- The Washington Times - Sunday, May 8, 2016

Proposals to enhance transparency in the U.S. banking system are likely to be contentious and costly despite public support for the Obama administration’s efforts being spurred by a massive leak of data from a Panama-based law firm that has spotlighted the widespread use of shell companies to hide assets, banking and tax experts say.

Among the proposals outlined last week as part of a plan to crack down on money laundering, tax evasion and corruption, the U.S. Treasury Department announced it had drafted legislation to set up a federal registry of the real or “beneficial” owners of all companies created and operating in the U.S.

“That’s a very expensive proposition,” said Rob Rowe, vice president and associate chief counsel of regulatory compliance at the American Bankers Institute. “What kind of data security would they have in place? Who is going to have access to it?” he said, noting that there has been state-level opposition to previously proposed efforts. “You have to track the information and make sure it’s updated. You have to make sure it’s accessible to the right people.”

The so-called customer due diligence rule that the Treasury finalized Thursday, which requires banks and financial institutions to know and verify the identities of anyone who owns or operates at least 25 percent of a legal entity with an account at the bank, could be costly. Citing a regulatory impact assessment of the rule, the National Association of Federal Credit Unions estimates that the cost for financial institutions to implement the rule ranges from $700 million to $1.5 billion over a 10-year period.

“That is putting a huge burden on the banks,” said tax attorney Barbara Kaplan, co-chair of the Global Tax practice at international law firm Greenberg Traurig. “Requiring identification of account owners behind shell companies will expose many owners to potential audit scrutiny and possible criminal prosecution. It will be problematic, however, for nominees that are not true owners of accounts that the banks identify as the account owners.”

The due diligence rule has been in the works for years, but President Obama said last month’s release of the so-called “Panama Papers” highlights the need to make it harder for businesses to mask their finances and keep secret the identity of their owners.

“We’ve seen just how big a problem corruption and tax evasion have become around the globe,” the president said Friday, promising to continue the effort “to make sure that the rules aren’t rigged and our economy works for everybody.”

Last month’s publication of the estimated 11.5 million confidential files from a Panamanian law firm exposed the offshore and potentially illegal financial dealings of dozens of wealthy, famous and powerful people around the world.

Other proposals put forth by the Treasury Department include a requirement that a small class of foreign-owned companies, which previously had not had any obligation to report information to the Internal Revenue Service, obtain employer identification numbers from the IRS.

“I think a lot of it is a reaction to other countries pointing fingers at us,” Ms. Kaplan said. “They say, ‘If you, the U.S., want us to provide information to you about your citizens, you’ve got to have some transparency back to us.’”

The Justice Department has also proposed legislation that would allow government lawyers to issue administrative subpoenas in civil money laundering investigations as a means to speed up investigators’ access to financial records and enhance their access to foreign bank or foreign business records.

Treasury Secretary Jack Lew, in a letter to House Speaker Paul D. Ryan, advocated for Congress to quickly pass the legislation in addition to a series of pending tax treaties.

“This legislation would build on Treasury’s action by requiring companies to know and disclose the real person behind a company at the time of its creation,” Mr. Lew wrote. “Criminals are currently able to misuse companies to hide this beneficial owner, significantly weakening our ability to fight financial crime.”

Stefanie Ostfeld of the nonprofit Global Witness, which advocates for financial transparency laws, said it’s important that the Treasury Department is taking steps to “address gaping loopholes in the U.S. anti-money laundering framework,” but worries whether the rules will provide enough disclosure.

“The test will be whether the proposed bill allows broad access to company ownership information and that the right information is being collected at the time of incorporation and kept up to date,” Ms. Ostfeld said. “Otherwise, the administration risks muddying the waters by offering half-measures, which could undercut more comprehensive solutions and put the U.S. out of step with the rest of the world.”




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