Russia's invasion of Ukraine pushed trans-Atlantic cooperation to a peak, but rules in U.S. states, U.K. municipalities and EU member states that enable bankers and lawyers to conceal who benefits from companies, trusts, real estate and other assets have blocked their economic war efforts. Work by the International Consortium of Investigative Journalists and others motivated politicians to propose transparency measures, according to several private attorneys who have worked for the U.S. Treasury and Justice departments. They spoke on a panel at the American Bar Association Section of Taxation's May meeting, held in person in Washington, D.C., and online.
"The hypocrisy of it sort of reminds me of the League of Nations, right? We went out and told the whole world you need to have a League of Nations, and then we didn't join," said Jay Nanavati, partner at Kostelanetz & Fink and a former federal tax prosecutor. "Going back to my days at DOJ, I mean, it was really sort of galling."
Nanavati said while many federal tax investigations he worked on arose in Nevada, the Nevada secretary of state's website "shockingly" posted a taunting message saying "'no information sharing agreements with the federal government'."
Government policies in U.K. territories such as the Cayman Islands, dependencies such as Jersey, EU member states such as the Netherlands and Luxembourg and their subnational governments allow employees at private financial firms to refuse to identify who benefits from valuable assets, according to several panelists.
Secrecy jurisdictions at home and abroad have hindered the U.S. Financial Crimes Enforcement Network's efforts to seize assets from oligarchs based on intelligence, several former government attorneys said, despite several tranches of rules aimed at empowering government investigators.
In December, FinCEN issued proposed regulations implementing the 2020 Corporate Transparency Act, the purpose of which is to create a national beneficial ownership registry, and to combat, to the broadest extent possible, the proliferation of anonymous shell companies that facilitate the flow and sheltering of illicit money in the U.S.
Marco Q. Rossi, principal at Rossi & Associati, said the ABA had openly opposed related regulations in the Corporate Transparency Act, which took effect in January 2021, "on the basis that they violate attorney-client confidentiality."
Pamela A. Fuller, senior tax counsel at Zahn Law Group, said in response, "The ABA is adamant, right? I mean they may get canes and pull us off this panel."
Fuller, who chairs the ABA's tax policy committee, said the 2010 Foreign Account Tax Compliance Act gave FinCEN broad new powers and introduced requirements for other governments to report information to the U.S., which the Americans don't reciprocate.
Rather than going after policymakers in secrecy jurisdictions who enable professional service providers to hide illicit financial flows, the federal government has punished foreign countries for not complying with unilateral reporting requirements, Fuller said.
"The U.S. sanctioned other countries for not implementing FATCA," Fuller said.
Government investigators rely on journalists in groups such as the ICIJ to obtain private information about not just Russian oligarchs, but many wealthy and well-connected individuals and families who they suspect of civil and criminal violations such as tax dodging, money laundering and illicit finance, former government attorneys said.
On May 7, FinCEN published guidance warning lawyers and others that they're planning to step up efforts related to financial transparency, including going after individuals and firms who work with Russian oligarchs, as the military onslaught of Ukrainian civilians continues.
"What FinCEN wants to do is have the reporting company report all persons who might have substantial control, which raises a whole series of issues," said Alan Winston Granwell, of counsel at Holland & Knight LLP. "The point I am making is that if you have something with a Russian connection, you better talk to a sanctions lawyer."
During the early 1980s, Granwell was the international tax counsel and director in the Office of International Tax Affairs at Treasury, responsible for advising the assistant secretary for tax policy on legislation, regulations and administrative matters involving international taxation, and for directing the U.S. tax treaty program.
"If things continue this way, you're probably going to have to keep all sorts of records and expand your engagement letters," Granwell said, suggesting that not only attorneys, but former legal clerks could be implicated by new FinCEN regulations.
"You're saying my law firm could be exposed, clearly," Fuller said.
Now officials in Washington say they expect foreign officials to comply with new unilateral sanctions on Russia spurred by the urge to target Russian oligarchs, but their self-defeating track record on offshore finance has prompted some to call them hypocrites.
"Going after enablers is something that every country in the world is doing right now," said Bruce Zagaris, partner at Berliner Corcoran & Rowe LLP with experience handling cases involving tax-related controversies.
EU politicians for years have tried to expose beneficial ownership information, but in the course of enacting rules, they made lots of compromises that weakened the legislation, Zagaris said.
"Now, with the whole Ukraine business, a number of [U.S.] senators, including [Sen. Elizabeth] Warren, just wrote a letter to the Treasury saying we've got to get moving on this because of what's going on, because we want to uncover these oligarchs," Granwell said. "So we'll see what occurs."
Fuller spoke about a bill that Warren, D-Mass., proposed in March called the Digital Assets Sanctions Compliance Act that would block cryptocurrency companies from conducting business with sanctioned companies. She said FinCEN's December proposals including amending anti-money laundering rules passed in 2020 such that the government could impose fines on many parties if they can prove willfulness regarding civil and criminal financial misconduct.
Fuller also recommended that lawyers interested in how sanctions targeting Russian oligarchs may impact them individually, as well as their firms, should refer to the U.S. Office of Foreign Assets Control's updated FAQs published Wednesday by Treasury.
Fuller repeated an audience member's question: "What happens if that paralegal quits? Or what happens if the associate moves out of her crappy apartment?"
Noting the seriousness of the new measures, Granwell quipped, "They can send you to jail."
Several attorneys said they were unsure given the broad new approaches FinCEN, EU regulators and politicians on both sides of the Atlantic have said they'd like to employ to crack down on illicit finance.
The ABA billed the panel as dealing with "circuitous investment strategies — involving tiers of shell companies, private banks and Wall Street connections" that "have facilitated the 'legal'" placement of billions of dollars with prominent U.S. hedge funds and [private equity] firms. Attorneys also discussed these issues at length.
"The true beneficial owners often remain anonymous, allowing every 'gatekeeper' (i.e., attorneys, accountants and investment advisors) plausible deniability — i.e., the ability to honesty say that he or she was not knowingly working directly for an illicit enterprise," the ABA said in a description of the event.
--Editing by Neil Cohen.
Correction: A previous version of this story attributed Fuller's statements to another person. The errors have been corrected.
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