Briefing | July 12, 2016

Hidden Menace

How secret company owners are putting troops at risk and harming American taxpayers

Since the financial crisis and release of the Panama Papers, we have heard a lot about the revenue governments lose to tax avoidance and evasion, but what about the losses resulting from corruption and fraud when governments spend money on goods, services and infrastructure?

Around the world governments spend $9.5 trillion each year on public procurement.  It should be no surprise that fraudsters, and corrupt officials, take advantage of this. According to research by the UN, corruption may amount to as much as 25% of the value of government procurement contracts worldwide.

Hidden Menace reveals the seriousness of the problem of anonymously-owned companies in U.S. government spending and recommends what must be done to fix it. It focuses on the issue of anonymous shell companies in military contract spending, both because of the serious national security risks posed by their use for illicit purposes, and because of the significant proportion of the U.S. budget—approximately 8.5% of total U.S. federal government spending annually.

According to the UN and other experts, at least 25% of government money spent in fragile states is illicitly diverted into the hands of U.S. enemies. For a country such as Afghanistan, where the U.S. has been engaged in military operations for over a decade, these diversions could amount to as much as $28 billion of the amount the U.S. government has spent in the country since 2002.

TEMPLO Graphic Businessman/Soldier
"Criminals who are ripping off public budgets need to hide what they are up to. Anonymously-owned companies, or those whose owners are hidden, have proven to be a common facilitator of waste, fraud and abuse in government spending." Eryn Schornick, Policy Advisor, Global Witness

Hidden Menace shows that this massive theft of funds has been possible in part because of the lack of information about the ultimate owners of companies (often called ‘beneficial owners’) bidding for federal funds. This threatens the safety, security and well-being of people around the world, including in America. Yet, the U.S. is the easiest place in the world to set up an anonymously-owned company. It is also one of the most popular places for corrupt government officials to create anonymously-owned companies to move ill-gotten gains through our financial system.

To fix this problem, Global Witness is calling for the Obama Administration to increase contract transparency through an open contracting system that includes a requirement for bidders to disclose who really owns or controls their companies. This information, along with awards and contracts, should be made public so that the government and businesses know who they are dealing with. Moreover, Congress should collect beneficial ownership information for American companies and put it into the public domain for all to see. All companies should publicly disclose who ultimately owns and controls them as an expression of business integrity and ethics.


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