Recently, the House and Senate passed the Corporate Transparency Act as part of the larger National Defense Authorization Act, sending it to the President’s desk by a veto-proof majority. They did so, appropriately, the same week as International Anti-Corruption Day. The Corporate Transparency Act is the culmination of a years-long effort – indeed, it and similar bills have been introduced in several past Congresses – to address a major roadblock to effective anti-corruption efforts in the United States: anonymous shell companies.
The formation of corporations and other legal entities in the United States is governed on a state-by-state basis. Many states collect less information in this process than they do in applying for a driver’s license. The critical area where information collection is lacking is the true, beneficial owners, who exercise significant control or derive a significant benefit from the legal entity. The Corporate Transparency Act closes this hole in our anti-corruption laws by requiring the Treasury Department to collect the names of beneficial owners at the time of entity formation.
Under the Corporate Transparency Act, a year after the bill becomes law, the Financial Crimes Enforcement Network (FinCEN) will be required to set up a registry to collect the name, address, and birth date of beneficial owners. A beneficial owner is defined in the Act as a person who: exercises substantial control over a corporation or limited liability company; owns 25 percent or more of the equity interests of a corporation or limited liability company, or receives substantial economic benefits from the assets of a corporation or limited liability company. States will be required to develop the means to report the information to FinCEN when entities are created. Corporations that exist already will have two years to file this information with FinCEN, and there are criminal penalties for providing false information. Therefore there are still some hurdles to overcome during implementation.
Transparency in the bill is not absolute – the information will not be available to the general public. Still, it will be available to law enforcement and financial institutions in the private sector upon request and with customer consent. Additionally, some companies are exempt from the requirements, such as certain investment funds, banks, credit unions, charities, and any entity with more than 20 employees, $5 million in annual sales, and a physical presence in the U.S. The bill represents a major step forward and will help law enforcement crackdown on our financial system’s abuse by money launderers and other criminals.
On the international level, the secrecy of our laws surrounding forming corporations and other legal entities has been used to facilitate extensive corruption. The sheen of legitimacy associated with American companies, combined with the ease of forming anonymous ones, has made our system a prime tool for international criminals. Some of the most notable examples include Isabel dos Santos, the richest woman in Africa, who, according to reports, laundered hundreds of millions of dollars of public money through shell companies – including those in the United States, as well as the 1MDB scandal, where anonymous shell companies were used to steal billions of dollars from the Malaysian government.
Domestically, the most recent trend has been using anonymous shell companies to defraud relief funds for the ongoing Covid-19 crisis, including the PPP loan program. In one example, three men used shell companies to fraudulently obtain loans from several Covid-19 relief programs. In another, two men carried out a similar scheme, which also involved defrauding banks.
The Corporate Transparency Act does not end criminals’ ability to use the American financial system to facilitate their crimes and hide and enjoy their ill-gotten gains. A registry is not a silver bullet, as can be seen in countries such as the UK, which already have them. Criminals can always file false information to registries, and verification can be challenging, although there are criminal penalties for providing false information.
There are still other legal loopholes that must be closed. Another favorite tactic of criminals and kleptocrats is to use real estate to park their illicitly obtained wealth. The Treasury Department can address this by expanding the Geographic Targeting Order program. The current GTO requires title insurance companies to provide the Treasury Department with the beneficial owners of all residential real estate transactions in cash above $300,000. It currently applies to cities and counties in nine states. Expanding this order to the entire country and commercial real estate transactions, and making it permanent would further help fight corruption, and we urge FinCEN to do so.
Any effective anti-money laundering system needs multiple checks and balances. In addition to legislation to collect beneficial ownership information upon company formation, resources for law enforcement should be increased, gatekeepers involved in luxury goods purchases such as the real estate industry should be required to conduct due diligence into buyers’ identities and the sources of their funds, and senior officials at banks and other institutions who enable money laundering should be individually prosecuted. Financial institutions should also increase the resources devoted to compliance and increase training available for their staff.
However, the fact that there remains work to be done should not take away from the fact that this is a major step forward in the fight against corruption. By making it significantly more difficult to hide behind anonymous shell companies in the United States, the Corporate Transparency Act makes it more difficult for our financial system to be abused by criminals. This is an important step that should be celebrated, and we should all continue this work, but it is only through a partnership between the public and private sector that we can truly stop international criminals from exploiting our laws to enable their corrupt acts.
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Shruti Shah is a contributing editor of the FCPA Blog and the President and CEO of the Coalition for Integrity (formerly Transparency International-USA), where she leads the Coalition’s development and promotion of approaches to combat corruption in business and government. She can be contacted here.
Alex Amico is a legal fellow with the Coalition for Integrity.
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