Corrected, Dec. 16 | Clark Gascoigne’s entire career has been about ending anonymous shell companies.
Starting at Global Financial Integrity in 2009 and then at the Financial Accountability and Corporate Transparency Coalition, Gascoigne has been on a mission to inject transparency into the ocean of anonymously owned corporate entities that can hide all manner of financial malfeasance.
He and other advocates moved closer to success on Dec. 8, when the House passed the National Defense Authorization Act, with provisions that would establish a beneficial corporate ownership reporting regime and change other anti-money laundering laws. The Senate followed suit last Friday, marking significant legislative steps to make life harder for tax evaders, traffickers and counterfeiters.
“I’m not popping the champagne until the president signs this thing into the law,” Gascoigne said. Trump has threatened to veto the measure because of other provisions, but lawmakers say they have the votes to override.
Proponents of the proposal needed years to convert opponents into backers, overcome resistance from powerful lobbyists, garner bipartisan and bicameral support, and eventually hitch a ride on a must-pass bill. In a final twist, they lost the vote of the lawmaker who spent a decade pushing for transparency.
Rep. Carolyn B. Maloney, D-N.Y., introduced a beneficial ownership bill in 2010. At a Dec. 7 news conference, she called it the “most important anti-money laundering and anti-corruption bill in 20 years, and it will make our country substantially safer.”
A day later, Maloney said she would vote against the measure. “I cannot, in good conscience, vote for legislation that continues to explode the Pentagon’s budget while millions of Americans are suffering from the COVID-19 pandemic and stay silent on the 1033 program, leaving in place the mechanism that transfers military equipment to local law enforcement across the county,” she said in a statement.
The United States is a popular destination for ill-gotten financial gains, in large part because the states, which govern corporate registrations, make it as quick and easy as possible. In Delaware, it costs $90 and requires a one-page form with the name of the entity, name of a registered agent, and a mailing address or P.O. box.
That entity could create a Russian nesting doll of subsidiaries to keep the true owners hidden. Any one of those companies could purchase legitimate assets, like real estate, using surreptitiously transferred, ill-gotten funds, laundering them in the process. Each layer forces investigators to get another warrant as they try to uncover tax evasion or money laundering.
According to a United Nations report confirmed by the Treasury Department, about $300 billion in illicit proceeds flowed through the U.S. financial system in 2010.
The NDAA’s provisions would require new entities to report who ultimately owns them, providing the Treasury Department’s Financial Crimes Enforcement Network, or FinCEN, with names, dates of birth, addresses and passport or driver's license numbers of anyone owning more than 25 percent of a company or exercising substantial control. Any change in ownership would require an update within a year.
The legislation would exclude highly regulated companies, or those with more than 20 employees and more than $5 million in revenue.
The bill would also increase FinCEN staffing, encourage FinCEN and Justice Department investigators to cooperate more, require the attorney general and Treasury secretary to consider raising the monetary threshold for banks filing suspicious activity reports, redefine “coins and currency” to include cryptocurrencies, and overhaul the Bank Secrecy Act.
The idea of restricting anonymous shell companies began bouncing around Congress shortly after the U.N. and others released reports about U.S. shortcomings. Then-Democratic Sens. Carl Levin of Michigan and Barack Obama of Illinois introduced a bill in 2008, and Sen. Charles E. Grassley, R-Iowa, became a co-sponsor in 2009.
The National Association of Secretaries of State opposed that proposal because it would require states to collect the information. The U.S. Chamber of Commerce led corporate opposition, predicting that millions of legitimate businesses would be swamped in red tape to snag relatively few bad actors.
Maloney kept reintroducing proposals, with Rep. Peter T. King, R-N.Y., a co-sponsor. Other proposals popped up in the Senate. None went far.
Things began to change in 2016, after federal regulators, according to the Congressional Research Service, increased the size and frequency of monetary penalties for anti-money laundering deficiencies.
That July, FinCEN required title companies in hot real estate markets to report all-cash purchases of residential real estate by corporate entities, including the beneficial owners. A Federal Reserve Bank of New York study found the new rule led to an immediate 70 percent drop in all-cash purchases by corporations in Miami.
Earlier in 2016, FinCEN finalized a know-your-customer rule for banks, requiring beneficial ownership information of corporate clients seeking to open accounts.
Gary Kalman, executive director of the FACT Coalition at the time, told CQ Roll Call in a 2019 interview that in 2016 he approached the Clearing House, a group of large financiers now known as the Bank Policy Institute. The two began working together.
“I was aware of pretty serious flaws in how the regulatory regime was working and how it was incentivizing banks to do things that were catching fewer bad guys,” BPI CEO Greg Baer told CQ Roll Call last month. “I was just expressing frustration that the resources devoted to this were in all the wrong places.”
According to congressional staffers and lobbyists, the BPI’s recommended changes to anti-money laundering laws in 2017 prodded the Senate Banking Committee to schedule hearings. Banking and credit union groups began to support an overhaul, and insurers followed. Corporations came on board, worried about shady sources far down supply chains and about counterfeiters hiding behind shell entities as they sold knockoffs. National security hawks saw a way to crack down on terrorism financing.
Treasury Secretary Steven Mnuchin, when he arrived with a new administration in 2017, was also a supporter. He and FinCEN Director Kenneth Blanco testified for the proposals in hearings across Capitol Hill.
By 2018, Republican Reps. Steve Pearce of New Mexico and Blaine Luetkemeyer of Missouri offered a bill that had a major difference from Maloney’s: They would make FinCen alone the collector and holder of beneficial ownership information.
