By Nicole D. Prysby, J.D.
The CRS has released a report discussing U.S. regulatory and legislative responses to the problem of lack of beneficial ownership information for U.S. corporations, which is a key vulnerability in the nation’s anti-money laundering regime.
The Congressional Research Service has released a report on beneficial ownership transparency, focusing on regulatory efforts and legislation on beneficial ownership disclosure related to the use of shell companies with hidden owners in the banking and real estate sectors. The report explains how the lack of beneficial ownership data impacts enforcement of the anti-money laundering system and the pressures the U.S. has been under to require disclosure of beneficial ownership data.
In 2006, the Government Accountability Office issued a report explaining that many states require only minimal information to form a U.S. company (GAO-06-376). This raises concerns about the ease with which companies may be used for illicit purposes such as money laundering. As previously reported, Treasury Department reports in 2015 and 2018 (such as the National Money Laundering Risk Assessment and the National Terrorist Financing Risk Assessment) also pointed out the misuse of legal entities as a key vulnerability in the banking and securities sectors (see Banking and Finance Law Daily , June 15, 2015, and Dec. 21, 2018).
The CRS report notes that the U.S. has been under domestic and international pressure to combat this vulnerability and explains recent U.S. regulatory efforts and legislation in this area. Regulatory efforts have focused in particular on beneficial ownership disclosure related to the use of shell companies with hidden owners in the banking and real estate sectors. Recent federal regulatory tools include Treasury’s Customer Due Diligence (CDD) rule and use of Geographic Targeting Orders (GTOs). Under the CDD Rule, effective since May 2018, certain U.S. financial institutions must establish and maintain procedures to identify and verify the beneficial owners of legal entities that open new accounts. Covered financial institutions must collect identifying information on individuals who own 25 percent or more of legal entities. Since January 2016, Treasury’s Financial Crimes Enforcement Network has issued GTOs to require certain title insurance companies to collect and report identifying information about the beneficial owners of legal entities that conduct certain types of high-end residential real estate purchases.
Congressional action. Recent legislative efforts to require reporting of beneficial ownership information include H.R. 2513, the Corporate Transparency Act of 2019 and S. 1889, the True Incorporation Transparency for Law Enforcement (TITLE) Act. The Corporate Transparency Act would require many small corporations and LLCs to report their owners to the federal government, if the owners exercise substantial control, own 25 percent or more in equity, or receive substantial economic benefit from the business. The bill would exempt regulated entities with more than 20 full-time employees or more than $5 million in gross receipts, and entities with an operating presence at a physical office within the U.S. The TITLE Act is also limited to small corporations and LLCs and defines beneficial owner similarly to the Corporate Transparency Act.
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