Federal legislation aimed at preventing the use of anonymous shell companies has been in the making for over ten years.The latest measure, which would require businesses to disclose their beneficial owners at the time of formation, hitched a ride on the National Defense Authorization Act (NDAA) for fiscal year 2021 and may finally see the light of day as law.
The brainchild of Representative Carolyn Maloney (D-N.Y.), different versions of the corporate transparency bill have bounced around Washington over the past decade, the latest of which was in the form of the Corporate Transparency Act of 2019. I wrote a short blog post (more like "micro-blog" post) about the Corporate Transparency Act when it was first introduced here. Although prior iterations of this legislation have failed to pass Congress, the AML landscape has changed considerably since the bill was originally introduced. In fact, a number of events over the past few years have exposed significant gaps in the U.S. AML regime, making the current environment ripe for change and increasing the likelihood that the bill will finally be enacted.
Notably, the release of the Panama Papers and a number of other data leaks, have brought to light the widespread abuse of shell companies. There has also been an increased focus and recognition of the U.S. as a financial secrecy haven due primarily to its lax requirements around company formation. Additionally, EU member states, along with a number of other countries, have recently begun implementing beneficial ownership registries. Finally, the Bank Secret Act (BSA), which reached its 50th anniversary this year, hasn't been significantly updated since the USA PATRIOT Act was passed in 2001. These events have resulted in increased international pressure on the U.S., once a leader in the AML effort, to implement long overdue and more meaningful AML reform.
Anonymous shell companies have long been exploited as vehicles for various crimes, including tax evasion, money laundering, sanctions busting, cybercrime, terrorist activity, and many other illicit activities. Shell companies are legal to form and they operate just like any other business. They can own assets, bank accounts, and engage in business and financial transactions. The problem arises because these legal entities can be misused for nefarious purposes while their owners and controls remain hidden.
The most recent AML measure has support from both sides of the political spectrum, the banking industry, the National Fraternal Order of Police, the National Association of Attorneys General, NGOs, human rights groups, and a number of others, as well as Treasury Secretary Steven Mnuchin. It is not without its opponents however. The most vocal of these are small and independent business organizations, which see the legislation as both burdensome and a privacy threat.
As a result, the current bill contains several changes to address these concerns. Some of these amendments include a reduction in the reporting frequency, a lengthened period of time before the bill takes effect, and a change to the penalties for failing to provide the information, penalizing only willful negligence. Representative Maloney noted this as a “very modest price to pay for national security,” and said that for the United Kingdom to collect this information, it costs a small business about a $200 one-time fee.
Under the corporate transparency bill, four pieces of information about the identity of beneficial owners would need to be filed with FinCEN— a name, address, date of birth, and Social Security number or passport number. This is basic Know Your Customer (KYC) information that is already required to open a bank account.
The NDAA was finalized last week and Congress is scheduled to vote on it this week. If it passes, the bill would have a significant impact on the formation of anonymous shell companies in the U.S., with the ultimate goal of curtailing the various crimes that are enabled when corporate beneficial owners remain hidden.
Prior Blog Posts
I wrote about shell companies, beneficial ownership, and proposed AML legislation in several prior blog posts. I discussed the likelihood of the passage of the Corporate Transparency Act of 2019 and its companion bill, the ILLICIT CASH Act, here. I wrote about managing AML risk related to shell companies here, a post which also contains a list of red flags associated with illicit shell company use. The EU's 5th Anti-Money Laundering Directive (AMLD5) and its mandate for public beneficial ownership registries is summarized here. And a post about the value of BSA data, particularly how it relates to beneficial ownership, can be found here.