Shell Company Update: Congress and FATF Target Beneficial Ownership

0
140

U.S. House Passes Corporate Transparency Act; FATF Issues Guidance on Identifying Entities’ Beneficial Owners

First Post in a Two-Post Series on Beneficial Ownership

As we often blog, the issue of the beneficial ownership of entities and the potentially pernicious role of shell companies in perpetuating money laundering is the primary anti-money laundering (“AML”) concern across the globe for both enforcement officials and the financial industry.

Consistent with this concern, and within a single week, both the U.S. House of Representatives and the Financial Action Task Force (“FATF”), an international and intergovernmental AML watchdog group, recently took notable steps in the fight against the misuse of shell companies. Specifically, on October 23 the House passed H.R. 2513, a two-part Act which sets forth in its initial section the Corporate Transparency Act, or CTA. If passed into legislation, the CTA would require certain, defined U.S. companies to report identifying information regarding their beneficial owners to the Treasury Department – so that such information would be available to both the government and financial institutions carrying out their own AML duties. Meanwhile, FATF has issued a detailed document entitled “Best Practices on Beneficial Ownership for Legal Persons,” (“Best Practices Guidance”) which urges countries to use multiple methods to identify accurately and timely the beneficial owners of legal entities, and sets forth some high-level recommendations.

Today, we will discuss the CTA. Tomorrow, we will discuss FATF’s Best Practices Guidance, which approaches the problem of beneficial ownership from a different angle – the Guidance and its recommendations represent an evaluation of historical efforts by the member countries’ approaches to the collection and maintenance of beneficial ownership information in countries that already create repositiories of such information for law enforcement, as envisioned by the CTA.

The U.S. House approved H.R. 2513 by a vote of 249 to 173 – largely along party lines. “Division A” of H.R. 2513 sets forth the CTA. As we blogged regarding the initially proposed 2019 version of the CTA, this legislation focuses on bolstering beneficial ownership (“BO”) disclosure, an issue of intense global interest in AML circles. In general, the CTA:

  • Requires certain, defined corporations and limited liability companies (see below) to disclose their BOs to FinCEN at the time the company is formed.
  • Establishes minimum BO disclosure requirements, including the BOs’ name, date of birth, current address, and driver’s license or non-expired passport number.
  • Requires covered companies to file annually with FinCEN a list of its current BOs, and a list of any changes in BOs that occurred during the previous year.
  • Imposes civil and criminal penalties for persons who willfully submit false or fraudulent BO information, or who knowingly fail to provide complete or updated BO information.

The key provision of the CTA is its definition of a “beneficial owner.” With certain exceptions, noted below, the CTA broadly defines a “beneficial owner” as a “natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise – ”

(i)   exercises substantial control over a corporation or limited liability company;

(ii)  owns 25 percent or more of the equity interests of a corporation or limited liability company; or

(iii) receives substantial economic benefits from the assets of a corporation or limited liability company.

Although the initially proposed version of the CTA provided absolutely no definition of “substantial economic benefits,” the recently-passed version of the CTA purports to define this term as follows: “a natural person receives substantial economic benefits from the assets of a corporation or limited liability company if the person has an entitlement to more than a specified percentage of the funds or assets of the corporation or limited liability company, which the Secretary of the Treasury shall, by rule, establish.” So, this “definition” by Congress remains very vague, and Congress has placed the onus on FinCEN to generate downstream a workable definition. Somewhat unhelpfully, the CTA contains language instructing the Department of the Treasury to impose a definition which seeks to provide clarity to corporations and limited liability corporations, and also to identify the natural persons who exercise a “dominant influence” over entities as a result of their substantial economic benefits.

Importantly, the “substantial economic benefits” prong under the CTA’s definition of a “beneficial owner” represents an expansion of the definition of “beneficial owner” imposed by FinCEN’s existing BO regulation, which contains only the two “control” and “ownership” provisions. How these competing definitions of the same key term can be reconciled is extremely unclear.  Similarly unclear is how financial institutions will deal with checking the beneficial ownership information that they have collected from their customers under the BO regulation against a database that presumably will include different and more expansive information.

The CTA contains certain key exemptions from its definitions of covered “corporations” and “limited liability companies.” Importantly, companies with over 20 employees and over five million dollars in annual gross receipts or sales, and which have a physical presence in the U.S., are exempt, under the logic that companies that employ this many people and that have seemingly legitimate income are unlikely to represent shell companies subject to misuse. Federally regulated banks, credit unions, investment advisers, broker-dealers, state-regulated insurance companies, churches, and charitable organizations are also exempt from coverage, given their already highly-regulated status.

BO information reported to FinCEN under the CTA would be available to: (1) upon request, a Federal, State, Tribal or local law enforcement agency that has an existing investigatory basis for requesting such BO information and which has undergone adequate training regarding the proper access, use and storage of BO information; (2) a federal agency making a request on behalf of a law enforcement agency of another country under an international treaty or agreement; or (3) a financial institution making a request, with customer consent, for the purposes of complying with its due diligence and Know-Your-Customer requirements under the BSA. Presumably, customer consent will be obtained by financial institutions in the paperwork for opening up accounts.

Generally speaking, financial institutions would welcome the passage of the CTA, because it would provide a national, government-sponsored database to assist them with complying with their already existing obligations under the BSA regarding the identification of the BOs of entities opening new accounts. Perhaps not surprisingly, however, the small business community is concerned about the prospect of passage of the CTA, and the compliance costs of its reporting requirements. However, in the era of the fall-out of the Panama Papers, and the global perception that the U.S. is a hypocritcal haven for international money launderers and tax cheats, these complaints are likely to fall on deaf ears, given the persistent concerns regarding the misuse of shell companies for the purposes of laundering money and avoiding taxes.

Finally, H.R. 2513 contains another section – “Division B” – entitled the “Counter Act of 2019.” It stretches for 63 pages and is almost twice as long as ther CTA. The Counter Act of 2019 represents a grab-bag of numerous and disparate provisions involving potential BSA/AML reforms which previously had been set forth in a proposed and inelegantly-named bill, “To make reforms to the Federal Bank Secrecy Act and anti-money laundering laws, and for other purposes” (on which we previously blogged, here). The Counter Act of 2019 has 35 different sections, including a whistleblower provision; a provision including “dealers in antiquities” in the definition of a “financial institution” covered by the BSA; and many other provisions pertaining to information sharing, resource sharing, and technological innovation. We refer readers to our prior blog post on the breadth and detail of these proposed legislative reforms.

Tomorrow, we will discuss FATF’s Best Practices Guidance, and the multi-pronged approaches recommended by FATF to gathering beneficial ownership information from several sources, in order to increase transparency and access to information, and help mitigate accuracy problems.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.