Research Papers
Regulation and Realpolitik: The U.S. and the Politics of International Financial Regulatory Initiatives
30 Mar 2016

The U.S. Continues to Serve as an International Financial Services Jurisdiction As Civil Society Increasingly Calls for More Accountability, Better Governance and a Level Playing Field in International Initiatives

By Bruce Zagaris – Partner, Berliner, Corcoran & Rowe LLP

The U.S. has traditionally served as a center of attraction for international capital.  During the last decade or so, its status as a superpower has enabled it to increasingly obtain market share from other countries by ignoring its failure to meet international standards while using its control of international organizations and groups, such as the OECD, the G7, the G20, FATF, and the Financial Stability Board, to sanction smaller jurisdictions with which it competes.[1]

This article discusses the politics of international regulatory initiatives followed by U.S. federal and state initiatives to attract foreign investment, including a section on regulatory arbitrage, in particular entity transparency, anonymous foreign investment in U.S. real estate, the gatekeeper initiative, and automatic exchange of information.  Finally, some potential solutions are offered for rectifying the problem of the lack of a level playing field in international financial regulatory initiatives.



The “global” multilateralism characterizing the last fifty years of international economic affairs has been replaced by diverse and more modest regional clubs, such as the European Union (EU) and the Association of Southeast Asian Nations (ASEAN), to more geographically diverse initiatives like the G-20, the Basel Committee on Banking Supervision and the Financial Stability Board (FSB).  The new groups and forums also endeavor to coordinate diverse sectors of the international economy and export their priorities to member governments.  Many of the groups and forums are more modest in size, formality, and even inclusiveness.  They are very active in influencing the minilateral strategies of economic statecraft.[2]

In today’s multipolar, multilayered world, policymaking has become more varied, and inconsistent, as regional organizations and groups use approaches that do not necessarily apply elsewhere.  As a result, international cooperation has increasingly become more varied and nuanced.

The increasing multipolarity of the international system is leading to more, not less, institution building and cross-border cooperation.  Cooperation is evolving from the core tenets of postwar multilateralism, such as big global fora, to formal rules of the road for economic relations, and U.S. dollar hegemony.  As globalization becomes more entrenched, the old wars are replaced with alternative mediums and diplomatic tools in order to respond to the more varied interests, preferences, and power shifts.

Globalization continues to enable institutions to arise as supranational organizations where executive bodies or managers make decisions in the place of free-standing negotiations between far-flung and numerous members.  To the extent international actors obtain more power, they can move the coordination process forward in ways difficult to do otherwise, or fill in important gaps when new decisions must be made or disputes resolved.

As globalization has continued, it has not only created a greater need for cooperation as goods and capital flow more easily across borders, but the new financial statecraft is shifting from a multilateral system of governance to varied “minilateral” approaches of diplomacy.  Nevertheless, it has a profound effect on other means of international cooperation and the global economy.  It has also shifted the balance of power out of equilibrium.  As American power has eroded, disagreements on policy have increasingly arisen creating dissent, and as more countries are rising with regards to their own economic prominence and influence, multilateral bargaining has become increasingly difficult as more countries, with more brass and varied economic priorities, must be consulted to achieve global agreements.  Hence, investing time and effort into multilateralism has become a less attractive strategy.

Multipolarity in the international economic system is yielding new innovative modes of cooperation, which, like earlier modes of economic statecraft, are directed at both liberalizing and supervising the global economic system.

Two elements characterize the new minilateral system.  One development is the increasing turn from global cooperation toward strategic alliances in which countries try to find the smallest group required to achieve a specific goal.  Instead of trying for the ever-increasing “global” accords directed toward reducing tariffs virtually everywhere, countries are instead cooperating in discrete clubs to reduce trade barriers.  Even these discrete clubs have shifted from working along regional lines to a system diversified in scope and ambition that now involves widespread partners trying to integrate their economies without the procedural constraints of the multilateral system.  An example of the forming of strategic alliances in international tax enforcement cooperation has been the formation of JITSIC in April 2004 by the Commissioners of the Australian, Canadian, United Kingdom and United States tax administrations.[3]  A second example is in response to the significant criticism by countries that the Foreign Account Tax Compliance Act (FATCA) violated fundamental national laws. On February 28, 2012, the U.S. Treasury Department announced that the United States and five other countries (France, Germany, Italy, Spain, and the United Kingdom) were exploring a framework to share information on bank accounts across borders under a ground-breaking intergovernmental approach to implementing FATCA.[4]

The second emerging coordination strategy involves a turn from treaties to informal, explicitly nonbinding “soft law” accords.  The informality of the latter permits financial authorities to take risks on agreements where the outcome of cooperation may not be obvious or certain and reduces some of the transaction costs associated with more formal obligations.  Soft-law accords are easier to reach between technocrats and administrative agencies, often with relatively little interference by political outsiders.  Their nonbinding nature enables participants to amend the accords relatively easily.  Soft law accords can be supported with market and governmental enforcement mechanisms.  Hence, the obligations of tax transparency and BEPS are accompanied by peer reviews, blacklists and countermeasures against violators.  Similarly, the obligations of corporate transparency, anti-money laundering due diligence, and gatekeepers within the Financial Action Task Force on Anti-Money Laundering[5] are accompanied by peer reviews,[6] blacklists, and countermeasures.

The cooperative strategies embraced by minilateralism are less inclusive than traditional multilateralism, less legal, and more flexible due to the absence of hard law treaty requirements.   Notwithstanding the binding, hard-law nature of treaty provisions, alliances permit countries to circumvent governments that may try to block cooperation, and enable states to engage both regional and global problems efficiently.  Soft law permits speed and flexibility where the costs of cooperation are ambiguous yet require many countries to participate.  Institutions can be developed that provide even nonbinding accords with clout. Financial engineering helps parties prepare and diversify for the volatility that inevitably accompanies the dispersion of geo-economic power, by reallocating monetary risk and diminishing the switching costs of using new international currencies.

Traditionally, international tax policy has been the mainstay of the OECD rather than the more universalist international organizations of the United Nations (e.g., the UN Ad Hoc Committee of Tax Experts), the International Monetary Fund, as well as the European Union (EU).  When developing countries have tried to strengthen the UN as the main body to make international tax policy, they have not succeeded.  Since 1998, the leading players in international tax compliance and enforcement efforts have been the OECD, the EU, and the U.S.  From time to time China, India, Mexico, Brazil and other countries have supported them.  While the U.S. has emphasized unilateral actions more often than the OECD and EU, for the most part they have cooperated.[7]



Non-resident aliens have been traditionally exempt from tax on U.S. bank deposit interest. IRC §871 (h) and (i) exempts from U.S. tax the interest paid to NRAs by persons carrying on the banking business, savings institutions, and insurance companies. CDs, open account time deposits, and multiple maturity time deposits are all exempt.  A similar exemption applies with respect to estate taxes.

Many U.S. states offer single-member LLCs, whereby an individual can open an LLC to do foreign activities, generating non-sourced U.S. income and avoid U.S. and state taxation.  By default, the IRS will treat a single-member limited liability company (SMLLC) as what it calls a disregarded entity. This means that the IRS will not look at an SMLLC as an entity separate from its single owner for the purpose of filing tax returns. Instead, just as it would do with a sole proprietorship, the IRS will disregard the SMLLC, and the owner will pay taxes for the business as part of his or her own personal tax returns.[8]

The list of  U.S. states offering captive insurance include Alabama, Arizona, Arkansas, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois, Kentucky, Maine, Nevada, New Jersey, New York, North Carolina, Oklahoma, Oregon, Rhode Island, South Dakota, Tennessee, Utah, and Vermont.[9]  A captive insurance company is essentially a new subsidiary that is created by a parent company to underwrite the insurance needs of its operating subsidiaries. The basic idea of a captive is to bring in-house the purchasing of insurance that was previously done from unrelated commercial insurance companies, and retain the underwriting profits for the benefit of shareholders.  For most tax purposes, there is little difference between an offshore captive (one formed outside the United States) or a domestic one, since the vast bulk of captives make the election under Tax Code § 953(d) to be treated as a domestic company.  Thirty-seven states in the U.S. offer themselves as a captive domicile.  [10]

Under the EB-5 U.S. immigration program, for an investment as low as $500,000.00, entrepreneurs (and their spouses and unmarried children under 21) are eligible to apply for a green card (permanent residence) if they: make the necessary investment in a commercial enterprise in the United States; and plan to create or preserve 10 permanent full-time jobs for qualified U.S. workers.  The program has resulted in a series of fraudulent projects, investigations, and scams.[11]



A.     Overview

In recent years the U.S. unilaterally and through international organizations and groups has raised transparency and gatekeeper requirements without taking any significant measures itself.  In 2006, FATF found the U.S. non-compliant with corporate transparency and gatekeeper requirements.  In 2012, FATF raised standards further.  Meanwhile, the G7 and G20 have similarly had initiatives against the abuse of entities.   For many years under the leadership of now retired Senator Karl Levin, the U.S. Senate Permanent Subcommittee on Investigations conducted investigations exposing how money launderers, terrorists, organized crime, corrupt officials, tax evaders and others have utilized U.S. financial institutions to conceal, transfer, and spend suspect funds.[12]  Other government reports have highlighted the ways in which the lack of beneficial ownership information prevent the U.S. from effectively responding to requests by foreign prosecutors for assistance. [13]  Since at least 2013, the Incorporation Transparency and Law Enforcement Assistance Act (ITLEA) was introduced into the U.S. Congress.  Due in part to opposition by the private sector and states, the proposed legislation has not progressed much.

