When Ukraine’s PrivatBank filed a lawsuit in the United States against its former owner Ihor Kolomoisky one year ago, it claimed the tycoon had used a slew of anonymous shell companies registered in the U.S. state of Delaware to carry out what it called a “brazen” heist.
Mr. Kolomoisky and his partner Hennadiy Boholyubov used Delaware-based limited liability companies (LLCs) – which are popular for their lack of beneficial ownership disclosure requirements – to acquire U.S. businesses and properties worth hundreds of millions of dollars with stolen funds, the Kyiv-based bank claimed.
The men “have gone through great lengths to conceal their ownership and control over U.S. assets,” the lawsuit filed in Delaware’s Chancery Court on May 21, 2019, said.
Two new bills now on their way through the U.S. Congress could make it much harder to do that – and easier for U.S. law enforcement agencies to immediately identify owners of shells, speeding up investigations.
Citing unnamed sources, the Daily Beast reported in April 2019 that the FBI has been investigating Messrs. Kolomoisky and Boholyubov for potential financial crimes, including money laundering.
Lax registration rules in states such as Delaware, Wyoming and New Mexico – which require less information to create a company than to get a library card – have helped turn the United States into a leading offshore haven for criminals and corrupt officials the world over, including from the former Soviet Union.
The Tax Justice Network, a British-based advocacy group, ranked the United States second only to the Cayman Islands in its 2020 survey of the nations “most complicit” in allowing wealthy individuals and criminals to hide and launder money.
Now Congress is pursuing legislation to create a federal database of beneficial owners of shell corporations and LLCs to combat their abuse by criminal elements and corrupt officials. It comes amid a renewed global push for greater financial transparency following the 2016 publication of the Panama Papers – a leak of reams of secret legal documents and financial data that highlighted a global scheme to evade taxes worldwide.
The U.S. House of Representatives passed the Corporate Transparency Act in October 2019, with a bipartisan vote of 249-173. Representative Carolyn Maloney, a Democrat from New York who is one of the bill’s sponsors, said in May that she is hopeful it will pass Congress this year.
A separate piece of legislation known by the acronym ILLICIT CASH – its full title is the Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings Act – is currently in the Senate Committee on Banking, Housing and Urban Affairs.
Cui bono?
Both bills require beneficial owners of corporations and LLCs with 20 or fewer employees and $5 million or less in annual revenue to submit their full name, date of birth, current home or work address, and the identification number on their valid U.S. or foreign identity document to the Financial Crimes Enforcement Network (FinCEN), an arm of the Treasury Department.
Such companies would have to submit an updated list of beneficial owners each year. The House bill also requires foreign beneficial owners to submit a copy of their passport. A beneficial owner is described as anyone who “exercises substantial control” or owns 25 percent or more of the company.
“We’re the only advanced country in the entire world that doesn’t already require disclosure of this information. Frankly, it’s an embarrassment,” Rep. Maloney said in a May 20 webinar on the legislation organized by the Wilson Center’s Kennan Institute, a leading U.S.-based center for research on Russia and Eurasia.
All 28 member states of the European Union are already required to maintain registries of the beneficial owners of companies set up within its borders and are moving to make them publicly accessible to varying degrees.
The tougher European standards have driven some criminals to move their money to the United States, Sen. Chuck Grassley of Iowa, who is now the senior Republican in the Senate, said during a 2018 Congressional hearing.
Even offshore havens like the British Virgin Islands (BVI), Cayman Islands and Panama have introduced beneficial owner registrars, KPMG, one of the world’s largest audit firms, said in a January post. The BVI and Cayman Islands are expected to make theirs publicly searchable in 2023.
The U.S. database envisioned by the bills would only be available to law enforcement agencies that have an actual investigation into related matters and would not be publicly searchable. Financial institutions would also be able to utilize the database, but only with the permission of the companies.
The bills have the backing of law enforcement organizations and financial institutions.
“What a lot of this is about is making it easier for law enforcement to cut through the layers of ownership and entity structures and identify the big fish at the top,” Lawrence Hamermesh, a professor at the Widener University Delaware Law School and a former practicing attorney, told RFE/RL.
“It moves the needle. If you are bent on crime, it represents more of a deterrent,” he said.
Bad company?
Viktor Bout, the Russian arms trafficker who is serving a 25-year sentence in a U.S. prison after being convicted in 2011 of conspiring to kill U.S. nationals and sell weapons to terrorists, had used a dozen shell companies to hide assets in the United States, including in Delaware.
Former Ukrainian Prime Minister Pavlo Lazarenko, who served a prison term in the United States for money laundering, made use of a web of entities around the world, including anonymous shell companies registered in Wyoming.
LLCs are now regularly used to acquire U.S. real estate, especially high-end properties in New York City and Miami, to allow owners to maintain privacy.
But criminals and others seeking to launder money, though, have abused the practice, buying real estate through LLCs in all-cash transactions. The Treasury Department has begun targeting such transactions in select cities, while New York has been taking steps to collect more owner information.
Denis Katsyv, son of a former Moscow Oblast transport minister, used LLCs to disguise his all-cash acquisition of a $6.25 million condominium in Manhattan partially with money that the U.S. Justice Department said was stolen from the Russian budget.
Should one of the bills pass, its impact might be felt not only in Manhattan and Miami but also abroad, including in Moscow, Kyiv and other centers of power in the former Soviet Union, where some of the $300 billion in annual illegal proceeds moving through the United States originates.
Matt Rojansky, director of the Kennan Institute, said during the May 20 webinar that the nations that emerged from the Soviet collapse may have developed differently had their leaders not been able to easily “squirrel away” state money in the West.
“Imagine the way in which they would have to govern their own countries differently if they have to keep their ill-gotten gains at home,” Mr. Rojansky said. “Wouldn’t they want a little bit more rule of law at home to protect that money rather than being able to rely on exporting it to jurisdictions like ours, right here in the United States?”
Copyright 2020, RFE/RL Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave. NW, Washington DC 20036; www.rferl.org (to read the full story, see https://www.rferl.org/a/can-the-u-s-slow-the-flow-of-dirty-money-from-the-ex-u-s-s-r-/30651938.html).