Should the House Acknowledge the Threat Posed by Shell Companies Financing Terrorism? (H. Res. 206)

What is H. Res. 206?

(Updated October 7, 2019)

This resolution would express the sense of the House that the lack of sunlight and transparency in financial transactions and corporate formation poses a threat to U.S. national security and economic stability. It’d also support efforts to close loopholes related to these issues that allow corruption, terrorism, and money laundering to infiltrate the U.S. financial system. It’d encourage corporate transparency to detect, deter, and interdict individuals, entities, and networks engaged in money laundering and other financial crimes. It’d also urge financial institutions to comply with the Bank Secrecy Act and anti-money laws and regulations. Finally, it’d affirm that financial institutions and individuals should be held accountable for money-laundering and terror-financing crimes and violations.

As a simple resolution, this legislation is non-binding and wouldn’t advance beyond the House if passed.

Argument in favor

Congress should support efforts to hold financial institutions and corporate governance practices to a higher standard. This would benefit the economy and national security by encouraging financial institutions and corporations to ensure that bad actors can’t gain access to our financial institutions in order to fund terrorism and other crimes.

Argument opposed

This resolution doesn’t have any teeth. It doesn’t change anything related to regulation, transparency, or anti-money laundering — so there’s not much point to it. Rather than wasting time on this, Congress should focus on legislation that actually tightens regulations and enforces transparency.

Impact

Financial institutions; corporate formation; and Congress.

Cost of H. Res. 206

A CBO cost estimate is unavailable.

Additional Info

In-Depth: Rep. Maxine Waters (D-CA) introduced this resolution to express Congress’ support for greater sunlight and transparency in financial transactions and corporate formation.

In a February 28, 2019 Senate Banking Committee hearing on this issue, Heather Slavkin Corzo, Head of Capital Markets Policy at the AFL-CIO, responded to a question from Sen. Bob Menendez (D-NJ), who asked how to increase transparency and lack of diversity in corporate governance and investment. Corzo said companies need to be led by more diverse leadership. She said the lack of diverse leadership and employees is preventing proper regulations to be implemented. Thomas Quaadman, Executive CP at the U.S. Chamber Center for Capital Markets Competitiveness, added that it’s important to have diversity of thought in boardrooms, and transparency procedures in hiring practices could put companies on track on governance and investing.

There are no cosponsors of this resolution.

Of Note: Some believe that shell companies — companies without independent operations, significant assets, or employees — are often used to finance terrorist activities. In 2006, the Council on Foreign Relations (CFR) identified charities, illegal activities, and front or shell companies as the primary sources of terrorists’ financing. Of front companies, CFR wrote:

“Many terrorist organizations attempt to operate legitimate businesses, which generate their own profits and can also be used as a front for money laundering. Ties to terrorism have been found amid the trade of livestock, fish, and leather. Businesses involved in agriculture and construction have also been found to support terrorism. In 2001, the New York Times reported that Osama bin Laden owned and operated a string of retail honey shops throughout the Middle East and Pakistan. In addition to generating revenue, the honey was used to conceal shipments of money and weapons.”

Shima Baradaran Baughman, a professor of law at the University of Utah, adds that it’s incredibly easy to form shell companies in the U.S.:

“Nearly two million corporations and limited liability companies are formed every year in the United States, and most jurisdictions do not require any identity documentation whatsoever. In fact, [the media company] Fusion… demonstrated on video that one of its collaborators was able to form a Delaware shell company for her cat. This took only a few minutes, US$249 (via credit card) and required no identification documents at all. Similarly lax regulations exist in Montana, Nevada and Wyoming. These states compete for clients, so there has been a race to the bottom in states wanting to require even less than the others in order to form a shell corporation. With the ease of incorporation, some may choose to form companies for their pets. Others may decide to create companies to hide assets in for tax evasion or money laundering purposes. However, even more alarming is that terrorists can easily disguise their true identities from law enforcement through shell companies. A potential terrorist cannot take a flight to neighboring states without a passport or driver’s license, but they can form a shell company without any information in a matter of minutes. In a high-profile instance of this, for many years Russian arms dealer Viktor Bout used shell corporations to anonymously supply terrorist groups around the globe with major weaponry like tanks and shoulder-file missiles… If we want to fight terrorism effectively, we should also be cracking down on terrorism financing. Given the ease and persistence of terrorist financing – particularly using shell companies – a shift in attention on financial regulations that would stop terrorism financing would be a good start.”

Roger Gordon, Professor of Law and Director of the Institute for Global Security Law and Policy at Case Western University School of Law, casts doubt on the idea that shell companies are a frequently used by terrorists — and therefore a reasonable target of anti-terror efforts:

“If it were true that terrorists regularly used shell companies, it might make sense to dedicate additional resources to stopping them, including requiring corporation service providers to do a better job of detecting when their clients are really bad guys… However, given that the resources to prevent bad guys from doing bad things are necessarily finite, shifting resources to initiatives intended to stop terrorists from setting up or using shell companies necessarily means shifting them from somewhere else. But if that somewhere else is actually stopping bad guys, and if the assertion that terrorists use shell companies is false, the result could actually harm antiterrorism efforts. I don’t know if existing antiterrorist financing efforts are effective or efficient, nor do I know if efforts to try to stop terrorists from using shell corporations would actually pay off—though I have my doubts. But more importantly, I’m fairly sure that no one knows—except maybe the terrorists themselves. Pretending we do could result in policy changes built largely on myth, which is usually not a good idea. Unfortunately, it is a myth to claim that we know terrorists are using shell companies to finance terrorism.”

Media:

• Senate Banking Hearing on Capital Formation and Corporate Governance