B.     The Incorporation Transparency and Law Enforcement Assistance Act (ITLEA)

The gap between international standards on entity transparency and U.S. counterpart standards have grown significantly in the last few years, especially with the adoption of the 4th EU Money Laundering Directive, the action taken by the G-7 and G-20, and new legislation by the United Kingdom.

1.      The United States Situation

ITLEA would require states to establish incorporation systems with respect to beneficial ownership information.  Most states have no system and do not regulate corporate formation agents.

The lack of entity transparency regulation is of particular concern with regard to when foreign prosecutors request mutual assistance from the U.S., which is not able to appropriately respond.  Although the DOJ has repeatedly requested additional funding in yearly budget proposals, Congress has not provided the DOJ with the budget requested and thus they do not have the technological framework[14] or human resources to respond timely. [15] When it responds, the U.S. explains that the beneficial ownership information requested (e.g., for the single-member LLCs accused of criminal wrongdoing) is not available.

On February 3, 2016, Senator Whitehouse and Representatives Maloney and King introduced bills, S. 2489 and H.R. 4450 respectively.  The bills would facilitate the transparency of the financial system by making it more difficult for criminal organizations to hide behind front companies and shell corporations.  It has been referred to the Senate Judiciary Committee.[16]

ITLEA directs United States to have laws that require corporations and limited liability companies formed in a state that does not have an incorporation system to make the disclosure, updating, and verification of beneficial ownership information and to file information about their beneficial ownership with the Secretary as required by the Act.  States would impose the disclosure duties on a licensed formation agent who resides in the state.

ITLEA sets forth requirements for state incorporation systems with respect to beneficial ownership information, including: (1) identification of beneficial owners by name, current address, and non-expired passport or state-issued driver’s license; (2) identification of any affiliated legal entity that will exercise control over an entity to be incorporated and the identities of the beneficial owners of such affiliated entities; (3) updating of lists of beneficial owners not later than 60 days after any change in information related to such owners; and (4) additional information and verification required for beneficial owners who are not United States citizens or lawful permanent residents.

Under ITLEA, states that adopt an incorporation system must maintain beneficial ownership information for five years after an incorporated entity terminates.

ITLEA imposes a civil penalty of not more than $1 million (decreased from the $10 million in S. 1465 in 2013) on any person who: (1) provides false or fraudulent beneficial ownership information; (2) fails to provide complete or updated beneficial ownership information; or (3) knowingly discloses the existence of a subpoena, summons, or other request for beneficial ownership information without authorization.

ITLEA requires the Secretary of the Treasury, in consultation with the Secretary of Homeland Security and the Attorney General, to publish a proposal within 120 days of the enactment of the final law and a final rule within 270 days of the enactment, to require formation agents to establish anti-money laundering programs.

The Comptroller General is required to conduct a study and report to Congress on: (1) state requirements for the disclosure of beneficial ownership information; (2) whether the lack of such information has impeded investigations into entities suspected of terrorism, money laundering, and other criminal activities; and (3) whether the failure to require beneficial ownership information for partnerships and trusts formed or registered in the United States has elicited international criticism and what steps the United States has taken or is planning to take in response.

The bill has been introduced four times before.  However, now it has the wholehearted endorsement of the executive branch.  Some provisions are appearing in other bills.

A potentially important political dynamic is the July 2013 G8 leaders commitment to end the practice of establishing anonymous shell companies.  They declared:  “Companies should know who really owns them and tax collectors and law enforcers should be able to obtain this information easily.”  The G8 leaders promised to publish national action plans outlining the concrete steps each country will take to ensure that law enforcement and tax authorities have ready access to information on who owns and controls the companies formed under their laws.

In announcing the United States Action Plan, the White House expressed its commitment to ensuring that law enforcement and tax authorities have access to ownership information for companies formed within United States borders.  The Plan calls for enactment of legislation that meets certain principles, all of which are met by S. 2489 and H.R. 4450 respectively. The principles are the following:  requirements for covered legal entities to disclose beneficial ownership to states or regulated corporate formation agents at the time of company formation; requirements for verification of the identity of the beneficial owner; options for covering legal entities, depending on whether the applicant forms the legal entity directly or uses a regulated company formation agent; requirements for law enforcement authorities, including tax authorities, to be able to access beneficial ownership information upon appropriate request through  a central registry at the state level; an extension of anti-money laundering obligations to company formation agents, including an obligation to identify and verify beneficial ownership information; a mandate that entities provide updated information when beneficial ownership occurs within 60 days; and the imposition of civil and criminal penalties.

ITLEA is designed to combat the use of anonymous U.S. shell companies by requiring states to collect information about the “beneficial owner(s)” of a corporation or LLC.  A beneficial owner is a real person (that is, not just another company) who has a substantial economic interest in the business or ultimately controls the company’s activities or assets.  The information will be readily available to law enforcement, allowing officials to track illicit funds and activities much more efficiently and effectively.

At present the federal government does not collect any information from companies immediately upon their formation.

The introduction of the two ITLEA bills followed an airing on January 31, 2016 on “60 Minutes,” a CBS program wherein Global Witness, a British-based civil society organization, filmed an undercover investigation.  The investigation had a person posing as a German lawyer visiting American attorneys in 13 law firms in Manhattan, saying he was an agent for an African minister who wanted to buy an apartment and yacht.  Lawyers from 12 of the 13 firms suggested using anonymous companies or trusts to hide the minister’s assets for the purchases.  Global Witness also obtained advice from John Leubsdorf, Distinguished Professor of Law and Judge Frederick B. Lacey, Distinguished Scholar, Rutgers School of Law, William H. Simon, Arthur Levitt Professor, Columbia Law School, and Gertrude and William Saunders, Professor Emeritus, Stanford Law School.  They opined that in their opinion, the conduct by three of the lawyers shown in these interviews does not comply with the professional responsibilities of lawyers asked for assistance with potentially unlawful transactions.  The ethics professors also stated “it would be desirable for the authorities to revise current doctrine to remove any ambiguity about how it (the ethics rule) applies to such conduct. Among the desirable changes would be a revision to Rule 1.2(d) of the Rules of Professional Conduct that makes explicit that it applies to prospective as well as accepted clients. Your investigation is of great public importance. It suggests a willingness on the part of prominent lawyers to assist corrupt officials to profit from betrayals of public trust” (parenthetical material added).[17]

The airing of the Global Witness undercover investigation has called attention to the problem of corporate transparency, gatekeeper standards, and the application of both to the purchase of real property in the U.S.  In 2006, the Financial Action Task Force found the U.S. non-compliant in corporate transparency and the gatekeeper standards.  At present, FATF is now conducting its evaluation of the U.S. compliance with the current standards.  On January 13, 2016, following investigative reports by the New York Times on anonymous purchases of luxury U.S. real estate by foreign persons, including some apparently corrupt politicians, using shell companies, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued Geographic Targeting orders that temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in the Borough of Manhattan and Miami-Dade County, Florida.[18]   The Global Witness undercover investigation illustrates the frustration of civil society and some of the international community with the failure of the U.S. federal and state governments to meet international transparency standards, even though the U.S. prioritizes the same in its foreign policy and sanctions foreign financial institutions and professionals when they violate U.S. financial laws, such as the Foreign Corrupt Practices Act, and tax and money laundering laws.

Notwithstanding the attention to the problem of the use of shell companies to purchase luxury property, yachts and the like in the U.S., the immediate prospects of passage of ITLEA are not favorable due to the fact that it is a Presidential election year and the Congress is controlled by Republicans, who are generally not favorable to increased government regulation. In addition, several key private sector groups, such as the American Bar Association and the Chamber of Commerce, continue to oppose the legislation.  Failure of the U.S. to act on corporate transparency and the gatekeeper standards undermines the representation by FATF, the OECD, the G20, the G7, and the Financial Stability Board that their reform initiatives on transparency and good governance have a level playing field, meaning that all countries must participate and comply equally.  U.S. non-compliance also undermines the integrity of these international initiatives.

While the U.S. employed economic coercion to make jurisdictions worldwide sign FATCA intergovernmental agreements and adopt new legislation and regulations, and change the electronic systems for exchanging information, the U.S. has refused to sign the OECD Common Reporting Standard.  The gap and the unlikelihood of the use to join the CRS has resulted in a flood of trust companies holding assets of non-U.S. persons to move to the U.S. to avoid the CRS.[19]

2.      European Parliament Adopts the Fourth Anti-Money Laundering Directive[20]

On May 20, 2015, the European Parliament adopted the 4th Anti-Money Laundering Directive, containing new rules to help combat money laundering and terrorist financing in the EU.

The proposal for a Fourth Directive implementing FATF (The Financial Action Task Force) Recommendations was issued by the Commission in February 2013 and has formed the object of intense negotiation within the Council and within the European Parliament for almost two years.[21]

The text approved represents a key achievement in the European anti-money laundering framework.  It implements the FATF Recommendations, thereby bringing EU countries up to the most advanced international standards.  In addition, the draft directive also goes well beyond these standards, establishing an ambitious set of provisions which are expected to allow Europe to make major progress in the fight against money laundering and terrorist financing.   In particular, in order to enhance transparency on company and trust ownership and provide authorities with effective tools to combat money laundering and terrorist financing, the text approved establishes in all European countries a centralized register of beneficial ownership information. The register will be accessible to competent authorities, Financial Intelligence Units (FIUs), obliged entities and persons able to demonstrate a legitimate interest in the field.

