Do You Know Which Nations Own Your Data? The U.S. Government Doesn’t

(Bloomberg Opinion) -- The U.S. has always welcomed foreign capital – much to our economic benefit. But there is a hidden danger in the way we do business, and it’s growing. 

Washington knows shockingly little about foreign money flowing through the financial system, especially via private fund structures like hedge funds, venture capital and private equity, allowing foreign actors to make opaque investments that pose national security risks. Because the U.S. doesn’t track these flows effectively, we don’t know who owns government-issued debt, let alone who holds the trillions in outstanding corporate stocks and bonds or even which foreign actors invest directly in U.S. businesses.

While public attention has focused on the hacking and disinformation Russia deployed during the 2016 election, financial activity continues to be an integral part of Moscow’s covert influence strategy. But the U.S. can secure its financial perimeter. Protecting national security demands financial transparency and an end to anonymous companies, anonymous investment and unsupervised money flows.

The cases that have come to light show the need for more scrutiny: Last summer, the FBI warned Maryland that the Russian billionaire Vladimir Potanin was an owner of the company that hosted the state’s voter registry. Potanin held his stake through Altpoint Capital, a New York-based private equity firm in which he is the largest investor. Maryland elections were just one risk, though. The same private equity firm owns other companies that won technology contracts with the departments of defense, energy and labor.

The challenge doesn’t come only from Russia. The prominence of Gulf and Chinese money in Silicon Valley, often taking the form of venture capital investment, creates political influence and may provide access to Americans’ personal data. A recent U.S. trade representative report named two venture capital funds, Danhua Capital and Oriza Ventures, as examples of Chinese government efforts to “create a web of entities” to “further the industrial policy of the Chinese government,” noting in particular venture capital firms’ “ability to influence and potentially coerce” startups.

Yet the U.S., unlike Europe, does not require managers of private funds to maintain programs to prevent money laundering. These U.S. private funds hold more than $13 trillion, with no requirement that fund managers check the source of clients’ money, report suspicious activity or determine the true identities of their investors.

Anonymous companies are the most pressing weakness in our financial system. They help foreign investors hide their roles in potentially sensitive acquisitions, and they help foreign adversaries interfere in domestic politics. The U.S. is unique among major economies in allowing individuals, whether or not they are citizens, to form a company anonymously. In many states, it is easier to form an LLC than to obtain a library card. That LLC can be used to channel illegal campaign contributions or as a shell to purchase luxury real estate. Anonymity may prevent some illicit activity from being detected at all. When law enforcement agencies do get involved, they must spend enormous time and energy in figuring out who owns the companies.

Despite ample evidence of risks, the U.S. has failed to ban these anonymous vehicles. Compounding matters, illicit actors have exploited technological advances that facilitate cross-border money transfers and investments. Law enforcement, banks, transparency groups and the Treasury secretary all agree that it is past time for Congress to act.

Ending anonymity and improving transparency would also bolster screening of transactions conducted by the Committee on Foreign Investment in the U.S., which vets foreign acquisitions of American businesses for national security risk. Last week the Chinese owner of the gay dating app Grindr announced that it had reached an agreement with Cfius under which it must sell the app. The Grindr decision, which was grounded in data privacy concerns, follows Cfius’s rejection of the acquisition of MoneyGram by a Chinese company and the committee’s requirement that a private equity firm with Russian investors sell its stake in a cybersecurity company. Burying ownership amid layers of shell companies may make it more difficult to identify transactions in which foreigners have acquired a controlling interest in U.S. firms. 

National security officials have warned about authoritarian governments using these unconventional tactics for decades: In 2017, an intelligence assessment described Russian influence campaigns as “multifaceted and designed to be deniable because they use a mix of agents of influence, cutouts, front organizations, and false-flag operations.” More than 30 years ago, the FBI delivered almost the exact same warning about the Soviet Union.

While Congress must pass a law to ban anonymous companies nationwide, one powerful tool already available to combat illicit finance continues to go unused. The Treasury Department for over a decade has had the legal authority to set up a database of international funds transfers conducted through the U.S. banking system but has not done so. This collection would be a true game-changer in combating illicit financial flows, whose largest drivers are China and the former Soviet states. The FBI stated in a report to Congress that such raw transactional data – which it has received from Treasury in limited quantities – enhances the bureau’s ability to combat illicit Russian financial flows and bolsters counter-intelligence and investigations into money laundering and transnational organized crime.

A comprehensive American strategy to combat authoritarian interference must put countering illicit finance and bolstering financial transparency front and center. A modest investment in transparency will pay major security dividends. Russia’s and China’s efforts to project power and gain influence in the U.S. through financial means continue to intensify. Defensive measures are prudent and overdue.

To contact the editor responsible for this story: Philip Gray at philipgray@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Joshua Kirschenbaum is the senior fellow for illicit finance at the German Marshall Fund’s Alliance for Securing Democracy. He previously worked on sanctions and money laundering at the U.S. Treasury Department.

David Murray is the vice president for product development and services at the Financial Integrity Network. He served in the U.S. Treasury Department from 2008 to 2017.

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