Over the past month, the Biden administration has levied an extraordinary series of financial sanctions against Russia in response to its brutal invasion of Ukraine. To enforce these sanctions, the administration announced the formation of Task Force KleptoCapture, a multi-agency effort to track down and seize the assets of sanctioned individuals.
One of the key members of this task force is the Internal Revenue Service’s Criminal Investigation division (IRS-CI), which has “unparalleled experience in tracking how financial assets change hands.” This is because money laundering, bribery and corruption, fraud, and other financial crimes are often deeply intertwined with tax evasion and other forms of tax non-compliance.
To locate and seize assets of sanctioned individuals – and to identify the proceeds of criminal activity more broadly – the government must be able to link these resources to their ultimate owners. To frustrate such efforts, well-resourced people can try to shield their assets from regulators by setting up complex structures involving multiple legal entities. For example, over the course of two decades, one Russian oligarch used a chain of shell companies to route billions of dollars through foreign banks and invest in private equity firms and hedge funds in the United States. But, even though lawmakers recently gave regulators new tools to see through some opaque entity structures of this type, the U.S. legal system still provides too many avenues for wealthy individuals to hold assets anonymously.
Policymakers need to act on several fronts to plug holes in existing laws that attract and shelter illicit activity – such as, for example, increasing oversight of all-cash residential and commercial real-estate transactions. Other Just Security articles have argued that a range of actions to increase financial transparency can reduce the global instability that is often exacerbated by hidden financial dealings while simultaneously countering authoritarianism, which often thrives due to corrupt financial practices.
Strengthening the recently enacted Corporate Transparency Act is one of many important steps that lawmakers and regulators should take to crack down on corruption, money laundering, tax evasion, and other financial crimes.
The Corporate Transparency Act: A Step Forward
The 2021 Pandora Papers and 2016 Panama Papers leaks of millions of tax records, bank statements, contracts, and other financial documents spotlighted how, on a global scale, many high-net-worth individuals, including political leaders, can create complex legal structures to hide their wealth from tax and law enforcement agencies. For example, the leaks revealed that some wealthy foreign nationals would use Wyoming and Delaware shell companies (“corporations” on paper that have no employees, do not sell any products, nor earn any revenue) and South Dakota trusts to hold assets out of sight of regulators. Many of the assets and owners revealed in these leaks are linked to corruption, fraud, and other illicit activities.
Motivated in part by the Panama Papers leak, Congress enacted the CTA into law as part of the National Defense Authorization Act of 2021 on a bipartisan basis. The CTA requires certain domestic and foreign entities to report their “beneficial owners” to the Financial Crimes Enforcement Network (FinCEN). Once FinCEN regulations implementing the CTA are finalized, this information will be held in a database available to tax and law enforcement agencies, including the IRS and the Treasury Department.
As other commentators have noted, the CTA is a promising first step – especially if forthcoming FinCEN regulations implementing the law are robust. But even then, Congress will need to act to plug remaining holes in the CTA that will likely be exploited for tax evasion and other illicit activity. Most importantly, the CTA does not cover the full range of entities that corrupt actors can use to shield their assets from regulators. Lawmakers should also ensure that both the IRS and FinCEN have sufficient funding to deliver on the anti-corruption goals of the CTA.
FinCEN: Strengthen CTA Implementation
FinCEN is ironing out many details of the CTA. My organization, the Tax Law Center at NYU Law, submitted a recent comment on regulations implementing the law, making several recommendations that, if adopted, would help ensure the CTA is useful for tax administration and thereby advances the anti-corruption goals of the law. The comment noted:
“Tax compliance and anti-corruption aims are highly interrelated [….] IRS-CI spent over 15 percent of its time in 2021 investigating non-tax crimes like money laundering, corruption, and other types of fraud, identifying more than $8 billion in non-tax financial crimes as compared to $2 billion in tax fraud. Thus, if the regulations do not use the statutory authority granted by the CTA to require reporting of information that is highly useful for tax administration, they will not achieve the purposes of the CTA overall.”
The Tax Law Center’s specific recommendations to FinCEN include:
- Requiring mandatory Taxpayer Identification Number (TIN) reporting. TINs are unique identifiers that the IRS uses to match different tax returns made by the same individual in the agency’s internal systems. To help ensure that the beneficial ownership database is useful to the IRS, FinCEN proposed implementing TIN reporting on a voluntary However, the Tax Law Center recommended that FinCEN mandate TIN reporting. A voluntary TIN reporting regime is unlikely to result in widespread reporting of TINs and may require the IRS to do substantial additional work, including interacting with other agencies, to verify the identities of beneficial owners for tax administration and enforcement purposes. Because the IRS needs TINs to track an individual’s income flows and business interests over time in their internal systems, TIN reporting is a critical starting point for investigating tax crimes as well as other financial crimes the CTA aims to counter: money laundering, terrorist financing, and more.
- Providing the IRS efficient access to the database. The CTA explicitly states that the IRS should have access to the beneficial ownership database in connection with “tax administration” purposes. However, regulators should ensure that the IRS has direct, real-time access to the database – rather than, for example, requiring the IRS submit requests for access on a case-by-case basis. Imposing administrative barriers that prevent the IRS from easily accessing the database would be inconsistent with the underlying statute, waste the agency’s limited resources, and risk increasing taxpayer burden by potentially forcing the IRS to implement its own parallel reporting regime to obtain beneficial ownership information in a useful manner (as seen in the overlap between the FinCEN Foreign Bank and Financial Account Reports and the IRS Statements of Specified Foreign Financial Assets reporting regimes). Timely access to the database by authorized users – including the IRS – is supported by a bipartisan, bicameral group of legislators in Congress.
Lawmakers: Plug the Remaining Holes in the CTA and Fund the IRS
Even if FinCEN implements the CTA robustly, there are holes in the underlying statute that it cannot address without legislators amending the law.
Most importantly, the CTA should be expanded to apply to more entities. As currently drafted, the law covers only entities that must file documents with a U.S. state upon creation. This is a major hole in the CTA leaves corrupt actors with a menu of options to anonymously hold and conceal their wealth. For example, while the CTA will allow regulators to see through the types of anonymous shell corporations highlighted in the Panama Papers, the law will allow the ultimate owners of South Dakota trusts highlighted by the Pandora Papers to remain anonymous. Representatives of other nations, including an overwhelming majority of members in the European Parliament, have criticized the CTA for “fall[ing] short of ensuring full corporate transparency akin to the current standard in the EU.”
Lawmakers should also ensure that FinCEN and the IRS have enough funding to implement the CTA. FinCEN received a funding boost over last year’s levels in the omnibus appropriations package for fiscal year 2022 and in the emergency package for Ukraine, but these amounts fall short of what the agency needs. IRS-CI received a modest funding increase in the omnibus package, but the supplemental package for Ukraine did not include any of the $30 million that the administration had requested for IRS-CI.
IRS-CI needs additional resources in the short-term to enforce sanctions against Russia, and the agency at large needs a robust, long-term funding stream to rebuild its tax and law enforcement capacity after more than a decade of deep budget cuts. Since 2010, the number of IRS enforcement staff has fallen by about a third, and IRS-CI’s staffing levels have declined by about a quarter.
Understanding what assets are owned by kleptocrats is a difficult task. The IRS has, time and again, played a key role in following the money and unwinding complex chains of business and trust ownership. That is why their expertise is being leveraged now to track down the wealth of Russian oligarchs. However, U.S. policymakers can and should do more to provide regulators and investigators with the data and resources they need to link assets and entities to their true owners. They can begin by empowering the IRS and FinCEN to ensure the purposes of the CTA are fully realized.