names of natural persons who are beneficial owners and managers, with updates whenever changes are made.

Exceptions may occasionally be necessary. Some foreigners of good repute have money deposited in foreign shell companies in order to escape economic, political, or personal harassment by dictators and despots. In such cases, the U.S. Treasury Department could permit a longer period of perhaps three to five years before beneficial ownership information is required or the account is closed.  

Publicly available beneficial ownership information would shine light on the secrecy problem at the heart of modern capitalism. Many countries are already building registries of shareholder information, and such registries, public and online, should become the global norm. This effort, however, hit a setback in November, when the European Court of Justice struck down an anti-money laundering directive that required beneficial ownership information to be made public in all cases. The court cited the fundamental rights to respect for private life and to the protection of personal data. But the court’s ruling fails to distinguish between privacy and secrecy. I would like my bank accounts to remain private. This does not mean cloaked in secrecy. If someone with a name similar to mine is suspected of a terrorist act and authorities need to investigate possibly relevant account activity, I have no objection. My financial privacy is not above our collective personal security. 

Governments and societies have an interest in deterring disguised entities, which are readily available for use by criminals, kleptocrats, terrorist financiers, and of course, as always, tax evaders. With secrecy firmly entrenched in modern capitalism, our economic system is functionally beyond oversight by anyone. Eliminating secrecy in the form of anonymous companies is a necessary step in strengthening the democratic capitalist system. 

This essay is adapted from Invisible Trillions: How Financial Secrecy Is Imperiling Capitalism and Democracy—and the Way to Renew Our Broken System, published by Berrett-Koehler Publishers.

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