March 30, 2023

Strong Implementation of Bipartisan Law Key to Cleaning Up U.S. Financial System

A little sunlight truly is the best disinfectant.

There may be nowhere that statement is more true than in the realm of illicit finance.

By the Treasury Department’s estimate, dirty money flowing through the American economy is equivalent to 2 percent of our GDP each year. Whether it takes the form of Russian oligarchs hiding sanctioned assets in American real estate, or international drug cartels stashing the proceeds of their crimes in Delaware trusts, the dirty money is dangerous to our safety and integrity. Identifying dirty money is the first step toward eliminating it.

The Biden administration knows this well. In the first ever whole-of-government Strategy on Countering Corruption, released during the first Summit for Democracy in 2021, the administration’s top priority was to pull back the veil on anonymous shell companies, which have long been used to smuggle dirty cash into our financial system.

In Congress, we passed the Corporate Transparency Act, a bipartisan measure I helped lead. The law requires entities formed or operating in the U.S. to report their true “beneficial” owners to the Treasury Department. Strong implementation of this law should form the centerpiece of the administration’s agenda to fulfill its anti-corruption commitments.

Treasury got off to a good start when it finalized a strong rule in September detailing which entities are covered by the law and spelling out what information they will need to report. Unfortunately, implementation veered off track more when the agency proposed how law enforcement authorities might access the information and drafted the forms businesses will use to file the information.

New tools are only useful if you put them in the hands of those who can use them. The Corporate Transparency Act was always intended to give federal, state, local, and foreign-ally agencies the information they need to identify and investigate money laundering. Congress also wanted to make sure that financial institutions like banks could identify (and avoid doing business with) shady actors. Despite this clear intent, Treasury’s recent proposal severely limits access to the directory.

Of the many overly restrictive access protocols included in Treasury’s draft rule, the most damaging is the requirement—not found in the law—that local officials acquire a court order to access information collected under the law. Such a burdensome requirement would make accessing the directory slow, complicated, and impractical.

The proposal also limits access to the ownership directory by financial institutions, who need the information to fulfill their legal anti-money laundering, counter-terror financing, and sanctions-screening obligations. The Corporate Transparency Act was intended to improve and simplify compliance for financial institutions, yet the American Bankers Association said that the most recent rule “creates a framework in which banks’ access to the registry will be so limited that it will effectively be useless.”

On these points and more, Treasury can still reverse course and make the database a more useful resource—ensuring that law enforcement, national security officials, and financial institutions can readily access the data in line with Congress’ intent.

Likewise, a data tool is only as good as its inputs. Yet, a draft form proposed by Treasury for reporting information to the directory could effectively render the entire regime optional. Under the proposed form, reporting entities would be allowed to state that they are simply “unable” to obtain information about their true owners. It’s hard to imagine that entities will provide the appropriate data if given such an out. Further, Treasury has not yet committed to verifying the data submitted to the beneficial ownership registry, despite the law’s requirement.

These aren’t flashy issues. The technical details of a draft Treasury rulemaking rarely make the front page. But these mistakes risk undermining the most important anti-money laundering law of the past 20 years.

There’s hope if Treasury follows through on new commitments made this week. For one, a Treasury official now suggests the agency may revise the form. Further, the U.S. committed—in a joint agreement with 20 nations—to advance beneficial ownership directories that will use verification to ensure useful data for law enforcement and other users.

Fighting corruption and kleptocracy is one of the most important actions we can take to protect and promote democracy around the world. The international order built on democracy, free markets, and the rule-of-law is under assault from autocracy, kleptocracy, and criminality. It’s both a national and international security imperative that we—the democratic, rule-of-law societies—win this battle. I hope the Treasury Department uses this week’s Summit as an opportunity to bring that effort back on track.


By: Senator Sheldon Whitehouse