The draft Directive recognizes the importance of adopting a supranational approach to AML/CTF risks affecting the Union, entrusting the European Commission with the role of conducting a supranational risk assessment of these risks and making recommendations to the Member States in order to address them effectively. It also establishes a European approach to identify third countries which have strategic deficiencies in their AML framework. Provisions are also introduced in order to supervise more effectively the payment institutions operating cross border through agents. In addition, a whole set of new rules are provided  on the functions of and the co-operation between FIUs, which play a crucial role in the AML framework and are now provided with enhanced powers for exchanging information and collaborating  to find out money launderers operating cross border. In recognition of the seriousness and the cross-border nature of money laundering stemming from tax crimes, the Directive pushes to the largest extent possible the cooperation between FIUs in such cases.  The Directive will significantly enhance the traceability of funds transferred in the Union. Innovations are introduced on sanctions aimed at reinforcing compliance.

Article 2 states that the Directive applies to the “obliged entities”, which include credit institutions, financial institutions, and gatekeepers.  They include the following natural or legal persons acting in the exercise of their professional activities:  auditors, external accountants and tax advisors; notaries and other independent legal professionals, when they participate, whether by acting on behalf of and for their client in any financial or real estate transaction, or by assisting in the planning or execution of transactions for their client concerning the buying and selling of real property or business entities; managing of client money, securities or other assets; opening or management of bank, savings or securities accounts; organization of contributions necessary for the creation, operation or management of companies; creation, operation or management of trusts, companies, foundations, or similar structures; trust or company service providers;  estate agents and other natural or legal persons trading in goods to the extent that payments are made or received in cash in an amount of EUR 10,000 or more; and providers of gambling services.   The EU has successfully taken some gatekeepers, such as Belgian and French lawyers to the European Court of Justice to enforce compliance.

a.      Transparency of Legal Entities

One of the contentious issues concerned transparency of entities.  Article 29 requires EU members to ensure that corporate and other legal entities incorporated within their territory must obtain and hold adequate, accurate and current information on their beneficial ownership, including the details of the beneficial interests held. EU members must ensure that these entities are required to provide, in addition to information about their legal owner, information on the beneficial owner to obliged entities when the obliged entities are taking customer due diligence measures.   Article 29(2) requires EU members to require that the information can be accessed in a timely manner by competent authorities and Financial Intelligence Units (FIUs).  Under Article 29(3) EU Members must ensure that the information on beneficial ownership is held in a central register in each Member State.

EU Members must ensure that the information on beneficial ownership is accessible to competent authorities and FIUs, without restriction; to obliged entities, in the framework of the conduct of customer due diligence; and to any persons or organizations that can show a legitimate interest.  These persons or organizations will access at least the following information on the beneficial owner:  name; month and year of birth; nationality; country of residence; and nature and extent of beneficial interest held.  Access to the information on beneficial ownership must be in accordance with data protection rules and may be subject to online registration and to the payment of a fee.  The fees for obtaining the information must not exceed the administrative costs.

Under Article 29(9) EU Members can provide for an exemption to the access to all or part of the beneficial ownership.

Pursuant to Article 30(1) EU Members must require that trustees of any express trust obtain and hold adequate, accurate and current information on beneficial ownership regarding the trust.  The information will include the identity of the settlor, the trustee(s), the protector (if any), the beneficiaries or class of beneficiaries, and of any other natural person exercising effective control over the trust.

Under Article 30(2) EU Members must ensure that trustees disclose their status and provide in a timely manner the information to obliged entities, when, as a trustee, the trustee forms a business relationship or carries out an occasional transaction above the threshold  set forth in Article 10 for customer due diligence.

Under Article 31(4) EU Members must require that the information is held in a central register when the trust generates tax consequences.  The central register must ensure timely and unrestricted access by competent authorities and FIUs, without alerting the parties of the trust concerned.  It may also permit timely access by obliged entities when they are taking customer due diligence measures.  Article 31(7) requires EU Members to ensure that competent authorities and FIUs can provide information to the competent authorities and FIUs of other EU Members in a timely manner.  However, the register will not be as broadly available as the information concerning corporations and foundations.

b.      Third Country Policy

Article 8a in Section 3 requires the European Commission to identify third-country jurisdictions with strategic deficiencies in their national AML/CFT regimes that pose significant threats to the financial system of the EU in order to protect the proper operation of the internal market   Article 8a(1) authorizes the Commission to adopt delegated acts to identify high-risk third countries, taking into account strategic deficiencies, especially in relation to: the legal and institutional AML/CFT framework of the third country; the powers and procedures of the third country’s competent authorities for the purposes of combating money laundering and terrorist financing; or the effectiveness of the AML and CTF financing system in addressing money laundering or  terrorist financing risks of the third country.

c.       Due Diligence

The Directive requires banks and gatekeepers to increase the level of monitoring of their business relationships.  It tightens rules on simplified due diligence and situations where exemptions apply will no longer be allowed.  Decisions on when and how to carry out simplified due diligence will need to be justified on the basis of risk.  Politically Exposed Person (PEP) status is extended to domestic PEPs and to PEPs working in international organizations.  Articles 10-12 cover customer due diligence whereas Articles 16-23 require enhanced due diligence, such as certain cross border correspondent relationships and transactions with PEPs.

3.      G8 Adopts Action Plan Principles to Prevent the Misuse of Companies and Legal Arrangements

On June 18, 2013, at the G8 meeting in Northern Ireland, an action plan was adopted to prevent the misuse of companies and legal arrangements.  The action plan contains core principles that are essential to ensure the integrity of beneficial ownership and basic company information, the timely access to such information by law enforcement for investigative purposes, as well as, where appropriate, the legitimate commercial interests of the private sector.  A key element of the action is plan is that it was adopted “subject to our different constitutional circumstances, and understanding that a one-size-fits all approach” may not be the most effective.[22]

To implement the action plan, the G8 members committed to publish national action plans based on agreed upon principles that provide the concrete action each G8 member will take to counter money laundering and tax evasion.  To ensure that G8 members are accountable for their commitments, the G8 agrees to a process of self-reporting through a public update on the progress made against individual action plans and to inform the Financial Action Task Force (FATF).

A principle is that companies should know who owns and controls them and that their beneficial ownership and basic information should be adequate, accurate, and current.  As a result, companies should be required to obtain and hold their beneficial ownership and basic information, and ensure documentation of this information is accurate.

One of the goals behind the action plan is to make beneficial ownership available to law enforcement, tax administrations, and other relevant authorities, including financial intelligence units (FIUs).  The G8 action plan states that making beneficial ownership information available could be achieved through central registries of company beneficial ownership and basic information at the national or state level. Countries should consider measures to facilitate access to company beneficial ownership information by financial institutions and other regulated businesses.  Some basic company information should be publicly accessible.

Trustees of express trusts should know the beneficial ownership of the trust, including information on beneficiaries and settlers.  The information should be accessible by law enforcement, tax administrations, and other relevant authorities.

Authorities should understand the risks to which their anti-money laundering (AML) and counter-terrorism financial (CTF) regulatory regime is exposed and implement effective and proportionate measures to target those risks.  Appropriate information on the results of the risk assessments should be shared with relevant authorities, regulated businesses, and other jurisdictions.

The misuse of financial instruments and of certain shareholding structures which may obstruct transparency, such as bearer shares and nominee shareholders and directors, should be prevented.

Financial institutions and designated non-financial businesses and professionals, including trust and company service providers, should be subject to effective AML and CTF obligations to identify and verify the beneficial ownership of their customers.  Countries should ensure effective supervision of these obligations.

Effective, proportionate, and dissuasive sanctions should be available for companies, financial institutions, and other regulated businesses that do not comply with their respective obligations, including those regarding customer due diligence.  These sanctions should be robustly enforced.

National authorities should cooperate effectively both domestically and across borders to combat the abuse of companies and legal arrangements for illicit activity.  Countries should ensure that their relevant authorities can rapidly, constructively, and effectively provide basic company and beneficial ownership information upon request from foreign counterparts.[23]

On June 15, 2013, the United Kingdom announced that it would establish a central registry and will require companies to report beneficial ownership information to Companies House, the U.K. corporate registrar.  The U.K. has not yet decided whether to make the information available to the public.  The U.K. has also requested that its dependent territories also share beneficial ownership information.  Ten jurisdictions have agreed to publish action plans on beneficial ownership.[24]  On March 26, 2015, the U.K. gave Royal Asset to its own Company Transparency rules (this is expanded upon below in Section II, B, 4).

A major purpose of the action plan principles is to facilitate mutual assistance in criminal matters and tax enforcement cooperation.  At present, many requested states respond to requests that they do not have the right to request beneficial ownership information or that such information is not available because their national or subnational systems do not require the availability of such information.

An important element of the action plan principles is that they are subject to the different constitutional circumstances of each of the members.  In this regard, the Canadian courts have held unconstitutional and in violation of the Charter of Rights, the attorney-client relationship, and AML rules application to DNFBPs, namely lawyers.  In the United States, the American Bar Association has taken the position that some of the FATF principles (e.g., requiring lawyers to identify and report suspicious transactions) would violate the United States Constitution and the attorney-client relationship.  The real challenge for the action plan principles will be achieving a level playing field among countries and jurisdictions implementing the principles.

