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Piercing the Corporate Shell: New Legislation Will Force Anonymous Shell Companies to Disclose Their True Owners

Three months after a leak and investigation into over $2 trillion in suspect transactions at the world’s largest banks and financial institutions, known as the “FinCEN Files,” Congress passed legislation that would require anonymous shell companies to disclose their true owners.

[1] The Corporate Transparency Act, which was added to the National Defense Authorization Act (NDAA), would apply to future and existing entities and would make it more difficult for criminals and kleptocrats to anonymously launder money or evade taxes. The new legislation’s transparency requirements are expected to allow prosecutors to more easily bring cases against criminal groups.

According to the Corporate Transparency Act’s findings, nearly two million corporations and limited liability companies are formed under state laws each year, but very few states require information about the entities’ beneficial owners. Pursuant to the Act, anyone registering a new company must disclose the name, address, date of birth, and an identification number for each owner, such as a passport number, to the Treasury Department. Corporations and LLCs that already existed before the law’s anticipated adoption must disclose their ownership information within two years. In addition to the disclosure requirements, under the legislation, anyone willfully providing false information—including lawyers assisting with corporate-registration paperwork—will be liable for fines of up to $10,000 and up to two years’ imprisonment.

If signed into law, the legislation will also require the government to file reports on how it uses suspicious activity reports and deferred prosecution agreements. It also will offer protections to whistleblowers and offer them financial incentives to make reports.

While the general public will not have access to the ownership data, the Treasury Department’s Financial Crimes Enforcement Network will provide the data to law enforcement agencies and banks upon request. In some circumstances, allied nations will also be able to request ownership details.

Representative Carolyn B. Maloney, D-N.Y., who first introduced legislation to combat anonymous shell companies in 2009, has introduced a version of the bill in every subsequent Congress. In a press release, she explained that the “Corporate Transparency Act is the most important anti-money laundering and anti-corruption bill in 20 years, and it will make our country substantially safer” because “[a]nonymous shell companies…have become the vehicle of choice for terrorist financing, money laundering, and organized crime.” Representative Maloney added that the United States was one of the easiest places in the world to set up such shell companies. In fact, this year, the Tax Justice Network named the United States the world’s second most financially secretive jurisdiction, ranking behind the Cayman Islands and just ahead of Switzerland.

Other countries have started banning anonymous shell companies in recent years. The European Union told all member countries to create public databases by 2020 that disclose companies’ true owners. The United Kingdom mandated similar measures in 2016. 

Although President Trump promised to veto the NDAA for reasons unrelated to the anti-money laundering measure, the bill passed in the Senate and House with a veto-proof majority. Arent Fox will continue to monitor the Corporate Transparency Act and provide updates as the government begins to enforce any legislation that is passed.

[1] The FinCEN Files helped confirm that shell companies are a cornerstone of fraud, money laundering, and other financial corruption. 

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