By Samuel Rubenfeld and James Disalvatore
Monday, January 4, 2021
The U.S. will require the true, beneficial owners of companies to identify themselves as part of the 2021 defense authorization law that survived a presidential veto.
The defense law, which had originally passed Congress with large majorities, is the annual authorization for the U.S. military and defense department; it also includes multiple foreign policy and national security related provisions, such as the Corporate Transparency Act (CTA). The House of Representatives and Senate each passed the law again with the needed two-thirds majority to override the president’s opposition; President Donald Trump had called the law a “gift” to China and Russia in his veto statement.
Misuse of legal entities, such as corporations, to hide an owner, or an illegal source of funds, “continues to be a common, if not the dominant, feature” of illicit finance schemes, the U.S. Treasury Department had said in a strategy document released in February.
The CTA, along with a number of related provisions in the defense authorization law, comprehensively updates the U.S. anti-money laundering and counter-terrorism financing (AML/CFT) regulatory framework for the first time in decades, lawmakers said in an explanatory statement. Its passage follows multiple failed attempts to enact an overhaul since 2011, as well as a lobbying effort by anti-corruption groups that were eventually joined by law enforcement agencies, unions, non-profits, business groups, large banks and others.
The defense law also contains a provision expanding sanctions relating to the construction of two key Russian gas pipelines, and it mandated the designation of entities involved in Turkey’s purchase last year of a Russian missile system. Earlier in December, the U.S. prohibited certain exports and financing to the Turkish entity, seeking to head off the statutory mandate.
Under the CTA, a company will have to identify its beneficial owners when established, and at any time the beneficial ownership changes. Existing companies will have to report their beneficial owners within two years. A beneficial owner is defined under the law as someone who exercises “substantial control” of an entity, or owns at least a 25 percent stake in the company; they will be required to disclose their name, date of birth and an acceptable identification document, such as a passport or driver’s license, according to the law.
The information will be kept confidential and treated as sensitive information, according to the explanatory statement. It will be held in a database maintained by the Financial Crimes Enforcement Network (FinCEN), an office of the Treasury, and only disclosed to government agencies for national security and law enforcement purposes, and to financial institutions, for completing their customer due diligence (CDD) obligations.
To help with implementation of the anti-money laundering overhaul, FinCEN will receive an additional USD 10 million in funding, and the Treasury’s Office of Terrorism and Financial Intelligence (TFI) will receive special hiring authorities. FinCEN will also establish domestic and foreign liaison offices, and the Treasury will expand the number of attaches to give the department greater reach for its AML/CFT-related work. Last year, FinCEN launched a new division responsible for identifying, investigating and deterring illicit finance threats.
The CTA includes several exemptions concerning which companies must make the disclosure, however, including firms already subject to regulatory scrutiny, such as publicly traded companies, financial institutions, accounting firms and public utilities, according to a recent client note by the law firm King & Spalding LLP. Other exemptions include trusts, firms with more than 20 employees, a physical operating U.S. presence and USD 5 million in gross receipts, the client alert said.
“Ultimately, [the] new beneficial owner registry is a significant development for bank compliance departments, but the category of bank clients currently included in the registry appears somewhat narrow, limiting the CTA’s likely impact,” King & Spalding said.
Lack of disclosure around beneficial ownership was cited by the Financial Action Task Force (FATF), a global AML/CFT standards-setting body, as a principal weakness in the U.S. anti-money laundering legal framework during its last peer evaluation, completed in 2016.
The U.S. is considered one of the most attractive places in the world to store stolen assets, according to observers and experts, in part because of the ease with which bad actors can hide assets in a seemingly legitimate company or real estate.
In one case, Safina Materials Inc., a Conroe, Texas-based metals refiner and smelter, is ultimately owned by a Russia-based LLC held by a former manager of Renova Group, the holding company of Viktor Vekselberg, a sanctioned Russian billionaire, Kharon reported last year. The Texas corporate registry does not maintain the ownership of LLCs, but the chain was revealed by Czech and Russian records reviewed by Kharon as part of an investigation into divestments by Vekselberg to current and former managers of Renova Group.
In another, the relative and business associate of Mohammad Ibrahim Bazzi, a U.S.-sanctioned Hizballah financier, helped fund the purchase of a Washington, D.C.-area mansion for Zineb Jammeh, the wife of Yahya Jammeh, a former leader of The Gambia, Kharon reported in July. Both the ex-Gambian leader and his wife are sanctioned by the U.S. and U.K. over his corruption and human rights abuse, and her aiding and abetting of his crimes.
The couple bought the property “using funds acquired through illicit means,” including stolen state assets and bribes received from businessmen during his time in power, according to a U.S. forfeiture complaint.
Bazzi’s relative was part-owner of two Michigan-based restaurant companies, Kharon reported in 2018, citing historical documents. Bazzi, for his part, was sanctioned that year for facilitation of Hizballah, the Lebanese group designated as a foreign terrorist organization (FTO).
