For US to win beneficial ownership battle, federal laws, congressional support must trump fears

By Brian Monroe
bmonroe@acfcs.org
February 11, 2016

Driven in part by growing media attention on the dubious uses of anonymous corporations, as well as the Financial Action Task Force’s latest mutual evaluation of the US regulatory framework already in progress, pressure is mounting on US lawmakers and regulators to find solutions for the country’s persistent struggle with beneficial ownership and corporate transparency.

Yet compliance experts and advocacy groups say that creating a nation-wide system that captures beneficial ownership data of legal entities and makes it available to law enforcement – and potentially financial institutions, individuals and watchdog groups – will require the US to overcome a bevy of logistical, political and legal hurdles.

Shortcomings in the United States legislative and regulatory framework around beneficial ownership are hardly new. A mutual evaluation by the Paris-based Financial Action Task Force faulted the US in 2006 for allowing anonymous corporations in some US states, a lack of federal regulations requiring financial institutions to identify beneficial owners during customer due diligence , and the general dearth of ownership information collected at the time of incorporation. An International Monetary Fund assessment of the US financial sector, released in July of last year, noted that despite some progress on the issue, all of these same shortcomings remained in place.

Any reform of the US beneficial owner framework is likely to be a multi-step process, starting with requiring states, or the federal government, to collect the information – similar to the way data is gathered for driver’s licenses and car registrations –  then placing that information in state or federal registers available to law enforcement, and potentially ensuring the information is also open to the public, including bank compliance officers.

Currently, the US has satisfied none of these individual steps, though its counterparts in Europe and the United Kingdom have forged significantly further ahead in largely similar corporate transparency initiatives. The US Financial Crimes Enforcement Network (FinCEN) is still in the proposal stage for a beneficial ownership rule requiring financial institutions to collect the data, but many institutions and financial services trade associations have argued that ensuring accuracy will be deeply challenging without reliable state or federal sources to check against.

The country’s lack of corporate transparency and relative ease with which criminals can establish anonymous companies to move suspect funds into the U.S. gained prominent media attention on CBS’s 60 Minutes program. In a segment titled Anonymous, Inc., and airing January 31, 60 Minutes analyzed undercover footage from a member of Global Witness, a watchdog group devoted to fighting corporate opacity.

“In basically every case of corruption that we’ve investigated, we have found that anonymously owned companies have been used to move and hide money,” said Stefanie Ostfeld, acting head of Global Witness’ U.S. office, in a statement tied to the release of bills last week to combat the problem.  “What’s more, anonymously-owned companies are what unite all crimes that generate money, and America is at the heart of this problem.”

Wearing a hidden camera, an undercover investigator with Global Witness met with 13 New York law firms while posing as an advisor to a foreign government minister, and requested the lawyers show him how to anonymously move large sums of money that should have raised suspicions of corruption.

Lawyers from 12 firms suggested using anonymously-owned companies, with 11 of the firms suggesting using American companies.

Media spotlight spurs renewal of legislative efforts on corporate transparency

Shortly after the program, the Financial Accountability and Corporate Transparency (FACT) Coalition announced the introduction of bipartisan legislation to give law enforcement an important tool for investigating terrorism and other crime enabled through anonymous American shell companies.

Sponsored by Rep. Carolyn Maloney (D-NY), Rep. Peter King (R-NY), Rep. Dan Donovan (R-NY), Rep. Stephen Lynch (D-MA), Sen. Sheldon Whitehouse (D-RI), and Sen. Dianne Feinstein (D-CA), the Incorporation Transparency and Law Enforcement Assistance Act, if passed, would help fight the abuse of anonymous companies—one of the primary tools for laundering criminal, corrupt, tax evading, and terrorist money.

The legislation requires the disclosure of the real people who, directly or through another corporation, own a substantial portion of the company or have some control over it at the time of incorporation and that the information is kept up to date.

In what many consider a perform storm scenario, the 60 minutes piece occurs as the United States gets evaluated by the Paris-based Financial Action Task Force (FATF), which sets global anti-money laundering (AML) standards. The group, which overall lauded the country a decade ago, gave the US low marks due to not collecting beneficial ownership information.

“U.S. states have known about this problem for over a decade and have failed to take any action to learn and keep track of who owns or controls the companies that they incorporate,” said Heather Lowe, Director of Government Affairs at development research and advocacy organization Global Financial Integrity.

“Our failure to act in this area facilitates the flow of devastating amounts of illicit money out of developing countries every year,” she said.

What would it take to improve the US beneficial owner regime? What follows is a basic three-step outline.


Step One: Have states collect beneficial ownership information from the source at the time of legal entity formation

Likelihood of this happening in the US? Low.

