Friday, January 8, 2021

Corporate Transparency Act – Beneficial Ownership of Shell Corporations Must Be Disclosed (1/8/21; 2/11/21)

On January 1, 2021, Congress overrode the President’s veto of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”), here.  Among the provisions of the NDAA was TITLE LXIV--ESTABLISHING BENEFICIAL OWNERSHIP INFORMATION REPORTING REQUIREMENTS (§§ 6401-6403), which is called and may be cited as “Corporate Transparency Act” (§ 6401).  The CTA adds 31 USC § 5336, titled Beneficial Ownership Information Reporting Requirements.

First I will provide a high level summary (with some links), and Second some brief comments.  I will refer to the provisions by the short name by the initialism CTA for the Corporate Transparency Act.

High Level Summary (drawn from the following three web sites as well as a quick review of the CTA’s provisions: Jen Kirby, The US has made its biggest anti-money-laundering changes in years (Vox 1/4/2021), here, Landmark Bill Ending Anonymous U.S. Companies Is Enacted (FactCoalition 1/1/21), here; and Morris Pearl, Congress just passed the most important anti-corruption reform in decades, but hardly anyone knows about it (Fortune 12/26/20), here):

Certain corporations (non traded or with a small level of activity) will have to register their beneficial ownership with Treasury which will incorporate the information into a database that may be accessed by law enforcement agencies.  Prior to this, there was no federal requirement and states usually did not require that beneficial ownership be disclosed.  The CTA does not prohibit otherwise anonymous shell companies; it just requires that the ownership be disclosed to Treasury.  As noted in the Vox article, however, some compromises were made:

Clark Gascoigne

This is, of course, a compromise, right? If I could have waved a magic wand, this is not the bill I would have written.

 But it is a compromise with integrity. Most importantly, the definition of who is a “beneficial owner” in the bill is very strong and will truly identify the ultimate owners of the companies. That’s a big deal.

 Now, it doesn’t solve all of our money-laundering problems. One big exemption in this is that while it applies to corporations, limited liability companies, it does not apply to trusts or partnerships.

 Partnerships are generally considered lower risk, but trusts are a major issue, particularly because the vast majority of trusts in the United States don’t actually register with their legal contracts.

 So you will still be able to set up a trust that could potentially be abused for money laundering after this. That’s something that we’re going to have to take a look at. There are studies that the Government Accountability Office and Treasury Department are going to have to do on the risks posed by trusts. The bill mandates those studies, and hopefully we’ll be able to address that down the road.

 There’s also some concerns around pooled investment vehicles, like hedge funds and private equity funds, that are operated or advised by a registered investment adviser. Law enforcement will be able to tie the fund to the investment adviser, and they’ll know the beneficial ownership information for the investment adviser, but they won’t know it for the fund itself.

 There is a big concern around that because you’ve got trillions of dollars in money going into these private pooled investment funds that could potentially pose some risk for money laundering.

 Jen Kirby

When it comes to those pooled investments, just to make sure I’m understanding this: So if I have dirty money, and I am putting it into this fund with a lot of other investments, it basically muddies the waters. You know who’s managing the fund, but you have no way to pull out each investment, correct?

 Clark Gascoigne

Correct, yeah.

 JAT Comments:

1.  My principal comment is that this change will go a long way to changing the view that the United States did not do enough to combat a money laundering and tax evasion from other countries.  The Vox article says:

Now that we’ve passed this bill, that we’re moving forward and implementing it, it allows our diplomats to go around the world and to truly push some of the seedier financial hubs around the world to clean up their act. That has just as big of an impact, if not probably a larger impact, than us collecting this information here in the United States.

 The Fortune article says:

 Currently [before the Act is implemented], the U.S. is the easiest place in the world to form an anonymous shell company that can be used for money laundering, crime, and corruption. 

* * * *

Many issues plaguing our nation and the international community have some connection to anonymous shell companies, which act as the perfect financial getaway vehicles. After all, given how effectively anonymous shell companies mask perpetrators’ finances—authorities often watch their investigations go cold as soon as they run into one of these shell companies—what criminal network wouldn’t take full advantage of all that secrecy?

Those using and abusing anonymous shells to cloak themselves in anonymity run the gamut. From tax cheats hiding their finances and bleeding local coffers dry to drug cartels flooding American streets with opiates turning to anonymous shells to launder their profits, a wide range of criminal forces have used anonymous companies to mask their tracks.

Clamping down on anonymous shell companies won’t solve economic inequality—most of the very rich are people who take advantage of perfectly legal loopholes in the law—but it will increase fairness by making everyone follow the rules that most hard-working honest Americans already follow.

It will also curb a wide variety of international criminality and wrongdoing that currently flows through the American financial system. The people and companies responsible for ongoing environmental devastation around the world often hide their environmental crimes behind anonymous shell companies, like the European company Norsudtimber, which covers up illegal logging activity in the Democratic Republic of the Congo in a web of anonymous shells. So do repressive regimes abroad, from Moscow to Pyongyang to Damascus, who use anonymous shell corporations to avoid sanctions and bankroll their authoritarian efforts.

Environmental criminals, authoritarian regimes, tax evaders and financial criminals, drug traffickers, wildlife poachers, and gun runners—all those responsible for the most heinous crimes have turned to anonymous shell companies. And all too often, given the outsize role America has played in producing anonymous shell companies, the entities at the heart of these criminal networks are produced here in the U.S.

The pending bill outlawing anonymous shell companies in the U.S. will help solve these problems. Not only will it prevent criminal actors from abusing American financial secrecy tools to expand their own illicit empires, but it will also be the biggest anti-corruption step the U.S. has taken in decades.

2.  Added 2/11/21 3:15pm:  A good summary of the CTA is in Sandra R. Brown & Michael Greenwalde, The Corporate Transparency Act takes on Serious Tax Fraud: Say Goodbye to Not Disclosing Beneficial Owners of Entities (Tax Litigator Blog 2/8/21), here.

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