Reported by HELEN SANTORO

As of January 1, small businesses must report who owns and controls the company to financial regulators or face stiff penalties. The disclosure is required under a new anti–money laundering law designed to curb tax fraud and terrorism financing.

But while mom-and-pop cafe and hardware store owners are now busy filling out the disclosure paperwork, many investment vehicles flagged by law enforcement agencies are exempted from those same disclosure rules after Wall Street firms spent millions lobbying on the matter.

Early versions of what became the Corporate Transparency Act did not include the special carve-out. But the final legislation had a line exempting pooled investment vehicles. That means venture capital funds, hedge funds, and private equity funds are not required to report their ownership information, even though the FBI has said such opaque entities are among those used in criminal money laundering.

This loophole undermines “anticorruption, counterproliferation, and counterterrorism programs,” Senators Sheldon Whitehouse and Elizabeth Warren (Democrats from Rhode Island and Massachusetts, respectively) wrote in a 2022 letter to the Treasury Department and the US Securities and Exchange Commission (SEC), which is responsible for regulating the securities markets and protecting investors.

Congress included the Corporate Transparency Act in a defense spending bill and passed the legislation with bipartisan support in January 2021. This happened amid growing concerns over financial crimes following scandals like revelations of corruption and money laundering within the FIFA soccer association and the Panama Papersexposé detailing widespread international corruption.

In a 2022 letter, lawmakers from both parties urged the Treasury Department to accelerate the implementation of the law, saying delays would “undermine American efforts to respond to Russia’s war against Ukraine, and hinder broader efforts to protect the U.S. financial system against the threat of illicit finance.”

According to lobbying records, the American Investment Council (AIC), an advocacy organization for private equity firms, spent $22 million trying to influence legislators over the past decade. In the two years leading up to the passage of the Corporate Transparency Act — and its inclusion of the loophole — the group lobbied directly on the legislation and related matters. AIC later boasted that it “worked with Members of Congress and their staffs to help craft these exemptions.”

Once the law passed, the Treasury Department was charged with issuing detailed rules and requirements for companies to comply with the statute. At the time, transparency groups urged regulators to issue as narrow an exemption as possible. But AIC pressed treasury regulators to apply the exemption not merely to pooled investment vehicles’ parent companies, but also to the firms’ complex web of “subsidiaries and affiliates.”

As justification, the group insisted that the lifespan of a private equity fund is usually ten to twelve years, meaning it takes that much time to gather money from investors, invest that money into businesses, and sell those businesses for a profit. “Criminals would prefer quick access to their ill-gotten gains,” AIC wrote. The group also noted that since there typically are “restrictions on cash withdrawals during the fund lifespan,” private equity funds are “unattractive for money laundering.”

The final rules, issued at the end of 2023, clarified that the Corporate Transparency Act exemption extended to subsidiaries of banks, venture capital funds, and investment companies.

Read full report: https://jacobin.com/2024/01/wall-street-money-laundering-exemption-lobbying