The vote - which cannot be overturned by a Presidential veto - has major implications for beneficial ownership disclosure in the US, part of a wider global trend towards transparency. The issue remains controversial, however, because of the need to protect legitimate financial privacy.
A week ago US lawmakers in the Senate voted – by a veto-proof margin - to change anti-money laundering rules and banned anonymous shell companies, a blow for financial transparency. The bill requires most companies to report their true beneficial owners to the government, allows greater information sharing between law enforcement agencies and regulators, and authorizes the use of new suspicious activity monitoring tools.
Disclosure of beneficial ownership of companies and other structures has been a consistent theme among those claiming that the current system allows criminals to hide behind shell companies. Offshore jurisdictions such as Switzerland and the Cayman Islands have in the past come under attack. Ironically, states within the US such as Delaware are often favored as jurisdictions in which to register companies.
This news service intends to explore how the law change will affect specific states in the US – such as Delaware – that have specialized as registration hubs for such entities. Already, lawyers and other specialists are working out what the implications might be. In this article, from law firm McDermott Will & Emery, authors Leigh-Alexandra Basha (partner); David Ransom (counsel), Daniel J Bell (associate) and Sebastian Orozco Segrera (associate), examine what is at stake.
This article is being republished in Family Wealth Report with the firm’s permission; the editors of this news service are pleased to share this content and invite readers to jump into the debate. To comment, email email@example.com and firstname.lastname@example.org The usual editorial disclaimers apply.
On December 11, 2020, the US Senate joined the House of Representatives in passing the National Defense Authorization Act for Fiscal Year 2021 – which includes the Corporate Transparency Act – with a veto-proof majority of 84 to 13. The Corporate Transparency Act (the Act) requires a report be filed with the Financial Crimes Enforcement Network (FinCEN) that identifies each beneficial owner of and applicant forming a reporting company.
A version of the Act has been floating around since the summer of 2017. In May 2019, legislators in both houses of Congress introduced the Corporate Transparency Act of 2019 as S. 1978 and H.R. 2513. The House of Representatives passed its version of the Act in October 2019. The White House issued a statement of administration policy in support of the House bill, but the Senate never acted on it (see Statement of Administration Policy on H.R. 2513 – Corporate Transparency Act of 2019, as amended by Manager’s Amendment, October 22, 2019, available at: https://www.whitehouse.gov/wp-content/uploads/2019/10/SAP_HR-2513.pdf. The current measure, if enacted, brings the United States closer to parity with other developed nations, which have enacted similar mandates.
What is a reporting company?
A reporting company is defined as a corporation, limited liability company or other similar entity that is created by filing a document with the secretary of state (or an equivalent office) of any state, or formed under foreign law and registered to do business in the United States in a like manner. The Act exempts many categories of companies from the reporting requirement, specifically:
-- Companies that are already subject to supervision or otherwise closely regulated by the federal government (e.g., banks);
-- Dormant companies;
-- Companies that employ more than 20 people, filed a tax return reporting gross receipts in excess of $5 million, and have a physical presence in the United States;
-- Any entity owned by an entity otherwise exempt
Who is a beneficial owner and/or an applicant?
A beneficial owner is defined as an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise (i) exercises substantial control over an entity or (ii) owns or controls at least 25% of the ownership interests in an entity. A few notable exceptions from the Act include:
-- Minors, provided that information with respect to a parent is otherwise reported;
-- An individual acting as nominee, intermediary, custodian or agent on behalf of another individual;
-- Persons who control an entity solely because of their employment;
-- An individual whose only interest in a reporting company is through a right of inheritance; and
-- An applicant is defined broadly as an individual who files an application to form an entity.
What information must be reported and when?
The report shall include the name, date of birth, current address (business or residential) and unique identifying number from an acceptable document for each beneficial owner and/or an applicant, with an option for such individuals to request and use a FinCEN unique identifying number instead. Existing entities will be required to report this information within two years of the effective date, which regulations promulgated within one year of enactment will determine. The report will be required for newly formed entities at the time of formation. Finally, a reporting company will need to update the information provided to FinCEN upon a change in beneficial ownership.