On June 6, 2014, the G-7, meeting in Brussels, Belgium after having disinvited Russia as punishment for its aggressive incursions in Ukraine, pledged to act on several international enforcement issues.   The declaration pledges to “continue to work to tackle tax evasion and illicit flows of finance, including by supporting developing countries to strengthen their tax base and help create stable and sustainable states.”

The declaration renews the commitment of the G-7 members “to deny safe haven to the proceeds of corruption, and to the recovery and return of stolen assets.”

The declaration restates the commitment to “prevent the misuse of companies and other legal arrangements such as trusts  to hide financial flows stemming from corruption, tax evasion, money laundering, and other crimes, ensuring that beneficial ownership information is available in a timely fashion to financial intelligence units, tax collection and law enforcement agencies, for example through central registries or other appropriate mechanisms, leading by example in implementing the Financial Action Task Force and other relevant international standards and our national action plans in line with the principles we agreed at Lough Erne. Greater transparency in this area will help developing countries.”[25]

4.      U.K. Enacts Company Transparency Rules and Sets Stage for Other Countries

On March 26, 2015, the United Kingdom gave Royal Assent to the Small Business, Enterprise and Employment Act 2015 (“the Act”).  The Act implements a series of reforms of the UK’s company law designed to improve the transparency and accountability of UK-incorporated companies.  The Act implements the G7 initiative of British Prime Minister David Cameron during the June 17-18, 2013 Lough Erne, Northern Ireland G-8 Summit.

a.      Register of Beneficial Owners

The substance of the measures in Schedule 3 of the Act.  §81 requires companies to keep a register of people who have significant control (PSC) over the company and to record the beneficial owners in a publicly accessible register.  However, in a change from the original bill, the Act does not extend to cover limited liability partnerships.

Companies will have to record the following:

  • Information on individuals who ultimately own or control more than 25 percent of a company’s shares or voting rights, or who otherwise exercise control over the company or its management, who are referred to as PSCs; and
  • Where a qualifying beneficial interest is held through a trust arrangement, information on trustees or any other natural persons exercising control over the activities of the trust.

The rules have “look through” nominee arrangements, since they require registration of beneficial ownership, as opposed to the registered ownership of the shares.  If there exists a chain of UK companies in a group structure, only the top UK company will need to maintain a PSC register.[26]

UK companies which are subject to Rule 5 of the Disclosure and Transparency Rules, namely companies listed on the Main Market of the London Stock Exchange or AIM, will be exempt from the requirement to keep a PSC register as they are deemed to be already subject to equivalent disclosure requirements.  A subsidiary of such an exempt company must only identify the relevant exempt company as the subsidiary’s beneficial owner.  It will not have to provide details on the owners of the exempt company.

Under §790K the company and PSCs must provide the PSC’s full name, date of birth, nationality, a service address,  country or state of usual residence, residential address,  date on which it acquired the beneficial interest in the company,  and details of that beneficial interest and how it is held, and the nature of his or her control over the company.  All the information, except for the PSC’s residential address will be publicly available.  In exceptional circumstances, the company can apply to the Registrar of Companies to protect certain beneficial owner information.[27]

The Act imposes the obligation to disclose the information on both the company and on the PSCs.  A UK company must take reasonable steps to discover the relevant information for inclusion in a PSC register and give notice demanding information to any person who may reasonably be a PSC.  The UK company’s directors may be liable to fines and imprisonment for failing to fulfill this obligation.

According to § 790D, a company that has a duty to report information has a duty to investigate and obtain information.  In that regard, a company with a duty to report  must take reasonable steps – (a) to find out if there is anyone who is a registrable person or a registrable relevant legal entity in relation to the company and if so, to identify them.   A company must give notice to anyone whom it knows or has reasonable cause to believe to be a registrable person or a registrable relevant legal entity in relation to it.

  • 790E requires a company to keep information up-to-date, such as if a “relevant change” occurs when the person ceases to be a registrable person in relation to the company, or any other change occurs as a result of which the particulars stated for the person in the PSC register are incorrect or incomplete.

A PSC must comply with any notice for information served on it by the UK company.  If a PSC fails to do so, then the UK company may follow a procedure to suspend the rights attached to the shares controlled by the suspected PSC and to prevent their transfer.  Although this procedure is optional, directors may want to follow this procedure to prevent incurring sanctions of its own.[28]

Under §790E a UK company has an obligation to keep information up-to-date.  The company must give notice to the person or entity if the company knows or has reasonable cause to believe that a relevant change has occurred.  In the case of a registrable person, a “relevant change” occurs if:  (a) the person ceases to be a registrable person in relation to the company, or any other change occurs as a result of which the particulars stated for the entity in the PSC register are incorrect or incomplete.

In the case of a registrable relevant legal entity, a “relevant change” occurs if – (a) the entity ceases to be a registrable relevant legal entity in relation to the company, or any other change occurs as a result of which the particulars stated for the entity in the PSC register are incorrect or incomplete.

b.      Penalties

  • 790F provides that, if a company fails to comply with a duty to investigate and confirm information or keep information up-to-date or to take steps or give notice, an offense is committed by the company and every officer of the company who is in default. A person guilty of an offense under this section is liable upon conviction on indictment, to imprisonment for a term not exceeding two years or a fine (or both).

c.       Register Must Be Kept Available for Inspection

  • 790N requires a company’s PSC register to be kept available for inspection – (a) at its registered office, or (b) at a place specified in regulations under § 1136. A company must give notice to the registrar of the place where its PSC register is kept available for inspection and of any change in that place.  However, a company need not give notice if the register has, at all times since it came into existence, been available for inspection at the company’s registered office.  If a company makes default for 14 days in complying with the obligation to give notice to the registrar of the place where its PSC register is kept available for inspection, an offense is committed by the company, and every officer of the company is in default.  A person guilty of an offense under this section is liable on summary conviction to a fine not exceeding level 3 on the standard scale and, for continued contravention, a daily default fine not exceeding one-tenth of level 3 on the standard scale.

d.      Bearer Shares Prohibited

  • 84 precludes UK-incorporated companies from issuing new “bearer shares” after May 26, 2015. Hence, shares that are owned by the holder of share certificate, but for which there is no formal register of holders are barred. By February 26, 2016, all companies must have converted any existing bearer shares into registered shares.

Any existing bearer shares will have their associated rights automatically suspended, and will not be able to transfer them, as of December 26, 2015.[29]

Schedule 4 provides for arrangements by which share warrants issued before this section comes into force are to be converted into registered shares or cancelled.

e.       Prohibition of Corporate Directors

From October 2015, the Act prohibits the use of corporate directors, that is, a company acting as a director of another company.  Instead, only a natural person can be appointed director.   An appointment in contravention of these provisions is void. Although the Secretary of State may publish exceptions to this rule, it has not yet published exceptions and has not stated whether it plans to do so.

Any existing corporate directors serving before October 2015 will automatically cease to be regarded as such as from March 26, 2016.

f.        Analysis

            The UK Department for Business, Innovation & Skills (BIS) has issued guidance on a provision implementation plan for Parts 7 and 8 of the Small Business, Enterprise and Employment Bill.  In Phase 1, two months after the Royal Assent of the bill, companies will no longer be able to issue bearer shares.  The nine month conversion period for existing companies will start from this point.  Hence, already companies cannot issue bearer shares.  The nine month conversion started May 26, 2015.  In Phase 2 (October 2015), the prohibition of corporate directors, with exceptions, came into force.  The Department for Business, Innovation & Skills is currently consulting on what those exceptions should be.[30]

Some of the transparency of entities provisions are found in the European Union’s Fourth Anti-Money Laundering Directive.

Prime Minister Cameron has demanded that the UK dependent territories adopt public registers although until now they have not agreed to do so.

One of the loopholes in the Act is the fact that, when trusts hold shares, only the names of the trustees or persons controlling the shares must be disclosed.  As a result, the beneficial owners will not be disclosed.  Similarly, the exclusion of limited liability partnerships from the Act means that some planning structures may decide to use LLPs rather than companies.

Until now it remains to be seen whether and how other G7 countries, especially the United States will implement the promises to implement the transparency of entities initiative.  UK dependent territories and other jurisdictions with international financial services do not want to become uncompetitive in international financial services because investors want to use jurisdictions with confidentiality provisions.

The Act is important because it may well provide a model for the company transparency legislation elsewhere in the world, especially in the UK dependent territories and in the Commonwealth countries.

A key purpose of the legislation is to follow Cameron’s pledge at the 2013 Lough Erne G-8 Summit and force other jurisdictions to comply with the UK’s notions of tax transparency.  To accomplish this, Cameron’s government must present the UK as having clean hands and a strong regime against the misuse of companies whose beneficial owners are secret.[31]

5.      Anonymous Foreign Investment in U.S. Real Estate

Fueled apparently by the potential to anonymously invest, significant foreign investment is made each year in U.S. real estate, especially luxury homes.  A recent initiative by the Cameron Administration in England underscores the gap between England and the U.S. in the transparency of foreign investment in real estate.

a.      Lack of Regulation and the FinCEN Geographic Targeting Orders

An area in which foreign investors have exploited is the ability to invest in U.S. real estate anonymously.  On January 13, 2016, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) issued Geographic Targeting orders (GTO) that temporarily require certain U.S. title insurance companies to identify the natural persons behind companies used to pay “all cash” for high-end residential real estate in the Borough of Manhattan in New York City, New York, and Miami-Dade County, Florida.  FinCEN has required the information reporting on all-cash purchases – i.e., those without bank financing – that may be conducted by individuals trying to hide their assets and identity by purchasing residential properties through limited liability companies or other opaque structures.  FinCEN is requiring certain title insurance companies to identify and report the true “beneficial owner” behind a legal entity involved in certain high-end residential real estate transactions in Manhattan and Miami-Dade County.

