The United States aims to stop the entry of illicit foreign funds through its real estate market – Rajika Jayatilake reports

The cornerstone of an age of technology is speed and convenience in financial transactions. This extends to the global transfer of money as well. The negative side to this is the rise of phantom investments in shell companies across the world.

According to a recent IMF study, global phantom investments amount to an incredible US$ 15 trillion, which is equal to the combined annual GDP of China and Germany!

The CEO of Standard Chartered Bank Bill Winters notes that “criminals are no longer simply winning when it comes to money laundering; they’re harnessing a growing arsenal of digital capabilities to completely change the game.”

Money laundering and associated corrupt activities are a global problem, and affect poor and wealthy nations alike. Indonesia’s Finance Minister Sri Mulyani Indrawati states: “Corruption, money laundering and tax evasion are global problems, and not simply challenges for developing countries.”

Evasive by its very nature, laundered money seeks economies that condone secrecy and also offer enticingly lower corporate tax rates. The IMF study shows that phantom capital is siphoned off as foreign direct investment (FDI) into shell companies that are merely a front and don’t engage in any business activity other than financial engineering to avoid paying taxes on that money.

The study also finds that 10 economies including Ireland are hosting nearly 85 percent of the world’s phantom FDI.

Adding weight to the concept is the Financial Secrecy Index (FSI), which is a politically neutral ranking of countries according to their secrecy and scale of offshore financial activities. It’s a tool created by the UK based independent international network called the Tax Justice Network (TJN) to enable understanding of the magnitude of global financial secrecy, tax havens and illicit financial flows.

The FSI reveals that the greatest financial secrecy for corrupt money is provided not by small palm fringed islands as popularly imagined but some of the world’s largest and richest countries.

Meanwhile, the recently published FSI 2020 reports that the US has overtaken Switzerland, which was earlier known as the premier haven of financial secrecy. And the Cayman Islands has leapfrogged the US and Switzerland to become the worst offender in hiding illicit funds of the world’s corrupt.

However, the FSI 2020 suggests that financial secrecy around the world is reducing compared to other years because more nations are embracing transparency reforms. In general, the countries on the index reduced their contribution to global financial secrecy by seven percent.

As Research Fellow at the Hudson Institute’s Kleptocracy Initiative Nate Sibley points out, the UK created a beneficial ownership register in 2016 and the EU instructed member states to create beneficial ownership registers at the beginning of
this year. Beneficial ownership shows the real owners behind shell companies. Only the US has anti-money laundering laws, which haven’t been updated for almost 20 years.

Heightening awareness of the fact is the US Department of Treasury’s identification of this shortcoming as one of the nation’s main vulnerabilities in its fight against money laundering and illicit money flows. However, this situation is about to change with the recognition that America urgently needs to modernise its laws.

The House of Representatives recently passed a landmark bipartisan anticorruption measure known as the Corporate Transparency Act to introduce unprecedented transparency to the US financial system. The act, which aims to create a federal register of the real owners of all US based companies, was overwhelmingly supported by Republicans, Democrats, the White House, law enforcement agencies and banks.

However, with COVID-19 and partisan dysfunction blanketing Washington, the Corporate Transparency Act was omitted from the spending package approved by the US Senate in July; and now, it has to be negotiated between the two chambers of Congress.

Sometime ago, The New York Times engaged in an investigation of over 200 shell companies owning exclusive real estate in Manhattan. It appears that 26 percent of New York City’s high end real estate was originally sold to foreign asset holders. In recent times, over 50 percent of real estate buyers in NYC have been foreigners – including government officials and their close associates from Russia, Colombia, Malaysia, China, Kazakhstan and Mexico.

The real owners of shell companies that own the land are so well cocooned that it took The New York Times more than a year to uncover them. The investigations covered business, property and court records of over 20 countries, and many interviews.

“We like the money that comes into our accounts and we’re not nearly as judgemental about it as we should be,” says Raymond Baker, who is the Founding President of Global Financial Integrity.

And US Congressman Tom Malinowski avers: “There’s no better way for America to stand up for people suffering under repressive regimes around the world than by cutting off their corrupt leaders’ ability to launder money through shell companies and real estate on American soil.”


Sri Mulyani Indrawati Finance Minister of Indonesia