Talks between the bill’s sponsors and Maloney trudged along as that session closed. An effort to advance anti-money laundering without beneficial ownership provisions failed. Gascoigne said that was when lawmakers realized the registry of beneficial ownership would be needed to pass anti-money laundering.
Maloney adopted the Pearce-Luetkemeyer approach in her bill introduced in the 116th Congress, a change that turned the secretaries of state into supporters.
Meanwhile, Senate Banking Committee members Mark Warner, D-Va., Tom Cotton, R-Ark., Doug Jones, D-Ala., and Thom Tillis, R-N.C., worked on a similar proposal, and the Senate Judiciary Committee held hearings in 2017, 2018 and 2019. In February 2018, the National Association of Realtors sent a letter to Senate Judiciary, giving advocates not just a powerful ally but one that had changed its view.
The Senate Banking group — with Mike Rounds, R-S.D., replacing Tillis — released a draft bill, combining language from Maloney’s and Rep. Emanuel Cleaver II’s bills. The group’s version was more business-friendly, in part thanks to a simpler definition of a beneficial owner. Senate Banking Chairman Michael D. Crapo, R-Idaho, scheduled two hearings over the summer of 2019.
Cotton rallied advocates at that second hearing, ripping into a witness from the National Federation of Independent Businesses, the largest and most vehement trade group still opposed to a beneficial ownership registry. In private, Democratic staffers applauded Cotton’s performance for browbeating NFIB into softening its opposition efforts.
On the House Financial Services Committee, Maloney’s and Luetkemeyer’s staffs were looking for a way to appeal to more Republicans as they approached a May 2019 markup for Maloney’s bill and one from Cleaver’s bill with other anti-money laundering changes.
With Luetkemeyer on board, Maloney now faced opposition from House Financial Services ranking member Patrick T. McHenry of North Carolina. She decided to pull her bill before markup and keep negotiating with McHenry. The committee advanced Cleaver’s bill 55-0 at the May markup.
Business groups still worried that the reporting requirements would drown investors with substantial holdings in many companies in paperwork.
Rep. Ann Wagner, R-Mo., found a solution: Create unique identifying numbers to allow one update to apply automatically across an investor’s other reported holdings. McHenry remained opposed but said he hadn’t asked his conference to vote against it; 10 of the committee’s 26 Republicans voted for Maloney’s bill when it was marked up in June.
House backers still wanted more Republican floor support for Maloney’s bill, hoping bipartisan passage would entice the Senate to act. They landed on the idea of combining it with Cleaver's bill. With a floor vote scheduled for Oct. 22, and a White House statement of support expected that morning, a new snag arose. Although the backers didn’t know it, McHenry had begun to whip opposition.
Gascoigne said he woke up that morning hoping for 80 to 90 Republican votes. But FACT and allies at the Fraternal Order of Police, the National District Attorneys Association and the BPI sensed an unexpected skepticism among Republicans they talked to. Backers got only 25 GOP ayes, although it included prominent leaders like House Republican Conference Chairwoman Liz Cheney of Wyoming.
In the Senate, Democrats Robert Menendez of New Jersey and Catherine Cortez Masto of Nevada and Republicans John Kennedy of Louisiana and Jerry Moran of Kansas had already joined Warner, Cotton, Rounds and Jones with a bill introduced in September 2019.
With a third of the Banking Committee in support, Crapo’s aides began working with the office of ranking member Sherrod Brown, D-Ohio. Staff members familiar with the work said they hoped for a spring 2020 markup.
But the pandemic threw Congress into disarray and put COVID-19 relief on top of the agenda. The Chamber of Commerce threw its support behind legislation in June 2020, but the odds of getting a vote on a Senate bill were vanishingly small.
Backers started looking for a must-pass vehicle. House Financial Services Chairwoman Maxine Waters, D-Calif., and Maloney persuaded the House Armed Services Committee to attach it to the NDAA as an amendment. But by the time their Senate counterparts tried the same approach, the Senate Armed Services Committee had hundreds of other bills seeking room in the NDAA. The Crapo-Brown bill didn’t make the cut.
The House’s NDAA passage, however, meant negotiations over the conference report. The leaders and ranking members of House Financial Services and Senate Banking led that portion of the NDAA. McHenry was the only one of the four still unsold. Aides met several times a week to hash things out, relying on Zoom and conference calls to reduce COVID-19 risk.
“It was probably the most contentious and difficult negotiations I’ve been involved in, and this was not my first conference committee,” said one staffer.
The division came down to judicial oversight of law enforcement’s access to FinCEN’s registry and how to handle the know-your-customer requirement for banks. McHenry was insisting that law enforcement officials, including local and state police, go to federal judges for permission to see FinCEN’s data, a deal breaker for Democrats who feared overburdening the federal judiciary and making the system virtually inaccessible for local authorities.
But aides familiar with the talks noted that McHenry never walked away, and eventually he accepted language similar to the Senate’s bill, which required state and local investigators to get approval from a state or local court.
McHenry also said the bill’s directive that FinCEN “revise” the know-your-customer rule wasn’t strong enough, preferring “rescind and replace” instead. He got his way, but that brought a new hiccup, this time with Treasury, where lawyers balked at “rescind and replace.”
For a weekend, the compromise appeared ready to collapse inches from the goal line. “It was a very nerve-wracking few days. We were very, very close to a deal we’ve been trying to cut for 12 years,” said one staffer.
But Treasury’s lawyers relented, saying they could live with the changes.
Correction: This report was corrected to show the sponsor of the bill that was combined with Maloney’s to ease House passage.