Is This the End of Anonymous Shell Companies? Not Too Fast

anastasios pallis

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The New York Times reported in 2015 that buyers of condominiums on the so-called billionaires row in Manhattan were using limited liability companies, known as L.L.C.s, to hide the identity of the properties’ owners. In 2016, “60 Minutes” captured lawyers on hidden camera offering to help move funds with questionable origins through a maze of shell companies.

How is it that a country that targets terrorist financing and banks that evade economic sanctions also allows the creation of anonymous entities that can hide the true source of funds?

The use of L.L.C.s and shell corporations has been an issue for the United States for more than a decade. In 2006, the Financial Action Task Force, a global watchdog established by governments to combat money laundering, noted that the United States had “significant shortcomings” for anti-money laundering compliance. A report that year by the United States’ Government Accountability Office stated that “federal law enforcement officials are concerned that criminals are increasingly using U.S. shell companies to conceal their identity and illicit activities.”

A bill approved by the House Financial Services Committee last month aims to bring the United States into compliance with global anti-money-laundering norms. The legislation would require the beneficial owners of shell companies to be reported to the federal government. A beneficial owner is defined as any person who “exercises substantial control” over the entity, who owns more than 25 percent of it, or who “receives substantial economic benefits from” the L.L.C. or corporation.

The legislation, called the Corporate Transparency Act of 2019 and offered by Representative Carolyn B. Maloney, Democrat of New York, would require that each applicant for an L.L.C. or shell corporation must report to the Financial Crimes Enforcement Network, or FinCEN, the name, date of birth and current residence of any beneficial owner. The legislation would also require annual updating of the names of the owners of the entity.

The legislation would apply initially only to newly formed organizations, but two years after adopting the rules, the Treasury Department could require existing L.L.C.s and shell corporations to disclose similar identifying information. This would allow the government to determine the true owners of companies already in existence. The law would also prohibit companies from issuing shares in “bearer” form, which means that the true owner would not be revealed because there is no ownership information disclosed on a stock certificate.

The information about the true owners would not be publicly available, however. FinCEN could release information only after receiving a proper request from a local, state, tribal or federal law enforcement agency, or a request by a foreign country. That means ownership information would not be publicly available to identify who is actually behind an investment.

Providing “false or fraudulent beneficial ownership information” or failing to update information would be subject to a civil penalty of $10,000, or a fine and imprisonment for up to three years for a criminal violation.

A negligent failure, however, would not incur civil or criminal penalties. That likely means anyone failing to provide the information would plead that it was simply a mistake, making the prosecution of offenders harder.

This is not the first time Congress has tried to deal with the issue of anonymous owners of shell companies. On several occasions, the former Michigan senator, Carl Levin, introduced legislation to impose similar disclosure requirements, but those efforts repeatedly failed.

Much of the opposition came from states, which generate revenue from L.L.C.s and corporations that must pay for the right to form an entity. In addition, they are subject to annual taxes in some states, which can add to the state’s coffers.

It would not be surprising if a number of states opposed the Corporate Transparency Act. The legislation would inject the federal government into the internal workings of L.L.C.s and corporations, an area traditionally reserved by the states, which are responsible for the internal governance of these entities. It also would require states to ensure that ownership information was gathered and submitted to FinCEN. That could add to the costs of forming shell companies, and perhaps cut into the revenue they generate for states.

Delaware’s secretary of state took the lead three years ago in opposing legislation to require disclosure of the actual owners of shell corporations because of the potential negative effect on the state’s budget, Reuters reported.

Another potential source of opposition to the legislation may be the high-end residential real estate sector. Shell companies have become increasingly popular among foreign purchasers, who want to hide their identity and the source of their funds.

The United States has lagged behind other countries by allowing shell companies to serve as a front for questionable transactions. It seems likely the current legislation will hit a roadblock, as prior iterations did, on Capitol Hill, where there may not be much support for changing a system that has turned out to be quite lucrative.

This article is from NYT – go to source

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