Shell corporations are the vehicle of choice for the criminal and the corrupt to launder illicit funds with impunity. Drug cartels, human trafficking rings, purveyors of counterfeit and pirated goods, rogue nations evading sanctions, corrupt officials stealing from state coffers, and others use anonymous corporate structures to move and hide illicit wealth.
For ages, they could conceal their identity with paper bearer shares. Belgium was one of the last countries in Europe to put an end to this anonymity by abolishing paper bearer shares in 2008. The identity of the shareholder must be registered in a material share register or a dematerialised account.
However, the authorities and the tax authorities do not have access to this information. More and more jurisdictions are introducing registers of beneficial owners. In its Anti-money laundering IV Directive, the European Union requested that all EU Member States set up national registers of beneficial owners of companies, associations, trusts and foundations, the so-called UBO-registers for ultimate beneficial owners).
The United States was always very laid-back in lifting the anonymity of American companies. It was still relatively easy to have a truly secret company; this was one of the reasons for the success of states like Delaware and Montana to set up a company.
There can be legitimate uses for using shell companies. The land on which Disney World in Florida sits was acquired through anonymous shell companies. This significantly lowered the land acquisition costs. Had Walt Disney let it be known what his plans were for central Florida, the landowners could have demanded exorbitant prices.
It is more sneaky when small business owners use shell companies to conceal private wealth from business creditors or from ex-spouses. It is not illegal.
It is not clear how many of these shell companies are used for illicit activities. They only come to light when the scams are uncovered. Russian arms dealer Viktor Bout used 12 shell companies (based in Delaware, Florida, and Texas) to help conceal his sale of weapons. Corrupt foreign officials have used such companies to siphon off public funds, robbing their own country.
Former attorney Michael Cohen bragged about how he could set up and use a Delaware shell company to distribute hush money to Stormy Daniels. The transaction may have violated campaign finance laws by improperly characterizing the payment as a legal expense.
Corporate Transparency Act
The objective in regulating these entities is to prevent illicit activities, without prohibiting the entities’ existence.
The House of Representatives approved the “Corporate Transparency Act” in 2019, and the Senate has included this act in the National Defense Authorization Act (NDAA, H.R. 6395).
The NDAA was submitted to President Trump who vetoed it. He objected to the bill’s renaming of military facilities commemorating Confederate officers and he complained that the bill did not eliminate civil liability protections for social media companies (although the NDAA had nothing to do with these liability protections).
There has been speculation that there were other unspoken reasons. If a person had anonymous shell companies to break the law, e.g., by violating campaign financing laws, they might have their own reasons for blocking the NDAA.
In an extraordinary move, both the House of Representatives and the Senate have overridden the veto.
The end of corporate anonymity
From now on, the real beneficiaries of American shell companies or offshore companies will have to reveal their identity to an agency of the American Treasury Department, in charge of fighting money laundering: the Financial Crimes Enforcement Network (FinCEN). FinCEN is the financial intelligence unit responsible for housing and reviewing data to protect our financial system from abuse by terrorist networks and other criminals. It is the same Treasury unit that handles foreign bank account reporting standards (FBAR Form 114).
Compared to the EU, very limited information is to be given: a name, an address, date of birth, and a driver’s license or another identification number. No financial information or details about business purpose or operation is required.
There are exemptions for certain entities that file redundant reports with other agencies (e.g. publicly traded firms file relevant information with the SEC), or that are lower risk (e.g. larger private companies with real operations in the U.S.).
Contrary to Europe where the information is to be updated regularly, updated reporting is only required when there is a change in ownership. Newly formed entities must comply immediately. Existing entities have a two-year period to comply unless ownership changes in that period. Failure to comply can result in civil and criminal penalties, with fines of $10,000 and prison terms of up to 24 months. Not only the beneficial owners must comply; lawyers, accountants, real estate agents and corporate formation agents could face penalties as well.
Only US federal, state and local law enforcement agencies will have access to the information for use in authorized investigations as well as financial institutions (with customer consent) that have legally mandated anti-money laundering obligations.
It is conceivable that the tax authorities of other jurisdictions will be able to benefit indirectly from that information by using the double tax treaties they concluded with the US under the exchange of information procedures in these treaties.
In many countries, like Belgium, information on the beneficiaries is accessible not only to the authorities but also to the public, unless the local authorities have granted an exception in very limited situations. And that raises questions of data privacy.
In the US, the information will not be available to the press and the public. The American choice is therefore very similar to that of countries such as Switzerland, which reserve this type of information for the public authorities, the only ones which have a legitimate reason for having access in the respect of data privacy.