Originally published in the New York Times on August 2, 2023
By Peter Coy
On Dec. 9, 2021, at the inaugural Summit for Democracy, Treasury Secretary Janet Yellen made a stunning admission: Her country had become the world’s most sought-after shelter for criminals’ money. “
In the popular imagination,” she said, according to the prepared text for the virtual event, “the money-laundering capitals of the world are small countries with histories of loose and secretive financial laws. But there’s a good argument that, right now, the best place to hide and launder ill-gotten gains is actually the United States.”
Yellen and many other people were determined to make the United States less hospitable to crooks. The good news: They’re slowly succeeding. New laws and rules, most of which were in the works before her speech, are stripping away veils of secrecy, making it easier to find and prosecute the bad guys. That’s good for democracy, because nothing corrodes faith in democracy more than the sense that the system is rigged and cheaters prosper.
Before I delve into what’s being done, I want to tell you about an interview I did on Tuesday with Raymond W. Baker, the author of “Invisible Trillions: How Financial Secrecy Is Imperiling Capitalism and Democracy — and the Way to Renew Our Broken System,” published this year.
He graduated from Harvard Business School in 1960 and made his way to Nigeria, where he bought or started several businesses. One that was failing before he acquired it was a company that manufactured bags for transporting cement. “It was the most profitable business I’ve ever owned,” he told me. “I did very well. It was great fun up until the mid-1970s, when Nigeria became so corrupt that it wasn’t all that much fun anymore.”
Baker returned to the United States and started a trading company that did business with Asia, Latin America and Africa. In the late 1990s he segued into think tanks and book writing. He didn’t sell his last investment in Nigeria until 2007.
One thing he learned is that cheating is rampant across the world. A common trick in poor countries is to use fake invoices to evade limits on the export of capital. By overinvoicing its imports and underinvoicing its exports, a company that has the assistance of compliant trading partners can shift funds to secret overseas bank accounts. Baker told me the people playing that game don’t always see themselves as corrupt. “They think it’s OK,” he said. “It has become so normalized that it’s the way you do business. They say they’re protecting money from loss or making it productive in the world economy.” It’s not OK, though. It starves poor countries of badly needed money for investment. Baker said all of the tricks that have been developed to shelter money were developed in rich countries, including the United States. He also argued — his opinion, not mine — that the Treasury Department is conflicted because while it opposes corruption, it likes the extra flows of money into the U.S. economy.
Back to the reforms. One of the most important would make it harder for foreigners to launder money through U.S. residential real estate. In 2002 the Treasury Department granted the sector a temporary waiver from anti-money-laundering rules. Twenty years passed. In February 2022 — two months after Yellen’s speech — the Treasury finally solicited feedback on an anti-money-laundering rule for residential real estate. A draft rule could be announced any day now. Scott Greytak, the director of advocacy at Transparency International, told me on Tuesday that it will probably be finalized by the end of the year. The Treasury rule would bar the use of shell companies to hide the true buyers of residential real estate.
Banks that make mortgage loans are already required to know their customers, but shells are often used in all-cash transactions. Under a program begun in 2016, the Treasury requires title agents to report the true owner in all-cash purchases of $300,000 or more in targeted U.S. counties, but the program has to be renewed every six months, and the list of targeted counties keeps changing. The new rule would be permanent, nationwide and applicable to a range of professionals involved in residential real estate transactions and closings.
The other major measure to strip away secrecy is the Corporate Transparency Act, which Congress passed in January 2021, overriding a veto by President Donald Trump. It requires companies and other entities, with some exemptions, to report their true — or beneficial — ownership. The database will be available to banks and law enforcement authorities but not the general public (or companies’ competitors).
Greytak said he’s worried that a Treasury rule to carry out the act would overly restrict access to the database by requiring state and local authorities to get a court order for access, whereas the enabling legislation requires only an authorization, which a court clerk can provide. The rule, however it turns out, is expected by September. There’s a potential third sunshine measure, the Enablers Act, which would require gatekeepers — such as lawyers and accountants who register companies, set up trusts or manage money — to adopt anti-money-laundering safeguards similar to those of banks. It passed the House in 2022 but not the Senate. “We expect it will be reintroduced this Congress in the next few months,” Greytak said.
The Treasury Department is bolstering its ranks by hiring people like Lakshmi Kumar, a senior policy adviser. As the policy director of the think tank Global Financial Integrity, she co-wrote a 2021 report that called residential real estate in the United States “a kleptocrat’s dream.” Diplomacy is also a factor. In December in Atlanta, the United States will play host to a biennial meeting of signatories to the United Nations Convention Against Corruption.
“If the U.S. hasn’t made progress by then, it would be potentially embarrassing,” Ian Gary, the executive director of the Financial Accountability and Corporate Transparency Coalition, told me. I think one reason the United States has been, until now, a kleptocrat’s dream is that it occupies an unfortunate sweet spot between vice and virtue. A pure country with strong controls won’t take a kleptocrat’s money. On the other extreme, a corrupt country would happily take the money, but the money wouldn’t be safe there.
The United States has a strong enough rule of law to keep ill-gotten gains safe and enough legal loopholes to take the money in the first place. That’s not a good place to be. Money laundering may seem like a relatively harmless white-collar crime, but it’s much worse than that. It’s a link in the chain that makes possible terrorism; trafficking in drugs, human beings and endangered species; counterfeiting; illegal harvesting of fish and timber; and much more.
I asked Baker what he thought of the federal government’s efforts to crack down on corruption and secrecy in the movement of money. “I think things are getting better,” he said. “They’re not getting better at the speed that is possible and necessary.”
