The use of anonymous shell companies by corrupt political figures was first brought to widespread public attention by the Panama Papers scandal in 2016, where over 11 million leaked documents containing confidential financial and attorney-client information revealed how the wealthy and politically connected used the offshore finance industry in furtherance of crime, corruption, and other wrongdoing. Since then, we’ve seen similar stories in the Paradise Papers and Luanda Leaks scandals. But the abuse of shell companies doesn’t just happen offshore. In fact, the United States has recently overtaken Switzerland in a global ranking of financial secrecy jurisdictions and is now rated by the Tax Justice Network as the second greatest enabler of financial secrecy.
On August 20th, Stephen Bannon, President Trump’s former political strategist, along with three other defendants, were arrested and accused of diverting private donations from a crowdfunding campaign purported to raise money for construction of the infamous wall along the U.S.-Mexico border. The four men, which allegedly defrauded hundreds of thousands of donors, were each charged with conspiracy to commit wire fraud and conspiracy to commit money laundering (charges typically seen together as the former usually indicates presence of the latter). How did they do this? Through shell companies, of course. More specifically, they used various U.S. shell companies and accounts to route donations to their own personal accounts.
Gone are the days of stashing cash under a mattress. Chances are if someone has money to hide, it’s in an anonymous shell company, a handy vehicle for any illicit actor but especially so for those in the public eye. That’s one reason why these opaque entities are often associated with political officials involved in illicit activity, such as misappropriation of funds, bribery, and other types of white-collar crimes which generate significant illegal profits. In such cases, there is probably nothing more effective than an otherwise legally formed business entity that provides access to the international financial system and through which all manner of financial transactions can be performed, all while giving the appearance of legitimacy and hiding the ultimate beneficial owner under a cloak of anonymity. And conveniently, one need not go offshore to do it.
A cursory analysis of the indictment (which is rather detailed) doesn’t look good for Bannon and the other defendants. Each of the conspiracy charges, applicable to all of the defendants in this case, carries a hefty prison sentence of up to 20 years. Although the defendants are presumed innocent until proven otherwise, the SDNY appears to have solid evidence. Nonetheless, it’s likely that the defendants could end up cooperating in exchange for a sentencing reduction. If this happens, it’ll probably diminish any deterrent effect for future illicit actors. Therefore, more needs to be done to prevent the illicit use of shell companies, which shamefully continues in the United States even as other countries have started enacting transparency measures, and is further enabled by the fact that these opaque business entities can be formed anonymously in any of the fifty states and without accountability for those involved.
Shell companies in and of themselves are not illicit. In fact, they are legal to form and operate and serve numerous legitimate purposes, both business and personal, from use as holding companies to estate planning. However, one should be skeptical when such companies are used by public officials who hesitate or downright refuse to be transparent in their financial dealings. If a company is truly legitimate, there will be a reasonable explanation for its existence, a logical purpose for its use, and consequently, there should be no problem providing substantial documents that clearly demonstrate the entity’s formation, business purpose and financial standing.
Just last month the House of Representatives passed an amendment to the National Defense Authorization Act (NDAA), which, if enacted by Congress, would result in much needed anti-money laundering (AML) reform by requiring the disclosure of corporate beneficial ownership information to the government and increasing transparency around U.S. shell companies. A prior version of this measure, known as the Corporate Transparency Act of 2019, had significant momentum and passed the House in October 2019 as a standalone measure. However, although the proposed legislation has bipartisan backing, there still remains noteworthy opposition, mainly on grounds that it is overly burdensome to small businesses. Although this argument is widely disputed by proponents of the bill, it is likely to carry enough weight in light of the current economic crisis already plaguing small businesses, that passage of the amendment to the NDAA may be derailed. In the meantime, cases involving the illicit use of anonymous U.S. shell companies will continue making headlines.
Read or download a PDF of the indictment here.