U.S. law enables the Director of FinCEN to issue an order that imposes certain additional recordkeeping and reporting requirements on one or more domestic financial institutions or nonfinancial trades or businesses in a geographic area.   The Director of FinCEN has based the order on a finding that reasonable grounds exist for concluding that the additional recordkeeping and reporting requirements are required to carry out the purposes of the Bank Secrecy Act and prevent evasions.

With respect to Miami, real estate transactions in excess of $1 million are covered when such a purchase is made without a bank loan or other similar form of external financing; and is made, at least in part, using currency or a cashier’s check, a certified check, a traveler’s check, or a money order in any form.  In the case of residential real property located in the Borough of Manhattan in New York, New York, the total purchase price must be in excess of $3 million.

The Order requires a title insurance company to file FinCEN Form 8300 within 30 days of the closing of the Covered Transaction.  On the form the title insurance company must identify, in the case that the purchaser is a legal entity, the  beneficial owner, defined as meaning “each individual who directly or indirectly, owns 25% or more of the equity interests of the purchaser.”  The title insurance company must also obtain information about the identity of the individual primarily responsible for representing the purchaser.  For both the identity of the individual primarily responsible for representing the purchaser and the purchaser, the title insurance company must obtain and record a copy of this individual’s driver’s license, passport, or other similar identifying documentation and describe such documentation on Form 8300.

The title insurance company handling a transaction must supervise, and is responsible for, compliance by each of its officers, directors, employees, and agents with the terms of the order.  They must transmit the order to each of their agents and the Chief Executive Officers or similarly acting managers.  If the title insurance companies or any of their officers, directors, employees, and agents violate the order, they may liable for civil or criminal penalties.  One commentator said a former investigator speculated that federal agencies may conduct undercover stings at title companies to ensure they are abiding by the terms of the order.

Once the information is reported to FinCEN, it will be made available to law enforcement investigators as part of FinCEN’s database. The information obtained will help identify natural persons involved in transactions vulnerable to abuse for money laundering by preventing individuals from disguising their involvement in the purchase.

The orders will be in effect for 180 days starting on March 1, 2016.  They will expire on August 27, 2016.

According to the National Association of Realtors, cash purchases compose more than 20 percent of home purchases nationally, down from a  peak of 33 percent in late 2013, but still higher than the traditional 10 percent.   However, cash purchases are a disproportionate amount of the market in Miami and New York.  In Miami, according to the Miami Association of Realtors, all cash deals were more than 50 percent of the sales as of November.

FinCEN’s order comes after a series in the NEW YORK TIMES that examined the use of shell companies by foreign owners.   The series examined a decade of ownership in the Time Warner Center, a condominium complex near Central Park.  It found a number of hidden owners who had been the subjects of government investigations.  They included former Russian senators, a former governor from Colombia, a British financier, and a businessman linked to the prime minister of Malaysia, who is now the subject of investigations.  The series discussed a condominium in Boca Raton linked to Mexico’s top housing official, who recently resigned and is currently a leading contender for the governor’s office in the state of Oaxaca.

In the spring of 2015, New York City’s Finance Department started requiring shell companies buying real estate to report their members to the city.

The National Association of Realtors is supporting the move by the Treasury Department as a “reasonable” approach to combat the problem of money laundering.

Global Witness called for the U.S. Treasury to expand the GTO to the entire country, to make it permanent and to place the ownership information in the public domain.  Global Witness observed that although the PATRIOT Act covers the real estate sector in implementing anti-money laundering and counter-terrorist financial regulatory policies, Treasury has granted the sector a temporary exemption more than thirteen years ago and should end the exemption, bringing the U.S. in line with global standards.

Meanwhile, in an editorial the NEW YORK TIMES said the crux of the problem  is that states – especially Delaware, Nevada and Wyoming, motivated by a desire to earn corporation filing fees, legal costs and related revenue, have facilitated the quick and cheap establishment of shell companies without providing any personal information.  The use of tiered-layers in structuring foreign investment in U.S. real estate has allowed owners to shield their identities from law enforcement and regulators.

The NEW YORK TIMES observes that, at the end of the 180-day period, FinCEN, after studying trends and activities, will decide whether to extend and broaden the program.  According to the editorial “(i)t is absurd that regulators would not require such basic transparency as a matter of course.  The current system practically condones money laundering and tax evasion.”

The GTOs and the debate surrounding them illustrates the problem with emerging international anti-money laundering (AML) standards.  There is a lack of uniform application and consistency throughout the world of AML standards.  At the time of the GTO, whispers were that the Financial Transactions and Reports Analysis Centre of Canada (“FINTRAC”), may issue a comparable order for high value residential transactions in Vancouver.

Despite Congressional investigations, investigative stories by major media, and an undercover sting done by a civil society and carried on “60 Minutes,” it remains easy for foreign officials to use shell companies to anonymously own luxury property in the U.S. [32]

b.      Prime Minister Cameron Announces Initiatives to Improve Transparency on Property Owned by Foreign Companies

The lack of transparency in foreign investment in U.S. real estate contrasts with the initiative announced by English Prime Minister David Cameron. On July 28, 2015, speaking in Singapore Mr. Cameron announced an initiative to prevent corrupt offshore companies from using the UK property market to launder “dirty money”.

Cameron announced that, as a first step, he has “asked the Land Registry to publish this autumn data on which foreign companies own which land and property titles in England and Wales. This will apply to around 100,000 titles held on the Land Register and will show for the first time the full set of titles owned by foreign companies.”

In addition, his government “will also look carefully at the case for insisting that any non-UK company wishing to bid on a contract with the UK government should also publically state who really owns it using the government’s buying power as  if you like, battering ram for greater corporate transparency around the world.”[33]

Cameron challenged every country “to ensure transparency over what your own companies are doing; require transparency for foreign companies in your country too and work with us to spread this approach to transparency around the world.”

According to Cameron, these themes will be a vital part of the Anti-Corruption Summit he will host in London next year.  The Summit will provide a platform for the whole world to cooperate to strengthen all the anti-corruption tools.[34]

Much of the property boom in recent years, especially in the luxury sector, has been attributed to foreign buyers who perceive the UK, especially London, as an attractive place to invest.  UK police said in most grand corruption cases that they investigated; proceeds were used to purchase high-end properties.  Since 2004, London police have investigated 144 property purchases worth £180 million.

The Land Registry lists legal owners, which include 2.2 million UK companies and more than 90,000 entities registered in third countries, principally international financial centers, but not beneficial owners.[35]

Cameron explained that, when Britain first announced in 2011 the creation of a partnership of countries that would make commitments on transparency – the Open Government Partnership – many people doubted it would amount to much.[36]  However, today 65 countries have made over 2,000 commitments on transparency and openness from pioneering citizens’ budgets in Liberia to letting the public audit major government projects in the Philippines. It’s making a difference.  Cameron explained that with the new Global Goals that will be announced in New York this September the international community is set to secure for the first time a concrete commitment to reduce corruption and bribery in all its forms.[37]

Cameron continued that, when he put tax, trade and transparency at the top of the G8 agenda for the first time back in Lough Erne in Northern Ireland two years ago, many thought it would be another one of those communiques with words that don’t really mean anything.  However, today he noted over 90 countries – including Singapore – have agreed to share their tax information automatically by the end of 2018.[38]

According to Nick Maxwell, Head of Advocacy and Research at Transparency International (TI), in March 2015, it called on the UK government to #unmaskthecorrupt and end corporate secrecy over, at least, property ownership.  TI remarked that the detail of the consultation will be important.  TI suggested that the government needs to consider all the other at-risk sectors, including luxury goods, and professional services like finance, legal and accountancy services.  The important component now is for other G20 governments to improve their own frameworks for company transparency.  In addition, the UK government will need to take additional steps, such as cleaning up money and lobbying in politics and ensuring its anti-bribery legislation is not diluted.[39]

Maxwell pointed out that the Cameron announcement in Singapore endorses TI’s main recommendation in the “Corruption on Your Doorstep” paper (March 2015) and its campaign.[40]

Clearly Prime Minister Cameron has exerted substantial leadership in combatting transnational corruption and promoting entity transparency.  His proposals to unmask the corrupt capital behind property ownership are the latest twist.  Throughout his initiatives civil society groups, such as TI, Global Witness, Global Financial Integrity, and other NGOs, have been in the forefront of their efforts to develop transparent regimes and facilitate stronger international government networks on transparency and good governance.[41]  For instance, a coalition of NGOs, in which TI participated, has been actively engaging international organizations, such as the World Bank Group, and informal groups such as the G20.[42]

6.      The Gatekeeper Initiative and the U.S. Gap

Since the FATF found the U.S. non-compliant in 2006 with the 2003 gatekeeper standards, the only developments have been that the American Bar Association in August 9-10, 2010, adopted the   Voluntary Good Practices for Lawyers to Detect and Combat Money Laundering and Terrorist Financing.

The United States is scheduled to undergo the on-site visit for its Fourth Mutual Evaluation in early 2016, with the FATF Plenary Discussion tentatively scheduled for October 2016.

