Blog / Sept. 17, 2010

Undermining Aid: How the U.S. Financial System Facilitates Overseas Corruption

Read this blog on Huffington Post.

When governments around the world are taking measures in support of fiscal austerity, foreign assistance is always a prime target for the chopping block. Bravely, some governments, including those in the United States and many in Europe have pledged to continue to increase foreign assistance despite slow domestic economic growth at home.

Despite the best intentions of these governments, the efficacy of their aid is being undermined by the vast quantities of corrupt money that is escaping the poorest countries in the world each year and ending up in foreign bank accounts. The unfortunate truth is that endemic corruption in the developing world is essentially being subsidized by services the developed world is paying for.

Investigations by Global Witness and others, including the Senate Permanent Subcommittee on Investigations, have demonstrated that foreign officials have been able to keep and spend corruptly acquired funds in major financial centers, including the U.S. Large-scale corruption simply could not occur without financial institutions willing to accept and move the money.

The days of corrupt foreign officials walking into a bank with $100 bills stuffed into briefcases, and depositing them into an account in their own name, are (mostly) over. Today these funds are held in bank accounts in the name of shell companies - corporate entities that exist on paper only and have no real operations. These fronts are ostensibly run by intermediaries such as attorneys or company agents, but are ultimately controlled by the corrupt official to hide their funds.

For example, Teodorin Nguema Obiang, the son of Equatorial Guinean dictator Teodoro Obiang, brought at least $110 million into the United States using shell companies created in the name of his attorneys and deposited it in banks such as Bank of America and Wachovia. This wouldn't be so suspicious if Teodorin's official government salary wasn't $60,000 a year, and if his father wasn't president of an oil-rich nation where 77% of the people remain in poverty. Teodorin was hardly shy about his money - he bought a $35 million mansion in Malibu, California and a $33 million airplane to go along with his fleet of luxury automobiles.

Another story demonstrates how this problem can negatively affect U.S. national security interests. A Department of Justice investigation discovered that tenants in a Manhattan skyscraper were unwittingly paying millions of dollars in rent each year to a company owned by an Iranian bank sanctioned by the Treasury Department for supporting nuclear proliferation. It used an American shell company to avoid sanctions.

The fact that U.S. law leaves the responsibility for corporate formation to individual states, leading to 50 different corporate formation processes, has allowed the U.S. to become an attractive repository for such corrupt funds. The collection of incorporation fees is a significant source of income for many states (Delaware reported over $767 million in revenue in its 2009 Division of Corporations annual report, providing 25 percent of Delaware's general fund), and some, notably Delaware and Nevada, have competed to create the most business-favorable regulations. Both openly advertise the fact that the ultimate owner of a corporation in their state may remain safely anonymous. This allows for the creation of shell companies where neither the state nor law enforcement can know the identity of the individual who ultimately benefits from the proceeds of the corporation (in financial jargon, the "beneficial owner"). The ease with which shell companies can be created attracts corrupt funds, including the proceeds of narco-trafficking and terrorist financing, as well as tax evasion from within the U.S.

The failure to collect information on the beneficial owner of a corporation in certain states is a glaring loophole in the U.S. financial system. The average American citizen has to disclose all sorts of information when purchasing a house or registering a vehicle, so why are corporate owners allowed anonymity?

To correct this national security threat, the U.S. Congress and Obama Administration must require states to collect information on the beneficial owner of a corporation at the time of registration. This will allow law enforcement officials conducting money laundering, narcotics, and terrorism investigations to access the information, and follow the money trail. Legislation has been introduced by Senator Carl Levin and Representative Carolyn Maloney to require beneficial ownership information to be collected and maintained by the states. Unfortunately, vested interests in Delaware, Nevada, North Carolina, and elsewhere are doing their best to prevent it from moving forward.

Law enforcement has made clear that the current failure to collect this information has inhibited criminal investigations and invited illicit funds to enter the United States, where they may someday be used for terrorist attacks rather than Malibu mansions. The federal government's need to provide for the national security of the United States clearly must trump a state's right to create a system which compromises that security, no matter how financially lucrative. As the November election nears, Congress could do far worse than to act in a bipartisan way to put an end to America's reputation as a safe repository for illicit funds. The goodwill America tries to create through its foreign assistance programs is fatally undermined when foreign leaders can move corrupt funds out their back door and into the United States.