Written by Taher Kameli & Chathan Vemuri
The creation of anonymous shell corporate structures for illicit purposes such as money laundering, the sale of pirated and counterfeit goods, human trafficking, and the drug trade has been a source of great concern for the U.S. government. These corporate structures are used to hide stolen assets and are without clearly identified owners, making it difficult to hold anyone to account. A range of groups have called for legislation demanding transparency from newly formed reporting corporations to hinder the creation of these anonymous shell corporate structures used to hide assets from illicit activities.
On December 11, 2020, these groups got just that. Both houses of Congress passed (by veto-proof majority) the Corporate Transparency Act, as part of a larger Act called the National Defense Authorization Act. The Corporate Transparency Act had been on the table in some form or the other since 2017, with the House of Representatives passing a version of the Corporate Transparency Act in 2019. This was supported by the White House but was never acted on by the Senate. As such, it was never enacted.
With the passage of the new Corporate Transparency Act, the U.S. finally pushed forward a mechanism by which to restrict the proliferation of anonymous corporations used to hide illicit activities and the funds stemming from them, bringing it in line with other First World countries. Assuming it is signed by the President, the Act will go into effect next year in 2021.
In general, the Act directs the Financial Crimes Enforcement Network (FinCEN) to register the identifying information of beneficial owners of reporting companies (those companies created by filing documentation with the Secretary of State or equivalent offices of any State, or formed under foreign law and registered to do business in the U.S.). Beneficial owners are those that exercise substantial control over entities or own or control at least 25% of the ownership interests in said entities.
Additionally, applicants for corporate status need not be beneficial owners yet they too must provide their information to the FCEN. The reporting companies must include the following in their reports about their respective beneficial owners and/or applicants submitted to the FinCEN: i.) the name, ii.) date of birth, iii.) current address (business or residential), iv.) unique identifying numbers from proper documents.
Already reported companies must report this information within two years of the effective date, “which regulations promulgated within one year of enactment will determine.” Newly formed entities will be required to turn over these reports at the time of formation. Furthermore, whenever there is a change in beneficial ownership, the reporting company must report this change to the FinCen, who will update the company ownership reports accordingly. These reports will be stored in a private database and made available to Federal and state law enforcement agencies upon proper request.
Additionally, the Department of the Treasury (DoT), foreign law enforcement, and financial institutions will have access to this database, be it for tax administration purposes (DoT), investigations for transnational crimes involving money, or mere customer due diligence. Those who choose not to provide these reports can face civil penalties of up to $500 a day for every day the violation continues whereas those who provide false or fraudulent information may face criminal fines of up to $10,000 as well as possible imprisonment for up to two years. Finally, unauthorized disclosure of this information costs not only the civil penalty of up to $500 a day but also a criminal penalty of up to $250,000 and a maximum five-year prison sentence.
However, this Act has broad implications for the regulation of companies to ensure compliance with domestic and international laws. As part of its crackdown on money laundering, the Act prohibits issuing any certificate evidencing ownership of the entity in question in bearer form, which has long been the concern of anti-money laundering initiatives.
Another, safety regulation of the Act is to control indirect ownership to prevent it from being a loophole through which to carry out illicit activity: such as a limited liability company (LLC) formed by a foreign corporation reporting the information of a non-American shareholder of said corporation. Also, foreign entities that do not register with the state to do business are not required to disclose their beneficial owners.
Even more importantly, FinCEN’s new set of regulations may lessen the anti-money laundering regime (AML) compliance burdens for financial institutions by modifying obligations under existing regulatory schemes for reporting companies such as the Customer Due Diligence Rule (CDD) issued in 2016. This required certain financial institutions to obtain the beneficial ownership information of specific customers as part of their AML programs. Exactly how is not clear as FinCEN has not yet complied with the Congressional directive to revise the existing CDD Rule in light of the new Corporate Transparency Act.
But it could potentially deem CDD obligations satisfied in certain circumstances such as obtaining beneficial ownership information from FinCEN or CDD definitions can be revised to include only those that were excluded from the definition of “reporting companies” under the CTA. These are just possible changes.
Nevertheless, it is not clear if it will be effective in reducing the use of shell companies for laundering illicit funds but evidence collected for the first iteration of the Act in 2019 suggested that the impact would be significant wherever there was transparency.
However, as far back as 2019, concerns have existed for its potential violations of privacy, individual rights, the insecurity of sensitive information in the Government’s hands, potential abuse by those engaged in illicit business ventures to be more sneaky in how they set up their companies, and potential violations of attorney-client privilege due to attorneys having to potentially report their own clients’ activity. There’s no reason to think that these concerns would have disappeared with the passage of the new Act.
In the end, the Corporate Transparency Act represents a milestone in the United States’ anti-money laundering initiatives. Not only may it streamline the existing company reporting process, but its closeness to measures used in other countries may allow for more effective international cooperation in cracking down on these schemes.
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 Gascoigne, Clark, FACT Sheet: A Brief Summary of the Corporate Transparency Act of 2019 (H.R. 2513), FactCoalition (Sept. 5, 2019), available at https://thefactcoalition.org/fact-sheet-a-brief-summary-of-the-corporate-transparency-act-of-2019-h-r-2513/
 Id. (“National security experts, police, sheriffs, local prosecutors, state Attorneys General, federal prosecutors, human rights advocates, anti-human trafficking groups, faith-based networks, international development NGOs, several CEOs and businesses, banks, credit unions, real estate professionals, insurance companies, over 125 non-governmental organizations, and scholars at both conservative and liberal think tanks, among others.”)
 Basha, Leigh-Alexandra, Bell, Daniel J., and Ransom, David, Congress Passes the Corporate Transparency Act with Veto-Proof Majority, 10 Nat’l Law. Rev. (Dec. 15, 2020) available at https://www.natlawreview.com/article/congress-passes-corporate-transparency-act-veto-proof-majority
 Nunn, Robin, Tehrani, Daniel and Woll, Bryan, Corporate Transparency Act: How Will it Affect Financial Institutions?, Morgan Lewis (Dec. 16, 2020) available at https://www.jdsupra.com/legalnews/corporate-transparency-act-how-will-it-62010/
 Gascoigne, Clark, FACT Sheet: A Brief Summary of the Corporate Transparency Act of 2019 (H.R. 2513), FactCoalition (Sept. 5, 2019), available at https://thefactcoalition.org/fact-sheet-a-brief-summary-of-the-corporate-transparency-act-of-2019-h-r-2513/ (“The early evidence, where transparency is in place, suggests it will have a significant impact.
- An early analysis of FinCEN’s efforts to collect ownership information in certain real estate transactions found that ‘…about 30 percent of reported transactions involve a beneficial owner or purchaser representative that was also the subject of a previous suspicious activity report.’
- A second study of FinCEN’s program by the New York Federal Reserve and the University of Miami found, ‘After anonymity is no longer freely available to domestic and foreign investors, all-cash purchases by corporations fall by approximately 70 percent, indicating the share of anonymity-seeking investors using LLCs as ‘shell corporations.’’
- An analysis of the U.K. directory found robust law enforcement use of the information.”
 Eberhardt, Anne, The Controversy Surrounding the Corporate Transparency Act of 2019, Corporate Compliance Insights (May 22, 2020) available at https://www.corporatecomplianceinsights.com/controversy-corporate-transparency-act-2019/