Some of the biggest obstacles for investigators going after Russian assets amid the country’s now three-month-long invasion of Ukraine are the legal mechanisms for preserving anonymity that are built into the U.S. tax and financial code.
The most powerful of these rules is the designation known as beneficial ownership, which allows asset owners to remain unregistered on legal documents as long as they name a third party to act on their behalf.
That means beneficial ownership laws can allow billions of dollars’ worth of illicit property to remain invisible to financial investigators.
They’re also one of the main reasons the U.S. now ranks above Switzerland and the Cayman Islands as the most financially secretive country in the world, according to a list published this month by the Tax Justice Network, a U.K.-based nonprofit.
“The U.S. has climbed to the top of a global ranking of countries most complicit in helping individuals to hide their wealth from the rule of law, earning the worst rating ever recorded since the ranking began in 2009,” the group said in a statement.
The top international ranking has had an impact among financial transparency advocates in the U.S.
“While the U.S. has committed to being a leader in cracking down on global corruption, these rankings show how corrupt actors are weaponizing our financial system against democracy here and abroad,” said Ian Gary, head of the U.S. non-profit Financial Accountability and Corporate Transparency (FACT) Coalition.
Despite these hurdles, investigators from the Department of Justice-led interagency KleptoCapture task force are pressing ahead in their search for assets belonging to Russian oligarchs and decision-makers within the Kremlin.
The IRS criminal investigations division said it has initiated 19 sanctions-related criminal investigations since March.
“The agency continues to use its financial and cyber expertise to assist the tax force and our international partners with identifying assets/entities tied to individuals on the Special Designated Nationals (SDN) List, deconflicting of sanctions-related enforcement efforts and developing new sanctions-related investigations,” the division said in a statement.
This may seem like quixotic work in a country portrayed by its own Treasury chief as the money-laundering capital of the world.
“There’s a good argument that, right now, the best place to hide and launder ill-gotten gains is actually the United States,” Treasury Secretary Janet Yellen said during a State Department Summit last year. “And that’s because of the way we allow people to establish shell companies.
“Since Andrew Jackson, individual states have been free to set their own rules for incorporating companies, and since the early 20th century, some states have allowed anybody to establish a shell company without disclosing who really owns it, what we term ‘the beneficial owner,’” Yellen said.
Two states well known for their secretive ownership laws are Delaware and Nevada, where corporate lawyers can name third parties, or “nominee” entities, to own something in the eyes of the government, while the true owner stays off the books.
But that may be changing.
As part of the landmark Corporate Transparency Act of 2020 (CTA), the U.S. is now rolling out a registration database for beneficially owned companies and implementing other rules aimed at showing who owns what assets.
Transparency advocates, however, say the regulations outlined by the law are still riddled with loopholes and will remain ineffective without blunter, less nuanced language from regulators.
For example, according to the American Bar Association, it’s still unclear whether limited partnerships are included in the types of companies that need to register.
Since “the CTA’s focus is on shell companies and other entities with limited or no operations, the CTA provides numerous exceptions for entities from undergoing reporting, including those in a regulated industry (where existing regulatory regimens would already include beneficial ownership reporting), publicly traded companies, investment vehicles operated by investment advisors, nonprofits, and government entities,” Lawrence A. Goldman and David J. Marella wrote for the association.
One of these exemptions that’s of particular concern to transparency groups is referred to in regulatory language as “pooled investment vehicles,” but more commonly known as hedge funds, private equity funds and venture capital firms.
“These are vehicles that in many cases have no anti-money laundering obligations, do not make known their ownership whether to a government regulator or to the public,” FACT Coalition advocate Erica Hanichak said in an interview.
An FBI document leaked to Reuters in 2020 warned that criminals – referred to as “threat actors” – may be taking advantage of the anonymity afforded to investors by the laws around private investment funds.
“The FBI assumes AML [anti-money laundering] programs are not adequately designed to monitor and detect threat actors’ use of private investment funds to launder money. Additionally, the FBI assumes threat actors exploit this vulnerability to integrate illicit proceeds into the licit global financial system,” the leaked memo said, according to Reuters.
In March, Democratic Sens. Elizabeth Warren (Mass.) and Sheldon Whitehouse (R.I.) wrote to. Yellen and the head of the Securities and Exchange Commission to demand more transparency in the investment sector.
“The exemption for the private investment industry, which includes hedge funds and private equity firms, allows companies and their advisers to accept and manage huge sums of money without needing to know basic information about their investors or clients, undermining anticorruption, counterproliferation, and counterterrorism programs and letting criminals and sanctioned individuals like Russian oligarchs hide and grow their wealth,” they wrote.
However the CTA is hashed out into practicable rules, the current reality for investigators seeking Russian assets is still murky and hard to navigate.
“There’s been talk about the use of beneficial ownership structures and nominees,” Don Fort, former head of the IRS criminal investigation division, said in an interview about the current investigation. “It’s not easy to crack those types of financial transactions.”
FACT Coalition’s Hanichak agreed.
“Often these chains of ownership can span four or five different continents and are intentionally opaque. Having better visibility into the U.S. piece of that puzzle is incredibly important, to be able to put together the broader picture of where Russian oligarchs’ assets could be invested,” Hanichak said.