A limitation of the Voluntary Good Practices is that neither the ABA model rules or the state professional rules have incorporated the voluntary good practices into the actual standards.  As a result, lawyers cannot be reprimanded or disciplined for not adhering to the voluntary good practices.

Recommendation 24(b) states:

“Countries should ensure that the other categories of designated non-financial businesses and professions are subject to effective systems for monitoring and ensuring their compliance with requirements to combat money laundering and terrorist financing. This should be performed on a risk-sensitive basis. This may be performed by a government authority or by an appropriate self-regulatory organization, provided that such an organization can ensure that its members comply with their obligations to combat money laundering and terrorist financing.”[43]

Since the Voluntary Good Practices have not been incorporated into any of the states’ professional rules, none of the state bars audit lawyers’ offices to ascertain compliance.

Already the U.S. bar associations do not apply the requirements in the FATF for gatekeepers to make suspicious activity reports and then not to tip off clients that a suspicious activity report was made.  FATF Recommendation  22  applies  to “designated  non-financial  businesses  and  professions”  (DNFBPs),  meaning in  FATF parlance to  include  casinos,  real  estate  agents,  precious  metal  dealers,  trust  and  company service providers, and “lawyers, notaries, other independent legal professionals and  accountants.”   According to Recommendation  22,   when  these  DNFBPs  engage  in certain specified activities,  they must comply with customer due diligence and record-keeping  requirements  set  out  in  other  Recommendations.

Recommendation  23 supplements Recommendation 22.  It provides for suspicious activity reports requirements for the DNFBPs.  It states that DNFBPs, which include lawyers, “should be required to  report  suspicious  transactions  when,  on  behalf  of  or  for  a  client,  they  engage  in  a  financial  transaction  in  relation  to  the  activities  described  in  paragraph  (d)  of  Recommendation 22.”[44]

Due to the vigorous objections from legal professionals  and  government  representatives,  the  Recommendations  include  an  Interpretative Note to Recommendation 23, which states that lawyers and other legal professionals  “are  not  required  to  report  suspicious  transactions  if  the  relevant  information  was  obtained  in  circumstances  where  they  are  subject  to  professional  secrecy or legal professional privilege.[45]



  • Lawyers, notaries, other independent legal professionals, and accountants acting as independent legal professionals, are not required to report suspicious transactions if  the  relevant  information  was  obtained  in  circumstances  where  they  are  subject  to  professional secrecy or legal professional privilege.
  • It is  for  each  country  to  determine  the  matters  that  would  fall  under  legal             professional privilege or professional secrecy. This would normally cover information lawyers,  notaries  or  other  independent  legal  professionals  receive  from  or  obtain  through  one  of  their  clients:  (a)  in  the  course  of  ascertaining  the  legal  position  of  their client, or (b) in performing their task of defending or representing that client in, or concerning judicial, administrative, arbitration or mediation proceedings.
  • Countries may  allow  lawyers,  notaries,  other  independent  legal  professionals  and  accountants  to  send  their  STR  to  their  appropriate  self-regulatory  organizations,  provided that there are appropriate forms of cooperation between these organizations  and the FIU.
  • Where lawyers,  notaries,  other  independent  legal  professionals  and  accountants acting as independent legal professionals seek to dissuade a client from engaging in illegal activity, this does not amount to tipping-off.”[46]

The “no-tipping-off” rule prohibits a lawyer from advising a client that the lawyer has submitted a suspicious transaction report regarding that client.

The FATF’s efforts to establish anti- money laundering and terrorist financing standards, in addition to promulgating the Recommendations  and subjecting its members to the mutual evaluation process, involves the issuance of various advisory papers and other documents.[47]  A risk-based assessment contrasts to a rigid rules-based “check-off-the-box” approach.   The idea is that everyone  benefits  if  a  potential  “gatekeeper” concentrates its resources on those clients and customers that pose the greatest  risk.   One  of  the  most  important  documents  from  the  legal  profession concerning this is  “Dirty Money: Assessing Assessments of Regimes to Control Money-Laundering and Combat the  Financing  of  Terrorism”.[48]

The FATF RBA is “high level guidance intended to provide a broad framework for implementing a risk-based approach for the legal profession.” It applies to lawyers who are engaged in one of five specified activities: “[1] buying and selling of real estate; [2] managing of client money, securities or other assets; [3] management of bank, savings or securities accounts; [4] organization of contributions for the creation, operation or management of companies; and [5] creation, operation or management of legal persons or arrangements, and buying and selling of business entities.”[49]

7.      The Mixture of Lack of Entity Transparency and Foreign Investment in U.S. Real Estate

One of the current U.S. states with proposed tax haven legislation is Colorado.[50]  With respect to the proposed Colorado tax haven law, one can point out the following:

  • Colorado does not comply with international standards on corporate/entity transparency or gatekeepers (e.g., FATF, OECD);
  • Colorado offers quick and inexpensive incorporations, including LLCs whereby, according to GAO and other reliable reports, are used by foreigners and others as instrumentalities of crime and launder proceeds of crime;
  • Colorado has incentives for captive insurance companies;
  • Colorado has no laws on and facilitates the use of shell companies to purchase real estate and other assets to launder drug proceeds in violation of international standards;[51]
  • Colorado offers financial and other assistance for aspiring and current Colorado exporters
  • Colorado offers financial assistance for tourism companies; and
  • Colorado offers financial assistance and incentives for film production.

Colorado illustrates how failure to meet entity transparency and real estate investment transparency facilitate anonymous investment by transnational organized crime into Colorado and how simultaneously Colorado’s tax haven initiative illustrates the hypocrisy of the U.S. and even some of the states adopting tax haven initiatives while increasing their own financial incentives and regulatory arbitrage to attract foreign investment.

8.      Gaps in Automatic Exchange of Information

The gaps between what the U.S. has required foreign tax authorities to exchange automatically, compared with the information the U.S. is required to give, create the potential and likelihood that some non-U.S. persons want to avoid reporting for legitimate reasons will move their financial structures to the U.S.[52]

On February 13, 2014, the Organization for Economic Cooperation and Development (OECD) unveiled the first half of its model framework for automatic exchange of tax information, which the U.S. and other major countries have awaited as a major weapon to fight offshore tax evasion.[53]

The Common Reporting Standard (CRS) was developed by the OECD together with G-20 countries.  It calls on jurisdictions to obtain information from their financial institutions and exchange that information automatically with other jurisdictions on an annual basis. It sets out the financial account information to be exchanged, the financial institutions that need to report, the different types of accounts and taxpayers covered, as well as common due diligence procedures to be followed by financial institutions.

The OECD formally presented the standard for the endorsement of G-20 finance ministers during a February 22-23, 2014 meeting in Sydney, Australia. The G-20 invited the OECD to develop a global standard on automatic exchange of information in 2013 and remains the driving force behind the move toward greater tax transparency worldwide.[54]

The CRS emulates the U.S. Foreign Account Tax Compliance Act (FATCA) Intergovernmental Agreements (IGAs). The new standard draws extensively on previous OECD work on the automatic exchange of information. It incorporates progress made in this area within the European Union and ongoing efforts to reinforce global anti-money laundering standards, which has played in the G-20 move towards automatic exchange of information in a multilateral context.[55]

With the OECD’s Common Reporting Standard, the Standard for Automatic Exchange consists of the following: the Common Reporting Standard (“CRS”) that contains the due diligence rules for financial institutions to follow to collect and then report the information, that underpin the automatic exchange of financial information; the Model Competent Authority Agreement (“CAA”) that links the CRS to the legal basis for exchange, specifying the financial information to be exchanged; the Commentaries that illustrate and interpret the CAA and the CRS; and guidance on technical solutions, including an XML schema to be used for exchanging the information and standards in relation to data safeguards and confidentiality, transmission and encryption.

Until now, the U.S. has decided not to participate in the CRS.  On March 14, 2016, IRS Commissioner John Koskinen said Congress should pass legislation to allow the IRS to participate in the internationally agreed common reporting standard (CRS) for automatic exchange of financial account information.  “I think it only makes sense for [the IRS] to move in that direction,” Koskinen told the audience at a Tax Executives Institute conference in Washington. “The reason we haven’t signed is we don’t have the legal authority to provide . . . the range of information that other countries are prepared to show to each other, and with us.” Questions remain about how much data the IRS can share about individual taxpayers under the existing statutory framework, he said.[56]

Even under FATCA Intergovernmental Agreements, the IRS will not give its “reciprocal” FATCA partners any information about: (1) depository (i.e., cash) accounts held by entities, even entities resident in the FATCA partner country; (2) non-cash accounts, whether held by individuals or entities, even those that are resident in the FATCA partner country, unless the accounts earn U.S. source income; or (3) the controlling persons of any entities, whether the entities are from the reciprocal partner country or from third countries, and even if those entities are owned and controlled by residents of the reciprocal partner country.

As a result, a non-U.S. individual wanting to avoid disclosure under an IGA can hold the following accounts in a U.S. financial institution:  (1) holding cash account through an entity; or (2) block non-cash accounts for assets that produce U.S.-source income, such as securities or if an individual wants to invest in U.S. securities, then just as with cash accounts, the individual should hold the account through an entity.[57]  The structures assume that fully compliant taxpayers who merely want to minimize reporting for legitimate reasons and who respect all corporate formalities are using the entities.[58]

Planning in the form of moving structures to the U.S. exists under GATCA as well.  GATCA is the UK regime equivalent to FATCA in place between the UK and the 10 Crown Dependencies (CDs) and Overseas Territories (OTs).  The 10 jurisdictions in which UK CDOT applies is Anguilla, Bermuda, the BVI, Cayman, Gibraltar, Guernsey, the Isle of Man, Jersey, Montserrat, and Turks & Caicos.  According to HMRC Guidance Notes, the intent to maximize consistency between IGAs and those between CDs and OTs to minimize additional costs.