In the US, states are responsible for administering the formation and dissolution of corporations, and registry information is held at the state level, with the quality, depth and accessibility of registries varying state by state. Very few states require information on the owners behind a company to be collected at the time of formation, and some, like Delaware, Nevada, and Wyoming, require so little information that they are sometimes regarded as domestic secrecy havens. In general, US states have seemed slow to change the status quo.

“Generally incorporating companies is a state right,” Lowe said. “But there are a few ways to override a state right. One is for national security while the other is commerce. To me, the need to identify who is behind anonymous shell companies that can operate in any state or country is certainly both a national security and commerce issue.”

One option to nudge states on this issue is persuading the US Uniform Law Commission to issue a law on the beneficial ownership issue.

The Uniform Law Commission (ULC, also known as the National Conference of Commissioners on Uniform State Laws), established in 1892, provides states with non-partisan, well-conceived and well-drafted legislation that brings clarity and stability to critical areas of state statutory law.

But, currently, the group, which has the power to supersede state rights on a broad array issues, has stated a more workable solution is for the companies themselves to know the information and designate an individual to make it available to law enforcement upon request.

With the ULC not “coming up with a conclusion that is worth implementing, that suggests we need a federal solution,” Lowe said. “Because if every state does not to do it, it’s a race to the bottom. A federal solution is very advantageous and necessary in this case.”

There is also a precedent for requiring states to collect such information from individuals in certain cases in the form of vehicle registrations and licenses. The federal government required states to collect those details, which has “worked out beautifully,” she said.

Step Two: Put the information into a state or federal registry available to law enforcement.

Likelihood of this happening? Low.

Lately, the US Congress has seen a flurry of bills and ballyhooing on the beneficial ownership issue, but to date these legislative proposals have never made it out of committee. Congressional support would be critical to require all states to capture the same information and, in some way, make it available in a central register.

No federal legislation on corporate transparency or registration has been enacted, although former Michigan Senator Carl Levin has repeatedly attempted to pass a bill that would require US companies to disclose their beneficial owners.

Since 2008, Levin has introduced the Incorporation Transparency and Law Enforcement Assistance Act several times, with a range of co-sponsors, only to have the proposed legislation die in committee.

Currently, the bills recently introduced after the 60 minutes piece would require either the states to collect the information and put it in a central registry, or mandate the US Treasury to collect it if the state is not already doing so.  Both approaches are lauded and supported by law enforcement, federal prosecutors and advocacy groups.

Other options on the federal side include the information being housed at the Department of Labor or Commerce, which would potentially leave the details more open than if held by, say, FinCEN or the IRS.

The key groups against the creation of such a system are also very powerful, including the National Association of Secretaries of State (NASS), the US Chamber of Commerce and the American Bar Association.

The reasoning behind this include concerns about state sovereignty, loss of domestic or international business and violating attorney-client privilege.

NASS, which represents the branch of state government usually responsible for overseeing corporate registries and entity formation, has staunchly opposed any attempt to impose national standards for legal entities.

From its perspective, NASS argues that the US Constitution grants states the power to regulate the formation of entities.

In the past, NASS has also criticized definitions of beneficial ownership, both those in the FATF’s 40 Recommendations and in Levin’s Incorporation Transparency Act, as overly vague and unworkable.

Without a national policy on legal entities, the degree of information required by each US state varies.

Delaware is not the only one to allow for largely anonymous company formation. States like Nevada and Wyoming also require minimal information to create a legal entity, and do not collect data on beneficial owners.

The business of company incorporation can bring substantial revenues to US states, Delaware in particular. According to a report by the Division of Corporations, the state made $883 million in business entity taxes and fees in 2013, $16 million more than in 2012.

Step 3: Make the beneficial ownership information public.

Likelihood of that happening in the US? Very low.

In current and historical drafts of bills on the topic, beneficial information was not required to be made public. Advocacy groups,  non-governmental organizations and some industry associations, argue this should change to allow for broader access. This would be more in-line with initiatives in the United Kingdom and European Union.

The European Union has already adopted plans for an EU-wide registry that would gather details on corporations and make them accessible to anyone with a “legitimate interest,” although the boundaries of what that entails have not yet been defined. Likewise, the UK is pressing forward with plans for a public registry, and reportedly exerting pressure on its territories and dependencies to join in.

In the US, allowing some level of public access is also a quandary in itself, as states have different right-to-know and freedom of information laws.

“There is no way to make this perfect,” Lowe said. “But there is a way to make capturing beneficial ownership information very good and give the tools to law enforcement they need to more vigorously enforce” laws against money laundering, fraud, corruption and terror financing.