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The U.S. flag hangs in front of the New York Stock Exchange in New York City. (Spencer Platt/Getty Images)
This month, Congress tackled one of America’s most serious finance vulnerabilities by including anti-money laundering reforms in the National Defense Authorization Act—the largest set of illicit finance reforms since September 11th. By effectively ending anonymous ownership of U.S. shell companies, the new legislation aims to prevent their misuse by terrorists, kleptocrats, drug cartels, human traffickers and other criminals who currently move billions of dollars through and within U.S. borders.
Research by Hudson Institute’s Kleptocracy Initiative played a leading role in bringing this issue to the attention of policymakers and the public during the decade-long effort to tackle shell company abuse. As the legislation progressed through the Senate and House, Hudson’s Nate Sibley [[link removed]] conducted dozens of briefings for senior congressional staffers on how authoritarian regimes have become adept at exploiting shell companies to undermine U.S. national security.
Below, we'd like to highlight one of Nate's most widely shared policy memos exploring how corporate secrecy is exploited by the Chinese Communist Party. And stay tuned for a major announcement involving the Kleptocracy Initiative in the new year.
With holidays around the corner, Weekend Reads will be taking a break for the following two weeks and we hope you will too. We'll see you January 9!
Read the Policy Memo [[link removed]]
Nukes and Mercedes:
Shell Companies as a Conduit of Crime
Key takeaways from Nate Sibley's policy memo, Countering Chinese Communist Party Threats with Corporate Transparency [[link removed]].
1. To steal American IP, the CCP uses shell companies every step of the way:
China is “the world’s principal IP infringer,” according to the U.S. IP Theft Commission, “deeply committed to industrial policies that include maximizing the acquisition of foreign technology and information.” Chinese entities rely on shell companies both to obscure their involvement in IP theft, to shield themselves from potential U.S. sanctions, and to conceal their participation in acquiring valuable American technology in U.S. bankruptcy proceedings. Trade secret theft, software piracy, and counterfeit goods are estimated to cost the U.S. between $225 billion and $600 billion annually.
2. U.S. national security agencies may be leasing office space from Chinese state-owned companies:
A Government Accountability Office (GAO) study of 1,406 high-security U.S. federal leases could not identify the owners in about one-third of cases because many of them were shell companies. In cases where the GAO did identify the owners, nine out of fourteen government agencies working on sensitive national security issues were unaware that the buildings in which they were housed were ultimately owned by companies in China and elsewhere.
3. The Belt and Road Initiative becomes a conduit of corruption through shell companies that hide embezzlement and bribes by Chinese officials and local governments:
China’s Belt and Road Initiative has supercharged kleptocracy throughout the developing world, with bribes and unprecedented opportunities for embezzlement offered to local elites in exchange for infrastructure contracts and other investments. Local politicians rely on shell companies to funnel bribes or stolen funds, while Chinese contractors can hide behind them to avoid accountability when they fail to deliver on overambitious projects. From Ecuador’s crumbling dam [[link removed]] to Kenya’s unaffordable railway [[link removed]] and Sri Lanka’s infamous stolen port [[link removed]], the ability to conceal corruption underpins BRI expansion worldwide.
4. China uses shell companies to help North Korea purchase luxury cars and nuclear weapons materials:
China’s state-controlled corporations routinely employ shell companies to circumvent U.S. sanctions and enable malign behavior. An integral part of the illicit financial networks on which North Korea depends are shell companies registered not only in Chinese financial centers but around the world. As U.S. Treasury officials routinely complain to Beijing, Pyongyang uses them to help procure everything from nuclear weapons components to luxury cars for Kim Jong-Un. A U.S. court recently held three of China’s biggest banks in contempt for failing to supply documents relating to allegations that they laundered $100 million through a Hong Kong shell company for a sanctioned North Korean bank.
5. Fentanyl fueling the U.S. opioid epidemic is manufactured, sold, and distributed through Chinese shell companies:
Anonymous shell companies play a critical role in facilitating both the Chinese production and U.S. distribution of opioids that killed more than 47,000 Americans in 2017—a figure that has increased almost six-fold since 1999. Fentanyl is typically manufactured in China, and either delivered directly to purchasers or shipped to drug traffickers in Mexico, Canada, and the Caribbean before being distributed in the U.S. Shell companies registered in the U.S. are used to launder profits, conceal connections with Latin American cartels and hide ownership of freight forwarding firms, P.O. boxes, and other properties used as fronts to receive fentanyl shipments directly from China.
6. Shell companies have grounded U.S. combat aircraft:
Another recent GAO study found that shell companies are routinely used to facilitate fraud and circumvent restrictions barring foreign contractors, including one whose faulty parts caused the grounding of forty-seven U.S. combat aircraft. GAO also noted that “contractors fraudulently misrepresenting themselves to [the Department of Defense] could actually be operated by… adversarial foreign governments [to conduct] sabotage or surveillance.” A New York company currently faces charges of illegally importing Chinese surveillance technology and selling it to U.S. government agencies before laundering the proceeds through shell companies.
7. Up until now, the U.S. has served as a leading haven for shell companies:
Researchers posing as terrorists and kleptocrats for another academic project found that the United States was the easiest place in the world to set up shell companies. According to the World Bank, U.S. shell companies have been used more often than those of any other country in major transnational corruption cases. Indeed the failure to collect corporate beneficial ownership information is the primary reason experts now rank the United States as the world’s second-worst financial secrecy haven, between Switzerland and the Cayman Islands.
Read the Policy Memo [[link removed]]
Go Deeper: Kleptocracy in the U.S.
Read [[link removed]]
The West is Open for Dirty Business [[link removed]]
Beyond the West, kleptocracy—not ideology or terrorism—is the main obstacle to democracy across the developing world, write Nate Sibley [[link removed]] and Ben Judah in Foreign Policy [[link removed]]. To fight it, the West must first understand it. Analysts have for too long naively talked about corruption morally—something that bad people, bad states, or bad cultures do—when it needs to be thought about systemically. The moment that starts, the frame of an honest “us” and a corrupt “them” falls away, clearly showing the West where it needs to start fighting the disease: at home.
Read [[link removed]]
America Must Combat Illicit Finance [[link removed]]
The ability to secretly transfer stolen wealth into the United States and other secure jurisdictions has fueled a corruption bonanza across the developing world, write Nate Sibley [[link removed]] and Ken Weinstein [[link removed]] in The Hill [[link removed]], resulting in illicit financial flows that now unfortunately dwarf humanitarian aid and development expenditures. Strategic rivals and rogue regimes, such as China, Russia, North Korea, Venezuela, and Iran all rely on crime and corruption to consolidate their grip on power and promote their foreign policy.
Watch [[link removed]]
Senator Bill Cassidy and John Penrose MP on Transatlantic Initiatives Curtailing Illicit Finance [[link removed]]
As the world’s two biggest financial centers, the United States and the United Kingdom have a unique responsibility to confront transnational corruption and other economic crime. Senator Bill Cassidy and John Penrose MP joined Nate Sibley [[link removed]] for a conversation on the transatlantic efforts to counter illicit finance.
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