The U.S. is not expected to enter into GATCA in the foreseeable future because most of the data that GATCA requires to be exchanged is not currently reported to the IRS by U.S. financial institutions.  Additionally, the U.S. law is unlikely to be amended in the near future to permit the IRS to collect the required data.  Since the Republicans control Congress and already Senator Rand Paul and the Florida and Texas Bankers’ Associations have sued to stop the implementation of FATCA, U.S. politics do not seem amenable to enacting new legislation.[59]

If the U.S. does not conclude GATCA agreements, its financial institutions will not report any non-U.S. persons under that regime.  Hence, an individual wanting to avoid reporting under GATCA can move his or her assets to a financial institution resident in the U.S. for GATCA purposes. An individual will need to ensure that the assets are held through a client structure that is itself resident in a participating jurisdiction.   In particular, a trust with a U.S.-resident  trustee but structured as a non-U.S. trust for U.S. tax purposes, should be well situated for this purpose, since it will avoid GATCA and FATCA reporting while simultaneously avoiding U.S. taxation.[60]



Notwithstanding all of the tax and regulatory carve-outs the federal and state governments provide to attract foreign investment, seven states have enacted tax haven legislation.  The laws seek to expand the scope of state taxation to encompass income earned by foreign subsidiaries in countries that a state defines as tax haven jurisdictions.[61]  Even though the Treasury includes states in TIEAs with Canada and Mexico and the Multilateral Convention on Administrative Assistance in Tax Matters, Treasury tells foreign jurisdictions that it has no authority to intervene in state taxation.[62]  Some states have issued blacklists based on lists that the OECD has not maintained for over a decade.  These lists are arbitrary and nonmanageable.  States continue to develop new legislation even though the laws bring reduced business employment and investment, potential foreign retaliation, and constitutional challenges.[63]



Among the potential solutions to rectify the lack of a level playing field is to reform the international financial architecture, so that small jurisdictions have a real seat at the table in international organizations and informal groups when decisions are made.  The decisions should have  more transparency so that governments, the private sector and civil society can review the record of the decisions.

A.     Reforming the International Financial Architecture

Most importantly, the international financial architecture is badly flawed.  Policy should be made mostly by bodies with universal membership, such as the UN and the IMF.  The FATF is an elite club.  There must be an international body which is making and implementing anti-money laundering standards.  Since U.S. states are sovereign, make their own ring-fenced financial incentives and hand out regulatory arbitrage, and since their economies are often 3 to 100 times larger than many countries, the states (not the U.S.) must be evaluated.  The FATF acts through reginal FATF-style bodies, but the FATF often ignores and has overriden the work of its regional bodies.

The U.S. blocks efforts to have tax policy conducted by the UN and the IMF.  The OECD has created the Global Forum on Transparency and Exchange of Information for Tax Purposes.  The FATF is not a formal organization, but rather an elite club.  The OECD controls the agenda and even information given to the Global Forum members who attend the meetings, so that the attendees’ opportunities to influence the agenda or the deliberations is diminished.

There must be an international body which is making and implementing anti-money laundering standards.  The body should be transparent, so that interested countries and persons worldwide can participate.  There needs to be a complete record of the deliberations and decision-making by FATF. When FATF makes decisions, it does so behind closed doors without a record of its deliberations.

The FATF acts through regional FATF-style bodies, but the FATF often ignores and has overriden the work of its regional bodies.

Since U.S. states are sovereign, make their own ring-fenced financial incentives and hand out regulatory arbitrage in violation of international standards, and since their economies are often 3 to 100 times larger than many countries, the states (not the U.S.) must be evaluated.

Until they are evaluated and subject to countermeasures directly, the AML standards will continue to suffer from a lack of level playing field and legitimacy.

Similarly, until the states pledge to abide by and meet corporate and tax transparency rules, they will continue to develop their other carve outs from the regulations while giving financial incentives in violation of the international rules.

Until they are subject to the Global Forum standards, they will not meet international tax standards and continue to use financial incentives to expand their market share of financial services businesses at the expense of small jurisdictions.

Meanwhile, small jurisdictions should have a permanent membership on FATF, which could rotate among countries participating in the FATF-style regional bodies.

Ultimately there should be a World Tax Organization with near-universal membership, similar to the World Trade Organization.

B.     WTO Dispute Panel

Another potential solution to the unfair trade practices is to convene a WTO dispute panel as Panama did against Argentina.[64]

The WTO in DS 453 found that the various measures imposed by Argentina on services and service suppliers from countries with Argentina classifies as “countries not cooperating for tax transparency purposes” violated the most-favored national (MMFN) obligations under the WTO’s General Agreement on Trade in Services (GATS).

In dispute was a 2013 Argentine Decree, which says that a cooperative country must have an agreement with Argentina for effective exchange of information practice, or fulfil necessary requirements for initiating talks.

By signing such agreements, which “shall as far as possible comply with the international standards on transparency adopted by the Global Forum on Transparency and exchange of Information for Tax Purposes,” countries cannot invoke banking, stock market, or any other form of secrecy in response to specific information requests from Argentina.

In the list published by Argentine authorities in Jan. 2014 more than 100 countries, including Panama, were considered cooperative countries.

Under the GATS, members must give most-favored nation treatment to all “like” foreign services or service suppliers.

The panel said that services and service suppliers of cooperative and non-cooperative countries are “like” under the GATS, given that the difference in treatment inherent in these measures is due to origin, not “other factor[s].”[65]

The panel found that the eight measures each establish different treatment according to whether the services and service suppliers are from cooperative or non-cooperative countries.

This difference is not due to whether Argentina has access to tax information.

For the panel, the measures’ design and operation adversely affect competition conditions for services and service suppliers of non-cooperative countries.[66]



[1]    Matthew Valencia, The biggest loophole of all, The Economist, Feb. 20, 2016; Jesse Drucker, The World’s Favorite Tax Haven Is the United States, Bloomberg Businessweek, Jan. 27, 2016


[2]    Chris Brummer, MINILATERALISM:  HOW TRADE ALLIANCES, SOFT LAW, AND FINANCIAL ENGINEERING ARE REDEFINING ECONOMIC STATECRAFT (Cambridge Univ. Press 2014); Bruce Zagaris, Application of Minilateralism to International Tax Policy, 76 Tax Notes Int’l 345 (Oct. 27, 2014).

[3]    Australian Taxation Office, Joint International Tax Shelter Information Centre (JITSIC) (accessed Nov. 21, 2015).


[4]    U.S. Department of Treasury, Joint Statement regarding an Intergovernmental Approach to Improving International Tax Compliance and Implementing FATCA, Feb. 8, 2012; Bruce Zagaris, Analysis of Current Intergovernmental Agreements, William H. Byrnes and Robert J. Munro (eds.), LexisNexis Guide to FATCA Compliance (2015).


[5]    See FATF, International Standards on Combatting Money Laundering and the Financing of Terrorism and Proliferation (2012)


[6]     For a discussion of FATF mutual evaluations, see FATF, Mutual Evaluations (accessed Nov. 21, 2015).


[7]    Frans Vanistendael, Are BEPS, FATCA, and EU Compliance Efforts Moving in the Same Direction? 2014 Worldwide Tax Daily 151, Aug. 6, 2014.

[8]    David M. Steingold, How Single-Member LLCs Pay Federal Income Tax


[9]    For a list of both U.S. and non-U.S. captive domiciles, along with a description and text of their laws, regulations, and forms, see Captive Domicile Showcases,, accessed March 28, 2016.


[10]   Dana Hentges Sheridan, Jay Adkisson, Choice of Domicile in Captive Insurance Planning, Business Law Today (Feb 2014) (undated) accessed Mar. 28, 2016.


[11]   Anthony J. Sometiuk, EB-5 Fraud Highlights Risk of Investor Program,  Forbes, Jan. 5, 2015;     Peter Elkind,  Marty Jones, The dark, disturbing world of the visa-for-sale program, Fortune, July 14, 2014  (“because the EB-5 industry is virtually unregulated, it has become a magnet for amateurs, pipe-dreamers, and charlatans…”); U.S. Securities and Exchange Commission, Investor Alert: Investment Scams Exploit Immigrant Investor Program, Oct. 9, 2013  (The U.S. Securities and Exchange Commission’s Office of Investor Education and Advocacy and U.S. Citizenship and Immigration Services are jointly issuing this Investor Alert to warn individual investors about fraudulent investment scams that exploit the Immigrant Investor Program, also known as “EB-5.”).

