US Senator Eyes Real Estate, Hedge Funds and Attorneys in Corporate Transparency Push

By Valentina Pasquali

Professional networks of corrupt attorneys, accountants, real estate agents and other corporate services providers have metastasized across the world to help drug traffickers, kleptocrats and other criminals invest in the U.S., U.K., EU and other safe havens.

Sheldon Whitehouse (D-RI), the newly appointed chair of the Senate Caucus on International Narcotics Control, has pledged to draw attention to this multibillion-dollar dark economy and its role in moving drug profits through the global financial system.

In an interview with ACAMS senior reporter Valentina Pasquali, Whitehouse discussed his agenda for the panel, which he and his co-chair, Sen. Chuck Grassley (R-IA), began with early outreach to Chinese authorities to bolster cooperation against the production and distribution of fentanyl.

A longtime champion of corporate transparency, Whitehouse, now in his third term in the Senate, said the Treasury Department’s database of beneficial ownership information will expose how cartels launder money through U.S. legal entities, and that similar disclosure rules should apply to hedge funds, real estate firms and even attorneys.

An edited transcript of their conversation follows.

Could you describe the landscape of the trade in illicit narcotics you’ve observed since becoming chair of the caucus?

We are seeing a continued threat of importation from the traditional narcotics cartels. In addition, we are seeing a new risk coming out of China in the form of fentanyl, which can be made so strong that it can be shipped in quite small packages that have to be cut very heavily.

But of course, in the illegal narcotics trade, people aren’t necessarily very scrupulous about how they go about cutting and packaging. And the result is that we’re seeing, and have seen in the last decade, an explosion of opioid overdose deaths traceable to fentanyl.

Cocaine, heroin, and methamphetamines all remain a problem. But fentanyl is really the newest threat.

What’s the scale of the associated money laundering problem? Do we have reliable data?

That’s part of what we want to look into. We have information that this is a multibillion-dollar annual industry. I remember comparing estimates for the narcotics cartel revenues years ago with the revenues of countries, and learning that they exceeded the revenues of many smaller countries. So the capacity for building really, really strong organizational heft with that kind of revenue is very, very real.

That’s why I think looking at the financial side is so important.

There appears to be a growing synergy between drug traffickers, kleptocrats, terrorist financiers, fraudsters and a whole range of other criminals. What is behind this trend?

We have a broad array of individuals who are up to no good in the world—whether they are international criminals, terrorists, narcotics traffickers, or oligarchs—who have gotten their hands on massive amounts of illicit, stolen or criminal proceeds.

They all share a common problem, which is: what do you do with all that money? If you stay in the world outside the rule of law, where you’ve made your money, the next bigger gangster, kleptocrat or hoodlum can steal it all. You need to find a way to get your ill-gotten gains behind the protection of the rule of law.

Because there’s so much money, it’s estimated to be a multitrillion-dollar dark economy. That kind of pressure gives rise to a whole industry of helping evil, very rich individuals hide their wealth.

Allowing them refuge in our rule of law system is bad enough when it comes to the illegal narcotics industry. But a lot of the national security challenges that the U.S. has faced have also emerged from non-rule of law countries, and for us to be giving aid and comfort to those enemies by allowing them the sanctuary of rule of law for their money is very dangerous behavior.

One additional layer that’s entered into the picture is cryptocurrency. How large of a role do you think it actually plays in the financial side of drug trafficking versus cash and other financial instruments?

Because cryptocurrency confers anonymity there’s a vulnerability there. And as the credibility of cryptocurrency grows, I think the problem will grow.

But money laundering is a mature, evolved and evolving industry. You don’t need to take big bets on cryptocurrency to find ways to hide your money. There’s plenty of traditional means to do that. I suspect cryptocurrency remains a relatively small part of the problem. I mean, it’s a microscopic part of the world’s economy. It’s probably a bigger part of the world’s dark economy. But I still think that there are so many established ways for hiding money that it remains a relatively minor part of the problem.

What are some of the other conduits you’re seeing?

We’re seeing increased activity with trade-based money laundering, something that we are working to catch up with. But I don’t think the folks at Treasury would be prepared to say that we’ve got a good handle on it. This is one of the areas where we saw the need for improvement and more coordination with other countries.

I’m also hearing more and more about Chinese money laundering organizations and their use of mirror trading, where you have transactions within a country or within a system, and a parallel transaction happens in a different system. And the two offset each other and create a de-facto transfer of wealth without money actually having to cross the border.

In that sense, the traditional exchange in the Islamic world is a kind of long-standing early exemplar of what we’re seeing now through the money brokers in the Chinese money laundering organizations.

What are your broader goals for the caucus?

I’d say our first three priorities are to pursue the inquiries that we made in the [May 20] letter to the Chinese ambassador, pursue the implementation of the beneficial ownership law, and to make the case for a broader international engagement with minimum standards that will discourage countries from providing shelter to the dark economy.

We just wrote to the Chinese ambassador asking for their cooperation, because illegal drugs are a problem that affects the Chinese population as well. The illicit fentanyl manufacturers in China appear also to be selling their product domestically, as well as exporting it to the U.S.

As for corporate transparency, one of the reasons I want to focus on this is because of the success we had recently in beginning to clean up America’s own shell-company problem.

I was one of the most ardent advocates for the beneficial ownership law. Now we’re looking at making sure that the Treasury regulations are strong to take advantage of the new authorities the department now has.

