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Corporate Transparency Act – Beneficial Ownership of Shell Corporations Must Be Disclosed (1/8/21)

On January 1, 2021, Congress overrode the President’s veto
of the National Defense Authorization Act for Fiscal Year 2021 (“NDAA”), here.  Among the provisions of the NDAA was TITLE
LXIV–ESTABLISHING BENEFICIAL OWNERSHIP INFORMATION REPORTING REQUIREMENTS (§§
6401-6403), which is called and may be cited as “Corporate Transparency Act” (§ 6401).  The CTA adds 31 USC § 5336, titled Beneficial Ownership Information Reporting Requirements.

First I
will provide a high level summary (with some links), and Second some brief
comments.  I will refer to the provisions
by the short name by the initialism CTA for the Corporate Transparency Act.

High Level Summary (drawn from the
following three web sites as well as a quick review of the CTA’s provisions: Jen
Kirby, The US has made its biggest anti-money-laundering changes in years (Vox
1/4/2021), here, Landmark Bill Ending Anonymous U.S. Companies Is Enacted
(FactCoalition 1/1/21), here; and Morris Pearl, Congress just passed the most
important anti-corruption reform in decades, but hardly anyone knows about it

(Fortune 12/26/20), here):

Certain corporations (non traded or with a small level of
activity) will have to register their beneficial ownership with Treasury which
will incorporate the information into a database that may be accessed by law
enforcement agencies.  Prior to this, there
was no federal requirement and states usually did not require that beneficial
ownership be disclosed.  The CTA does not
prohibit otherwise anonymous shell companies; it just requires that the
ownership be disclosed to Treasury.  As
noted in the Vox article, however, some compromises were made:

Clark Gascoigne

This is, of course, a compromise, right? If I could have
waved a magic wand, this is not the bill I would have written.

 But it is a compromise with integrity. Most importantly, the
definition of who is a “beneficial owner” in the bill is very strong and will
truly identify the ultimate owners of the companies. That’s a big deal.

 Now, it doesn’t solve all of our money-laundering problems.
One big exemption in this is that while it applies to corporations, limited
liability companies, it does not apply to trusts or partnerships.

 Partnerships are generally considered lower risk, but trusts
are a major issue, particularly because the vast majority of trusts in the
United States don’t actually register with their legal contracts.

 So you will still be able to set up a trust that could
potentially be abused for money laundering after this. That’s something that
we’re going to have to take a look at. There are studies that the Government
Accountability Office and Treasury Department are going to have to do on the
risks posed by trusts. The bill mandates those studies, and hopefully we’ll be
able to address that down the road.

 There’s also some concerns around pooled investment
vehicles, like hedge funds and private equity funds, that are operated or
advised by a registered investment adviser. Law enforcement will be able to tie
the fund to the investment adviser, and they’ll know the beneficial ownership
information for the investment adviser, but they won’t know it for the fund
itself.

 There is a big concern around that because you’ve got
trillions of dollars in money going into these private pooled investment funds
that could potentially pose some risk for money laundering.

 Jen Kirby

When it comes to those pooled investments, just to make sure
I’m understanding this: So if I have dirty money, and I am putting it into this
fund with a lot of other investments, it basically muddies the waters. You know
who’s managing the fund, but you have no way to pull out each investment,
correct?

 Clark Gascoigne

Correct, yeah.

 JAT Comments:

My principal comment is that this change will go a long way
to changing the view that the United States did not do enough to combat a money laundering
and tax evasion from other countries. 
The Vox article says:

Now that we’ve passed this bill, that we’re moving forward
and implementing it, it allows our diplomats to go around the world and to
truly push some of the seedier financial hubs around the world to clean up
their act. That has just as big of an impact, if not probably a larger impact,
than us collecting this information here in the United States.

 The Fortune article says:

 Currently [before the Act is implemented], the U.S. is the
easiest place in the world to form an anonymous shell company that can be used
for money laundering, crime, and corruption. 

* * * *

Many issues plaguing our nation and the international
community have some connection to anonymous shell companies, which act as the
perfect financial getaway vehicles. After all, given how effectively anonymous
shell companies mask perpetrators’ finances—authorities often watch their
investigations go cold as soon as they run into one of these shell
companies—what criminal network wouldn’t take full advantage of all that
secrecy?

Those using and abusing anonymous shells to cloak themselves
in anonymity run the gamut. From tax cheats hiding their finances and bleeding
local coffers dry to drug cartels flooding American streets with opiates
turning to anonymous shells to launder their profits, a wide range of criminal
forces have used anonymous companies to mask their tracks.

Clamping down on anonymous shell companies won’t solve
economic inequality—most of the very rich are people who take advantage of
perfectly legal loopholes in the law—but it will increase fairness by making
everyone follow the rules that most hard-working honest Americans already
follow.

It will also curb a wide variety of international
criminality and wrongdoing that currently flows through the American financial
system. The people and companies responsible for ongoing environmental
devastation around the world often hide their environmental crimes behind
anonymous shell companies, like the European company Norsudtimber, which covers
up illegal logging activity in the Democratic Republic of the Congo in a web of
anonymous shells. So do repressive regimes abroad, from Moscow to Pyongyang to
Damascus, who use anonymous shell corporations to avoid sanctions and bankroll
their authoritarian efforts.

Environmental criminals, authoritarian regimes, tax evaders
and financial criminals, drug traffickers, wildlife poachers, and gun runners—all
those responsible for the most heinous crimes have turned to anonymous shell
companies. And all too often, given the outsize role America has played in
producing anonymous shell companies, the entities at the heart of these
criminal networks are produced here in the U.S.

The pending bill outlawing anonymous shell companies in the
U.S. will help solve these problems. Not only will it prevent criminal actors
from abusing American financial secrecy tools to expand their own illicit
empires, but it will also be the biggest anti-corruption step the U.S. has
taken in decades.

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