Bills
| 3.23.22

Should Companies Have to Disclose Their ‘Beneficial Owners’ at Formation to Deter the Use of Shell Companies? (H.R. 2513)

Do you support or oppose this bill?

What is H.R. 2513?

(Updated June 22, 2020)

This bill — the Corporate Transparency Act of 2019 — seeks to crack down on money laundering in the U.S. through anonymous shell companies. It would require companies to disclose their true, beneficial owners at the time the company is formed to prevent bad actors from using anonymous shell companies to thwart law enforcement and hide their illicit activities.

“Beneficial owners” would be defined as natural persons who directly or indirectly express substantial control over a corporation or LLC, own 25% or more of a corporation’s or LLC’s equity interests, or receive substantial economic benefits from a corporation’s or LLC’s assets. Minor children, nominees, intermediaries, custodians, agents, persons acting solely as employees of the company or LLC and whose control derives solely from their employment status, persons whose only interest in a company or LLC is through a right of inheritance, and creditors would be exempt from this definition.

Under this bill, minimal disclosure requirements would include: 

  • Beneficial owners’ names; 
  • Beneficial owners’ dates of birth; 
  • Beneficial owners’ current addresses; and
  • Beneficial owners’ driver’s license or non-expired passport numbers.

Additionally, this bill would require companies to annually file lists of all their current beneficial owners and any ownership changes over the previous year. 

FinCEN would be responsible for collecting beneficial ownership information and compiling it into a database. Information from the database could be made available through requests.

Those who submit fraudulent or false ownership information could be subject to civil and criminal penalties. These would include imprisonment for up to three years and/or civil penalties up to $10,000.

U.S. companies that employ more than 20 workers and have more than $5 million in gross receipts or sales would be exempt from this bill’s mandates. Certain financial institutions which are federally regulated elsewhere (such as banks, credit unions, and investment companies) are also exempt. Non-profits would also be exempt.

Argument in favor

The opaque nature of American LLCs allows illicit money to enter the U.S. financial system and real estate market. These dirty funds can then fund international crime, terrorism, and more. Requiring companies to disclose their beneficial ownership will help fight money laundering and help law enforcement investigate and prosecute financial crimes, and won’t be an onerous burden that deters law-abiding people from founding new LLCs.

Argument opposed

Existing regulations and rules already provide enough information on companies’ beneficial ownership. This bill would impose duplicative burdensome reporting requirements that’ll hurt those who can least afford to comply with them — small businesses. It also raises serious privacy and cybersecurity concerns, as it collects a lot of personal information and stores it with the federal government, creating a massive target for hackers.

Impact

LLCs; anonymous shell companies; disclosure of companies’ beneficial owners; illicit money in the U.S. financial system; and FinCEN.

Cost of H.R. 2513

The CBO estimates that implementing this bill would cost $132 million over the 2019-2024 period.

Additional Info

In-Depth: Rep. Carolyn Maloney (D-NY) reintroduced this bill from the 115th Congress to crack down on anonymous shell companies and the use of NYC properties as bank accounts instead of homes, which drive up home prices for all New Yorkers. After this bill passed the House Committee on Financial Services, Rep. Maloney said: 

“I am tired of money launderers using NYC apartments as bank accounts and driving up home prices for New Yorkers. My bill, the Corporate Transparency Act, will crack down on anonymous shell companies and help to stop this practice by requiring companies to disclose their true, beneficial owners – the people who actually own the LLC – when the company is formed. This bill is also critical for our national security, because it finally allows law enforcement to track the money that terrorist groups use to finance their operations. Disrupting terrorist financing networks should be one of our top priorities, but right now, terrorist groups can easily hide their money using anonymous shell companies. That is completely unacceptable. And its not just terrorists – far too many criminal networks can legally hide and launder their money legally here in the US. We should all be outraged that human traffickers, gun rings, and drug cartels are skirting the law because we allow these shady practices.”

In another statement, Rep. Maloney notes that this legislation is of particular interest to her home district of New York City, both as a prime target of terrorist attacks and a favored place to stash dirty money: 

“You can just ride through my district at night, the East Side of Manhattan, and you’ll pass complete buildings where there are no lights on. They’re bank accounts, and they [law enforcement] simply want to know who owns that bank account for national security.”

The National Association of Assistant U.S. Attorneys (NAAUSA) supports this bill. Its president, 

“Legislation authorizing the federal collection of beneficial ownership information would be valuable to federal law enforcement investigations into organized transnational criminal operations and other unlawful activity. The sharing of this information with law enforcement would enhance the ability of Assistant United States Attorneys and law enforcement agents to investigate and prosecute criminal activity and guard against the misuse and abuse of shell corporations to facilitate money laundering, terrorist financing, tax evasion and other misconduct. Such legislation would assure transparency and provide law enforcement with access to critical ownership information, without unduly intruding upon individual privacy or being overly burdensome.” 

Treasury Secretary Steven Mnuchin expressed support for this bill during an April 2019 hearing. He said, “I do believe generally you are headed in the right direction, and I appreciate your work on this. I hope this is something that, on a bipartisan basis, we can get accomplished, both here and [in] the Senate.”