[12]   See, e.g., U.S. Senate Permanent Subcommittee on Investigations, “Keeping Foreign Corruption out of the United States,” S.Hrg. 111-540 (Feb. 4, 2010); “Tax Haven Banks and U.S. Tax Compliance,” S.Hrg. 110-614 (July 17 and 25, 2008); “Tax Haven Abuses:  The Enablers, The Tools and Secrecy,” S.Hrg. 109-797 (Aug. 1, 2006); “Money Laundering and Foreign Corruption:  Enforcement and Effectiveness of the of the Patriot Act,” S.Hrg. 108-633 (July 15, 2004); “Role of U.S. Correspondent Banking in International Money Laundering,” S.Hrg. 107-84 (March 1, 2 and 6, 2001); and “Private Banking and Money Laundering:  A Case Study of Opportunities and Vulnerabilities,” S. Hrg. 106-428 (Nov. 9 and 10, 1099); See also U.S. Senate Committee on Homeland Security and Governmental Affairs, “State Business Incorporation – 2009,” S.Hrg. 111-953 (June 18 and Nov. 5, 2009).


[13]   General Accountability Office, Company Formations:  Minimal Ownership Information Is Collected and Available GAO-06-376 (April 2006); General Accountability Office, Suspicious Banking Activities:  Possible Money Laundering By U.S. Corporations formed for Russian Entities GAO-01-120 (Oct. 31, 2000).


[14]   Bruce Zagaris, U.S. Government’s Ability to Obtain and Provide International Enforcement Constrained by Budget, Failure to Meet International Standards, and Join International Initiatives, 31 Int’l Enforcement L. Rep. 514 (Dec. 3015). (A limitation on OIA’s ability to process MLATs to and from the U.S. is that its case management system for managing its case work has not had a significant upgrade since its implementation in 1999.  Hence, a lack of transparency exists for OIA to see the progress of each request at each iterative step, e.g., receipt of the request, conclusion of review by OIA, receipt of the request by a U.S. Attorney’s Office, court order date, and date evidence when it was received.  More importantly, a significant source of frustration for OIA’s state, local and foreign partners is that no public-facing system or website is available for them to monitor the status of their requests.)


[15]   Id.  The FY 2015 proposal was for $3.2 million and 14 positions (7 agents).  The FBI will establish a dedicated MLAT unit that will centralize and standardize a variety of FBI responsibilities related to MLAT requests.  This until will manage the intake, tracking, and management of all MLAT requests and will provide training to FBI Legats and their foreign partners in the MLAT process and structure of requests.  This unit will also provide outreach to ISPs (internet service providers) to ensure the transparency of legal requirements and processes. Similarly, the FY 2016 President’s Budget for DOJ mentions the shortage of OIA resources at a time when MLAT requests are dramatically increasing.  For instance, in fiscal year 2014, OIA opened 3,270 foreign requests for assistance.  That same year, OIA granted assistance in whole or in part, in 1,465 cases or 45% of the requests. While its workload has dramatically increased, OIA has seen minimal changes in its staffing, and in fact suffered significant attrition during the DOJ-wide hiring freeze.


[16]   For background on the introduction of ITLEA, see Carolyn B. Maloney, Reps Maloney, King and Senator Whitehouse introduce bills to stop anonymous money laundering operations by requiring disclosure of shell corporation beneficial owners, Press Release, Feb. 3, 2016


[17]   Letter from ethics professors to Global Witness, dated Feb. 28, 2016, re Professional Responsibility Assessment of Lawyer Interview Transcripts. Global Witness, Lowering the Bar


[18]   U.S. Department of the Treasury FinCEN, FinCEN Takes Aims at Real Estate Secrecy in Manhattan and Miami; Press Rel., Jan. 13, 2016; Bruce Zagaris, FinCEN Issues Geographic Targeting Order for Real Estate Bought in NYC and Miami, 32 Int’l Enforcement L. Rep. 1 (Jan. 2016).


[19]   Peter A. Cotorceanu, Hiding in plain sight:  how non-US persons can legally avoid reporting under both FATCA and GATCA, 21 Trusts & Trustees 1050-1063 (Dec. 2015).


[20]   This section is based on the article by Bruce Zagaris, EU Reaches Agreement on Adopting the 4th Anti-Money Laundering Directive, 31 Int’l Enforcement L. Rep. 1 (Jan 2015).


[21]   Council of the European Union, Proposal for a Directive of the European Parliament and of the Council on the prevention of the use of the financial system for the purpose of money laundering and terrorist financing, 5226/15 ADD 2, Jan. 12, 2015.  For the agreed text see .

[22]   G8, G8 action plan principles to prevent the misuse of companies and legal arrangements, June 18, 2013.


[23]   Id.


[24]   David D. Stewart, U.K. to Create Beneficial ownership Registry, Tax Notes Int’l 1246 (June 24, 2014).


[25]   The Brussels G7 Summit Declaration, paragr. 17, June 6, 2014    For additional discussion of the meeting and the declaration, see Bruce Zagaris, G-7 Pledges Action on Extractive Minerals, Anti-Money Laundering, Transparency, Tax, Anti-Corruption and Sanctions, 30 Int’l Enforcement L. Rep. 351 (Sept. 2014).


[26]  Jonathan Edgelow, Lydia Sadler, Richard L. Thomas, and Sam Tyfiled, Enhancing UK Company Transparency:  Key Implementation Dates, National Law Review ).


[27]  Id.


[28]   Id.

[29]   Id.

[30]  Department for Business, Innovation & Skills, Provisional Implementation plan for Parts 7 and 8 of the Small Business, Enterprise and Employment Bill (Jan. 15, 2015).


[31]   Ownership register will list ‘people with significant control’, STEP UK News Digest, June 26, 2014.

[32]   Global Witness, Lowering the Bar:  How American lawyers Told US How to Funnel Suspect Funds Into the United States (Jan. 2016)


[33]   Prime Minister’s Office, Tackling corruption: PM speech in Singapore, July 28, 2015


[34]   Id.

[35]  John Aglionby and Cynthia O’Murchu, David Cameron to tackle ‘dirty money’ in UK property market, Fin. Times, July 28, 2015.

[36]   OGP was launched in 2011 to provide an international platform for domestic reformers committed to making their governments more open, accountable, and responsive to citizens.  Since then, OGP has grown from 8 countries to the 66 participating countries indicated on the map below.  In all of these countries, government and civil society are working together to develop and implement ambitious open government reforms.

[37]    Prime Minister’s Office, Tackling corruption: PM speech in Singapore, supra.

[38]   Id.

[39]   Nick Maxwell, Head of Advocacy and Research, Transparency International, Unmasking the Corrupt Capital Behind Property Ownership, Transparency International, July 28, 2015.

[40]   Id.

[41]   For a discussion of building government networks on enforcement , see Bruce Zagaris, International White Collar Crime:  Cases and Materials 9-14 (2010); Anne Marie Slaughter, A New World Order 3-4 (2004).

[42]    See, e.g., Bruce Zagaris C20’s Final Communique Contains Recommendations on Anti-Money Laundering, Anti-Corruption, Tax Enforcement and Transparency, 30 Int’l Enforcement L. Rep. 384 (Oct. 2014).

[43]   FATF, 40 Recommendations, supra.


[44]   Terry, supra, at 493.


[45]   FATF, 40 Recommendations, supra.


[46]   FATF, 2012 Recommendations, supra, at 83.


[47]   See, e.g., Risk  Based  Approach,  Fin.  Action  Task  Force,

Riskbasedapproach (Oct. 2008);


[48]   (Jan.  30,  2014),  available  at  

[49]   Laurel  S. Terry, U.S. Legal Profession Efforts to Combat  Money Laundering and Terrorist Financing, 59 N.Y. L. Sch. L. Rev.  487, 491-92 (2014/15).


[50]   “Taxation Of Corp Income Sheltered In Tax Haven”, LLS NO. 16-0166.01 Esther van Mourik x4215, sponsored in the House of Assembly by Foote and Pettersen (Jan 15, 2016).


[51]   According to a 2007 National Drug Intelligence Center report, Mexican drug trafficking organizations generally transport illicit drug proceeds to consolidation points around Colorado Springs and Denver prior to transporting the money in bulk to areas at or near the U.S.-Mexico border.  National Drug Intelligence Center, Rocky Mountain High Intensity Drug Trafficking Area Drug Market Analysis (June 2007)


[52]   Cotorceanu, supra.


[53]   For the text see  For background see OECD, OECD delivers new single global standard on automatic exchange of information, Feb. 13, 2014


[54]   OECD, OECD delivers new single global standard on automatic exchange of information, supra.


[55]   Id.

[56]   For more information see William Hoffman, Koskinen Calls on U.S. Lawmakers to Approve Common Reporting Standard, 2016 Worldwide Tax Daily  50-3, Mar. 15, 2016.

[57]   Id. at 1052-1053.


[58]   Id. at 1053.


[59]   Id. at 1054.


[60]   Id.

[61]   Bruce Zagaris, Raising Revenue on the Backs of Caribbean Jurisdictions, 80 Tax Notes Int’l 607, Nov. 16, 2015.

[62]   Letter dated Oct. 15, 2015 from John A Koskinen, IRS Commissioner, to Sir. Ronald Sanders, Ambassador Extraordinary and Plenipotentiary, Embassy of Antigua and Barbuda (with respect to the state tax haven matter Koskinen states “(w)e play no role in the legislative process of the District of Columbia or the states and, as a result, we are not in a position to assist you in addressing this issue”).

[63]   State Tax Research Institute, State Tax Haven Legislation:  A Misguided Approach to a Global Issue (Feb. 2016).

[64]   WTO, Argentina — Measures Relating to Trade in Goods and Services, DS 453, Panel report under appeal on 27 October 2015

[65]   WTO Panel Grants Panama Victory in Argentine Financial Services Case, 19 Bridges No. 33


[66]   Id.

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