WASHINGTON - The Democratic takeover of Congress, a recent reprimand from an international anti-laundering group, and high-profile bank fines are causing regulators and financial institutions to take a closer look at shell companies this year.
Once largely an issue only overseas, such companies have grown in numbers domestically over the past few years.
"You'll see more attention this year [on shells], because of the increased awareness and the anonymity behind shells on who owns them," said Ann Jaedicke, the Office of Comptroller of the Currency's deputy comptroller for compliance policy.
Sen. Carl Levin, the new chairman of the Senate Permanent Subcommittee on Investigations, is expected to look again at shell companies this year, and he is considering legislation on the topic. Bankers said regulators, in part because of Sen. Levin's interest, are stepping up their examination of bank ties to such companies.
Shell companies - a loosely defined term that refers to business entities without an active business or significant assets - are exempt from ownership disclosure requirements. They typically have no physical presence other than a mailing address, employ no one, and produce little or no independent economic value.
Regulators say that shell companies have legitimate uses - including asset transfers and corporate mergers - but the Treasury Department and international anti-laundering agencies have identified them as a growing threat for money laundering, in part because of the lack of transparent ownership.
"Shell companies get to the root of much of the problem of money laundering which is masking the ownership of money," said David Caruso, chief executive officer and managing director of Dominion Advisory Group LLC, an Centreville, Va., anti-laundering consulting firm.
Bankers' relationships with shell companies are tricky. Under the USA Patriot Act, banks must take several steps to confirm the identity of consumer customers. With corporate customers, banks must confirm the business is legitimate, but not necessarily who owns it.
That's good, bankers say, because determining who owns a shell company is anywhere between extremely difficult and impossible; even determining if a corporation is a shell company is hard.
Another complicating factor is banks' correspondent banking relationships. Under anti-laundering rules, banks must be satisfied that their customers' customers are not engaged in laundering or other criminal activity.
Despite the challenges in identifying shells, observers said, regulators expect banks to be watching out for such companies and conducting due diligence on them.
"During the examination process … [regulators] view those as high-risk accounts," said Peter Djinis, a lawyer in Sarasota, Fla., and a former Financial Crimes Enforcement Network official.
Banks may soon be required to get ownership information and verify that data, he said.
"Given today's climate, any time you are opening an account it is prudent to know enough information so at the end of the day you can decide if the transactions are consistent with the understanding of the business," Mr. Djinis said.
But it is unclear who would pass such a standard. Sen. Levin said he still wants the states - whose company formation rules vary - to do more to ensure a company's ownership is known. None of the 50 states routinely require applicants who want to form a corporation to disclose who would own it.
"Each year states form over 2 million new U.S. companies without obtaining the names of company owners," the Michigan Democrat said in a written response to questions from American Banker. "Unless states stop forming anonymous companies and start requiring more information, criminals will continue to misuse U.S. companies to launder money, evade taxes, and commit other crimes."
Though some observers speculated that Sen. Levin also could require banks to identify shell companies' ownership, an aide signaled that is not his focus.
"As part of their anti-money-laundering obligations, banks already have to obtain beneficial ownership information for companies that fall into high-risk categories," the aide said. "The question of whether states should know who is behind the companies they create and keep an official record of that information is a different issue."
But industry representatives say they worry regulators are already taking steps to push banks to do more. Some point to fear of Sen. Levin, who was highly critical of the OCC's handling of a money-laundering problems discovered at Riggs Banks.
But others point to the Financial Action Task Force, an international anti-laundering body that recently criticized U.S. company formation laws. In June the task force - which the United States helped form - said the country should require companies to disclose beneficial ownership information. The task force gave the United States two years to improve the situation.
"There's been attention on it in the past that's come more to the surface, in part because in the international arena there's been some focus on it," said Jamal El-Hindi, associate director for regulatory policy and programs at Fincen.
Bankers also are paying more attention to the issue because of fear of prosecution. In November 2005, Bank of New York was forced to pay $26 million of fines and $12 million of restitution to victims of a 1996 fraud scheme involving two shell companies opened at a retail branch of the bank.
A month later ABN Amro Bank NV was fined $80 million - one of the largest anti-laundering fines in U.S. history - for Patriot Act and Bank Secrecy Act violations. The problems included U.S. shell company customers that shuffled black-market money and engaged in financial scams.
The fines were notable for their size and for where the shell companies were located. In the past criminals used offshore shells to conceal asset ownership. But as banks began to scrutinize offshore accounts, criminals increasingly opened shell companies in the United States and received the same anonymity.
Regulators did not anticipate this, according to Robert Serino, a former OCC deputy chief counsel and now counsel at the Washington law firm Buckley Kolar LLP.
"At the OCC, we would send warnings on these. We never thought this would come onshore," he said.
Exactly how many shells companies operate in the United States is unclear, but observers say the numbers are steadily rising.
At the end of 2005 there were more than 4.9 million limited liability corporations, a key type of shell, according to the International Association of Commercial Administrators. The average state's increase in those companies from 2001 to 2005 was 133.37%, the group said.
Fincen officials said they are trying to bring more attention to banks and others about the risks of shell companies.
Late last year the agency released a report criticizing some states, such as Delaware and New York, for requiring little or no information to set up a shell company. In an advisory released along with the report, Fincen also gave broad guidelines for banks on the issue, saying they should review their anti-laundering policies to "ensure that internal policies, procedures, controls, systems, and training programs are designed to prevent, detect, and report possible money laundering and other financial crime involving shell companies."
The advisory also listed potential indicators of laundering involving shells, including an inability to obtain the identity of originators or beneficiaries of wire transfers, payments with no stated purpose, goods or services that do not match the company's profile, and the frequent involvement of beneficiaries in high-risk, offshore financial areas.
Mr. El-Hindi said that regulators expect banks to fold the Fincen advisory into their anti-laundering process, and that the agency might require more in the future.
"I don't know if we need to impose extra requirements on ... [banks], but I don't know I would rule it out," he said.
Bankers, meanwhile, are urging any action to be directed to the states.
Richard Riese, the director of the American Bankers Association's Center for Regulatory Compliance, said that banks already have more than enough anti-laundering obligations, and that forcing them to identify the owners of shell companies would be too burdensome.
"If there is a need for greater transparency about ownership of corporate entities, then that is a matter for states in this country and the federal government, and not the obligation of banks to address," Mr. Riese said. Banks "should not have the obligation or authority to resolve this."
Sources said several large banking companies have stepped up attention to shell companies but are frustrated with the idea that regulators could require more.
But some said it is only a matter of time before bankers are forced to collect ownership information.
"In a risk-based system, banks need to do due diligence on all of their customers," Mr. Serino said. "Banks are going to have to ... [find ownership] if they do business with shells. I think banks will be required to know their corporate customer."