I think that gives us a whole new window into the role of American corporations in all of these money laundering and dark economy transactions.

Because of the overlay that you described, the more that we’re attacking that dark economy and driving it into the sunlight, the more we’re advantaging ourselves not just in the fight against the international narcotics empires, but also advantaging world security.

What kind of details do you think are important now that Treasury’s Financial Crimes Enforcement Network, or FinCEN, is working to develop the beneficial ownership registry?

To me, what’s most important is to make sure that our law enforcement community is fully engaged with the Treasury Department in the design of the new regulations so that they’re getting the information they need in the timeframe and the format that they need it to effectively pursue criminal activity.

I think the question of kleptocracy and its national security risk is a little bit different and that it’s going to take international treaties, sanctions, trade pressure to be brought to bear to set a common global standard for the kind of behavior we’ll accept from countries in terms of hosting the dark economy.

I think the focus is going to be more on the law enforcement side in the first instance. Of course, we expect FinCEN will be talking to Treasury’s tax enforcement to make sure that they’re engaged and have a voice in the development of the regulations as well.

I’m assuming you envision an oversight role for Congress after the registry is up and running?

I think we have to feel our way along and see what each of these improvements produces in terms of results. But our goal should be a world in which sanctuary for criminals and kleptocrats and oligarchs and terrorists to hide their funds is hard to find.

Right now, refuge for that money is very easy to find, and we have not yet grappled with the extent to which our national security and the world’s security is compromised by allowing our rule of law system to give sanctuary to those funds.

That I think is where we need to be at the end of the day, that it is as unacceptable to engage in the dark economy as it would be to engage in child labor.

You’ve also called for FinCEN to finalize a 2015 proposal to have hedge funds and private equity covered by the Bank Secrecy Act, as well as to remove exemptions in the Patriot Act that shield real estate professionals. Why do you think it’s important to do those things now?

The banks are required to take comprehensive steps to avoid becoming vectors of money laundering, and that has moved the pressure to other professions. Whether it’s law firms or stock brokerages or yacht brokerages or real estate firms, we do need to expand transparency in those areas.

Defining exactly what needs to be reported and what wouldn’t be necessary remains an issue. As we saw just dealing with beneficial ownership, there are pretty powerful interests that make things difficult.

We had to go through opposition first from the U.S. Chamber of Commerce, which eventually quieted down when attention was paid to what they were actually saying, and then from the American Bar Association, which eventually quieted down when attention was paid to what they were actually saying, and then from the National Federation of Independent Businesses.

As pressure in favor of the bill mounted, there was counterpressure that basically deployed these organizations one after another until they really couldn’t credibly hold their position any longer.

When you see that happening, you look for what’s behind it. If you’ve got a multitrillion dollar economy, you’ve got a lot of people who are making a lot of money, whether they’re slippery lawyers or realtors who take enormous fees out of selling very, very expensive properties. There’s a business model that is threatened and they will fight back.

That’s the problem.

You’ve got to confine the fight and define what you need to do accurately so you are not making unnecessary enemies. Then you have to build the political pressure to be able to push through against the counterpressure from people who are rewarded by the dark economy.

You’ve mentioned lawyers. For many AML professionals, the necessary next step is to bring attorneys under AML rules, but it seems impossible here in the U.S. Or is it? Can you envision a similar path to the one you’ve just described that would make it possible to take the transparency push towards lawyers?

Yes, I can, but we have to do a lot of work to figure out how to get it done. If you don’t mind, I’ll float a hypothetical example.

When corporations were up to no good in their financial reporting, the Sarbanes-Oxley Act of 2002 required the procedural step that the CFO and CEO had to sign off on a whole variety of statements in ways that put them on the hook for false statements that were made in the corporate name. That created enormous internal pressure within corporations to quit making those kinds of false statements that would imperil the CFOs and CEOs.

Now, one could imagine a requirement that law firms of a certain size undertake some kind of internal reporting so that the managing partners know what’s going on and have done the work internally to the firm to make sure their clients are legitimate, and that they are not participating in money laundering and the dark economy.

That could make a significant difference in law firm behavior. It would also not require reporting to the government. Nor would it require breaking attorney-client privilege. There are a bunch of ideas we could come up with to drive bad behavior to the fringes of these professions rather than have it happen in the mainstream.

What is your message to the AML compliance community? How can they can help advance these efforts?

The first thing I’d say is thank you, because their hard work has shown that, within the banking industry, you can clean up this danger and business will proceed. Life will go on, people will make money, and they’ll do so in a way that is not conducive to so much evil in the world. They’re the exemplars.

I think the more that they can share the message that these are worthwhile steps to take, that they would not like to see the banking industry go back to the way it was, they can be a voice of reason in the private sector for the value of these changes. That’s pretty important.

But I really do want to pass on the thank you, because as the Chamber of Commerce first appeared in opposition to the beneficial ownership bill, it was the banks and anti-money laundering folks who pushed back and got them to stand down.

Same with the American Bar Association when it stood up as an adversary. It was the former prosecutors now involved in the anti-money laundering divisions that pushed back and got them to stand down.

Those victories helped get the beneficial ownership law passed.

Contact Valentina Pasquali at

Topics : Anti-money laundering , Corruption/Bribery , Know Your Customer
Source: U.S.: Congress , U.S.: Department of Treasury , U.S.: FinCEN
Document Date: May 26, 2021