Oligarchy

FINCEN RULES

Imposing order on the jungle that is American corporate ownership is not a task for the faint-hearted, and quite a number of observers (for example) were beginning to worry that implementation of 2020’s Corporate Transparency Act was taking far too long, so credit to the brave folks of FinCEN — the financial crimes bureau at the U.S. Department of Treasury — who have spent months trying to make this happen in the face of what must be some ferocious lobbying.

• “Today’s announcement is a major step forward in giving law enforcement, national security agencies, and other partners the information they need to crack down on criminals, corrupt individuals, and other bad actors who seek to take advantage of America’s financial system for illicit purposes,” said Treasury Secretary Janet Yellen.

As you will know if you’ve been following this issue, creating a shell company in some parts of the United States is notoriously easier than getting a library card, which makes life easy for fraudsters and other financial criminals who wish to own property anonymously. Solving the problem was complicated by the fact that each state had its own registry, and some of them (especially Nevada and Delaware) were heavily reliant on incorporation revenue to prop up their budgets, and didn’t want to do anything which might annoy the golden goose, even if the goose was enabling money laundering and tax dodging on a monumental scale.

Finally, at the tail-end of the Trump presidency, the Corporate Transparency Act was passed with bipartisan support, and FinCEN was left with the task of how to make it work. It has finally published the first of three rules that will do so, giving some details, including that more anonymous companies exist in the United States than in any other jurisdiction — perhaps “tens of millions” in total — which may be why it is taking officials so long to get this off the blocks. The act won’t come into effect until the beginning of 2024 but, hopefully, that lengthy lead time means the measures will really work.

I was impressed by the thoughtfulness of how it has been put together, which suggests its authors have genuinely considered all the comments made in their call for evidence. For those of us outside the United States, it is important that this works because other jurisdictions would then not be able to use U.S. inactivity as something to hide behind. If the US is leading the pack, rather than trailing it, then other countries will have to move too. We must keep our eyes on every bit of the ball here, however, including how this is all to be paid for.

• “As FinCEN has told Congress, its ability to deliver a timely rule hinges on its resources. As Congress punts on approving a budget for the next fiscal year, it should understand the consequences of keeping our nation’s financial crime fighters underfunded. Congress should fully fund FinCEN at $210.3 million for next fiscal year to make sure the bureau has the staff, technology, and resources it needs to protect the U.S. financial system,” said Tom Cardamone, President and CEO of Global Financial Integrity.

Hopefully, congress will retain its bipartisan focus on solving this problem, and make sure the federal agencies have the tools they need to finish the job.

OFFSHORE SHELL PEOPLE?

Of course, even if they do finish the job and get rid of shell companies in a way that forces other countries to do the same, oligarchs will still want to dodge taxes and hide their assets, so how are these poor rich people to arrange their affairs in a tax-efficient and scrutiny-free manner if shell companies are no longer available? It’s funny I should ask. Because I have thoughts.

A couple of weeks ago, the local authority in the London borough of Westminster announced that it had declared war on dirty money. Westminster, which is the bit of the capital where the houses of parliament are, is a favored destination for oligarchs to stash their cash, and is where we like to start our kleptocracy tours. As a result, I was delighted to see this announcement.

• “It took the war in Ukraine to refocus attention on oligarch investments and what London has become in terms of a European laundromat for dirty money. But the problem goes wider than Putin and his henchman to many others who see Belgravia, Knightsbridge, Mayfair and other parts of Westminster as places to rinse their money. This not only damages the reputation of our city by supporting authoritarianism abroad but drains the vitality of areas with empty or under-used homes,” said Adam Hug, who is leader of the council, and who appears to know what’s what.

I fully endorse what the council is up to, although I fear a local authority won’t be able to do much without a commitment from the central government.

To be honest though, I found myself more interested by the statistics in the press release than I was by the political arguments behind it, and specifically the claim that: “Westminster has seen … a rise of 1200% in the number of properties registered to owners in Russia.” This is not in and of itself surprising, since everyone knows Russian oligarchs love to buy up posh houses in London. But I did wonder what the source for this titbit was, so I looked up the government spreadsheet on shell companies that own bits of England and Wales (this is how transparency works in the U.K. — you can see what shell companies own, but not who owns the shell companies). But there is only one Russian company that owns property in Westminster, and I know who owns that, and I couldn’t see how an increase of one counted as 1200% anyway. So, if that wasn’t the source of this curiously specific claim, what was?

