According to FinCEN, “U.S. government reports have consistently identified the ability to operate through legal entities without ready identification of their beneficial owners as a key illicit finance risk for the U.S. financial system.” Earlier this year, Congress enacted the Corporate Transparency Act (CTA) to close this gap. The CTA requires every U.S. corporation, limited liability company or similar entity to identify its beneficial owners to FinCEN. FinCEN would make use this information as part of the government’s strategy to deter, detect, and prosecute financial crimes such as money laundering.
Under the statute, every state-licensed insurance company is exempt from reporting under the CTA – meaning insurers have no federal obligation to reveal their beneficial owners to FinCEN. For the 6000 traditional insurance companies in the U.S., this exemption makes sense because state insurance regulators carefully scrutinize insurance company ownership and make significant information available to other regulators and the public.
In an astounding oversight, the CTA appears to have swept some 3000 secretive state-licensed captive insurance companies into this exemption creating a gaping hole in our national strategy to fight the scourge of financial crime. This is not a hypothetical problem. The Internal Revenue Service has included abusive captive arrangements in its annual “Dirty Dozen
” for years. As recently as last month, the IRS has urged participants in abusive captive insurance schemes to fess up before one of its 12 newly formed captive examination teams come knocking.
While Congress may have thought state insurance regulators have been on the beat policing financial crime risk among captives, the evidence suggests rather than opposite. For example, the U.S. Department of Justice is currently in federal court trying to compel the Department of Insurance of the State of Delaware to comply with an IRS summons
as part of an investigation of abusive captives licensed in that state. CBI’s own work in investigating state-licensed captives has uncovered captives ultimately owned by a U.S. sanctioned “Communist Chinese Military Company
Ideally, the National Association of Insurance Commissioners would reverse its long-standing support of secrecy laws that have shielded captive insurance companies from public and even regulatory scrutiny. In the absence of a clear commitment by state regulators to address the financial crime risk posed by the captives they license and oversee, FinCEN (or, if necessary, Congress) must pare back the CTA’s insurance exemption so that state-licensed captive insurers are subject to the same financial crime controls as other high-risk entities.