The American Bar Association (ABA) wrote a letter opposing this bill on June 10, 2019. Its letter — which was co-signed by more than 24 organizations — called this bill’s reporting burdens overly burdensome to small businesses and raised concerns about privacy and cybersecurity: 

“This legislation would impose burdensome, duplicative reporting burdens on approximately 4.9 million small businesses in the United States and threatens that privacy of law-abiding, legitimate small business owners… This legislation would shift the reporting requirements from large banks, those best equipped to handle the reporting requirements, to millions of small businesses, those least equipped to handle the reporting requirements… [This bill] raises significant privacy concerns as the proposed FinCEN beneficial ownership database would contain the names, dates of birth, addresses and unexpired drivers’ license numbers or passport numbers of millions of small business owners. This information would be accessible on request… This type of regime presents unacceptable privacy risks. [This bill] also introduces serious data breach and cybersecurity risks. Under the legislation, FinCEN would maintain a database of private information that could be hacked for nefarious reasons.”

The ABA also maintains that current rules and regulations also provide enough information about entities’ ownership structures. In its June 2019 Washington Letter, the ABA writes: 

“Together, FinCEN’s CDD rule and other regulations, combined with the IRS’ SS-4 Form, provide the federal government with access to substantial beneficial ownership information on almost every business entity in the United States. Therefore, it is unnecessary to create a duplicative new regulatory regime that would impose unfair burdens, excessive costs, and the risk of severe civil and criminal liability on millions of small businesses and their lawyers.”

FreedomWorks opposes this bill. Its president, Adam Brandon, notes that it would “create five new federal crimes for paperwork violations and may have long-term privacy implications.” Brandon also argues that this bill’s definition of a beneficial owner is too broad, and that it gives the Treasury Dept. overly broad rulemaking authority “that could potentially expand the requirements for businesses and, in turn, widen the scope of potential criminal liability.” Finally, Brandon argues that this bill “targets small businesses by explicitly excluding businesses that have over 20 employees and more than $5 million in gross receipts or sales” from its requirements, thereby burdening small businesses — but not large corporations — with complying with this bill’s mandates. 

In May, FreedomWorks, the Due Process Institute, and the American Civil Liberties Union wrote a joint letter expressing concerns about this bill. They noted the vague definition of a beneficial owner and asked, “What does it mean to indirectly control an entity? The bill does not explain.”

This legislation passed the House Financial Services Committee by a 43-16 vote with the support of 10 bipartisan House cosponsors, including nine Democrats and one Republican. Its Senate companion, sponsored by Sen. Ron Wyden (D-OR), has two bipartisan Senate cosponsors (one from each party).

Multiple statements of support and opposition have been made with regards to this bill in the current Congress. More than 60 national security experts, 108 NGOs representing a broad cross-section of society, the banking, credit union, and real estate industries, the Delaware Secretary of State, the National District Attorneys Association, human rights organizations, and others have sent letters of support to Congress urging passage of this critical legislation.

The American Bar Association (ABA) and more than two dozen legal and business organizations, including the ACLU, International Franchise Association, National Federation of Independent Businesses, National Small Business Association, and National Association for the Self-Employed wrote a letter of opposition to this bill in June 2019. FreedomWorks, the Due Process Institute, and the ACLU also wrote a letter opposing this bill in May. 

In the 115th Congress, this legislation had 11 bipartisan Senate cosponsors, including six Democrats and five Republicans. Its Senate companion, sponsored by Sen. Wyden, had one cosponsor, Sen. Marco Rubio (R-FL). Neither bill received a committee vote.


Of Note: The UN reports that $300 billion in illicit proceeds flowed through the U.S. financial system in 2010 (this figure is confirmed by the Treasury Dept). Chip Poncy, senior adviser at the Foundation for Defense of Democracies Center on Economic and Financial Power and a former Treasury official, observes that anonymous entities allow illicit finance to flow through the U.S. financial system. Speaking at a panel organized by BPI and the Financial Accountability & Corporate Transparency (FACT) Coalition in April, he said: 

“The number one systemic vulnerability of the United States system for combating illicit finance, for using financial intelligence, for disrupting national security threats through targeted economic actions – the number one systemic vulnerability we face – is the use of anonymous entities.”

Rep. French Hill (R-AR) has proposed designating the Internal Revenue Service (IRS), rather than FinCEN, as the point of collection for beneficial ownership information and introduced his own legislation to this effect. Hill argues that this would be a more efficient way to collect beneficial ownership information. However, Rep. Maloney argues that IRS information would be difficult for law enforcement to access, as law enforcement agencies would have to subpoena the IRS for information.

There have been other efforts to combat the use of LLCs. In November, the Treasury Department sharpened its disclosure rules, requiring that title companies provide the identity of LLC buyers who spend $300,000 or more on a real estate purchase in 12 major metro areas, including New York City, Miami, Los Angeles, Chicago, San Francisco and Boston. This was a dramatic expansion of the previous Geographic Targeting Order, which had lower thresholds for cash deals in New York City, Los Angeles, San Francisco, San Diego, Miami-Dade, Broward and Palm Beach Counties, among other cities. Additionally, the Treasury Dept. finalized a requirement that financial institutions ascertain the beneficial ownership behind newly opened accounts in 2016. That rule went into effect in 2018.


Media:

Summary by Lorelei Yang

(Photo Credit: iStockphoto.com / maybefalse)