In my search for enlightenment, I emailed the council’s friendly press officer who directed me to the Centre for Public Data, a think tank I’d never heard of which has — amazingly — done a freedom of information request for foreign-based people who own property in the U.K., and published the aggregated fruits of the inquiry in a highly accessible form. This is not new data, in that the report was published almost a year ago, but I’d not seen it before and it’s very well presented. I highly recommend you take a look if you, like me, missed it when it first came out.

The core message of the report published alongside the data is that, while we have been focusing on the fact that 94,000 companies based in foreign jurisdictions own property in England and Wales (and the government has passed a new law to expose their true owners), there has been a gigantic and un-noticed increase in the number of people based in foreign jurisdictions that do so. In 2010, more offshore companies than overseas-based people owned property in England and Wales, but that picture has now completely changed. Whereas the total of offshore companies owning property has barely budged over the last 12 years, the total of overseas-based people has increased from around 90,000 in 2010, to almost 250,000 now. Within that number, Hong Kong-based owners have increased more than ten-fold, and China-based buyers almost 30-fold, while the number of Irish-based owners (the largest group in 2010) has fallen by about a third.

I am all in favor of Britain continuing to welcome people from every corner of the world, but there is enough in this data to suggest that we are seeing something other than immigration. It is notable that many of the people owning property are nominally resident in traditional tax havens — Jersey, the British Virgin Islands, etc., etc. — which will partly be a function of the fact many trusts are based in those jurisdictions (and a trust is technically owned by the lawyer who is its trustee), but which also suggests to me that “nominee owners” are being used to disguise ownership and to fight back against the tide of ever-greater transparency.

Why would this be happening? Since 2014, people who own British residential property via shell companies have had to pay a special tax, and rich people hate paying special taxes. If I was an oligarch, I’d be tempted to give up on using an offshore shell company and instead pay an underling to pretend to own my mansion and to pretend to live halfway round the world, secure in the knowledge that no one’s going to check. That way I’d save on paying this “Annual Tax on Enveloped Dwellings” with zero inconvenience to myself. The tax can add up to almost 250,000 pounds a year for the most valuable houses, so the saving from this little scam would allow me to pay my underling quite generously, while still coming out on top; and also avoiding any chance of being exposed on the new registry of offshore-owned property.

This raises the worrying possibility that the new version of an “offshore shell company” is an “offshore shell person,” and I have no idea what we’d do about them. Any ideas?

FROZEN MONEY DOWN UNDER

But where should my offshore shell person pretend to be based? How about Antarctica?

While reading the Centre for Public Data’s report, I couldn’t help noticing the fact that people permanently resident in the “Australian Antarctic Territory” now own 427 properties in the U.K., up from 32 in 2010 (that may not sound like much, but it’s more properties than are owned by people based in kleptocrat-plagued Kazakhstan, Azerbaijan and Ukraine added together).

Fully 143 of those properties are in Rochdale, a town in Greater Manchester, which was birthplace to the co-operative movement; while another 31 are in nearby Wigan, which is so famous for its pies that it hosts the World Pie Eating Championship. What on earth is going on here? Are pie-crazed penguins piling into the U.K. property market with the kind of enthusiasm they usually reserve for jumping onto ice floes?

The more I looked at this, the weirder it got. The Australian government has four research bases in Antarctica, and helpfully provides webcams so you can see what life there is like (really really cold). The territory is vast — about the size of India and Argentina added together — but there are apparently only 80 people who live in it all year round. So, either they own an average of five U.K. houses each, many of them in Greater Manchester, or someone’s up to something?

The Centre for Public Data thinks this may be a “data transcription error”, which probably is the most likely explanation, but I’m going to entertain the possibility that something more interesting is going on. Australians who live full time in remote or inhospitable bits of the country (of which there appear to be quite a lot) get a tax break, and it’s surely at least theoretically possible that some enterprising Aussie has discovered a bonzer tax-efficient way to pile into U.K. property by pretending to live in the great frozen continent.

Tax havens are traditionally called “sunny places for shady people”, but are we witnessing the growth of a new model down under: a snowy place for shell people? More research is needed. Is this just the tip of the iceberg? Should these Antarctic investments be put on ice before the global property market goes south?

WHAT I’M READING

In my quest to understand more about money laundering, the Financial Action Task Force, and related topics, I’m working through The Bankers Blacklist: Unofficial Market Enforcement and the Global Fight against Illicit Financing by Julia Morse. It’s a complex, and very academic work, which analyses the FATF without really going into the question of whether anything it does actually stops money laundering, but — to be fair — she does admit that at the outset with the disarming disclaimer: “the project sheds light on how and why states adopt the FATF’s prescribed policies but leaves unaddressed the query of whether the standards actually reduce money laundering and terrorist finance”. (Which they don’t.)