The defense law provides new whistleblower protections for those reporting money laundering violations, and establishes a reward program for tipsters. Those convicted of violating the money laundering regulations face new penalties; among others, individuals found guilty of “egregious violations” will be barred from serving on the boards of financial institutions.
The law also expands the definition of “money transmitters,” which is likely intended to capture a larger scope of businesses and transactions, according to a client note by the law firm Ropes & Gray LLP. The new definition could cover online payment service providers, gaming companies with in-game currencies and e-commerce companies offering items such as gift cards, the client note said.
The law also brings antiquities dealers under the anti-money laundering regulatory regime, and it requires a study into the facilitation of money laundering and terrorism financing through the art trade. High-value art sales are attractive to sanctioned parties, the Treasury warned in guidance issued in November.
“The CTA has widely been lauded as an instrumental tool in combating the use of anonymous shell companies to launder criminal proceeds,” law firm Morgan Lewis & Bockius LLP said. “What remains to be seen, however, is how this new tool will affect financial institutions.”
A series of studies, including a look into beneficial ownership requirements, as well as trade-based money laundering, money laundering by China, efforts of authoritarian regimes to exploit the U.S. financial system and the implementation of emerging technologies, are required under the defense law, King & Spalding said in its client note.
A provision of the defense law requires the U.S. Defense Department to identify Chinese military companies operating in the U.S.; the White House has banned Americans from investing in such companies as of next week, and exchanges have been delisting Chinese firms amid guidance from the Treasury that the restrictions also applied to subsidiaries. The prohibition on new investment, however, does not also require the sale of currently held securities, the Treasury said Monday in new guidance.
Another requires an assessment of U.S. cyber strategy to deter China from engaging in industrial espionage and cyber theft, and a report on the threat posed by the United Front Work Department, a Chinese external influence office. The State Department in early December said it blocked the visas of United Front Work Department officials.
And the law extended a prohibition on exports of certain munitions to the Hong Kong police; the U.S. has sanctioned top Hong Kong and some mainland China officials for the situation there.
The Treasury is also required to determine whether financial institutions through which Russian officials, state owned enterprises and oligarchs launder funds constitute an issue of “primary money laundering concern.” The department is tasked with studying whether there is a need for any additional measures to identify, prevent and combat money laundering linked to Russia, including through strengthening requirements of the real estate sector.
NORD STREAM 2, TURKSTREAM
Another part of the defense authorization law expands the scope of sanctionable activity related to Nord Stream 2, a Russia-to-Europe gas pipeline that the U.S. has for years tried to halt, and Turkstream, a Russia-to-Europe pipeline carrying gas via Turkey.
Officials and lawmakers have threatened over the years to impose sanctions on participants in the Nord Stream 2 project, but they have yet to do so. The pipeline is at the center of a tug of war between the U.S. and Russia over control of the European gas market, Kharon reported in 2019. The U.S. is urging European allies and companies to halt their work on the project and has prepared a round of sanctions, Reuters reported, citing anonymous senior U.S. officials.
Under the new law, the U.S. government will be able to impose sanctions on companies offering insurance and reinsurance to vessels laying pipe, as well as on those providing services such as technology upgrades, testing, inspection and certification of the pipe-laying effort.
The law also added exemptions for governments certifying the project, including the members of the European Union, Norway, Switzerland and the U.K. Denmark, an EU member, in 2019 approved the Nord Stream 2 pipeline route after months of debating the issue, Kharon reported.
It follows an announcement in October from the U.S. State Department committing to implement certain authorities under the Protecting Europe’s Energy Security Act (PEESA), which was passed as part of last year’s defense authorization law. The department said at the time that it would submit a report to Congress identifying vessels that had engaged in pipe-laying at depths of more than 100 feet, and people who sold, leased or provided the vessels for the project.
In July, the State Department had updated its guidance about sanctions authorities relating to Nord Stream 2 and Turkstream, saying that it can designate investments or other pipeline-related activities.
A number of vendors to Nord Stream 2 have ceased work on the project due to sanctions risk. The largest maritime insurance association advised its members, which comprise 90 percent of the market, to avoid covering anyone tied to the project.
Nevertheless, the project continues. Russian Deputy Prime Minister Alexander Novak vowed that the pipeline will be completed, the Russian outlet Vedomosti quoted him as saying on TV.
In late December, the Fortuna, a Russian pipe-laying vessel, left the construction site in German waters, an indication that a key part of the project was complete, according to a Reuters report. The Fortuna will resume construction this month in Danish waters, Reuters reported. Pipe-laying work related to Nord Stream 2 on the Baltic Sea bed will begin Jan. 15, according to a notification issued Dec. 22 by the Danish Maritime Authority.
The Fortuna will lay the pipe, and it will be assisted by construction vessels the Baltic Explorer and the Murman, along with other supply vessels, Reuters reported. Both the Baltic Explorer and the Murman are owned by the Russian government, records show.
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