Andres Knobel ■ The US beneficial ownership law has its weaknesses, but it’s a seismic shift


In January 2021 the US finally joined the more than 80 jurisdictions that, as of April 2020, had a law requiring beneficial ownership information to be registered with a government authority. As described in our recent blog, this is a major victory for US activists, with particular recognition to the leading role the Fact Coalition has played, which has been working tirelessly for beneficial ownership transparency in the US.

While the new legislation is an incredible achievement that sets the world’s largest economy on the right track, it does not yet go far enough to reduce the US’s ranking of second place on the Financial Secrecy Index if it were to be reassessed today. (Currently jurisdictions are assessed every two years). Due to the limited scope of the Corporate Transparency Act and numerous exceptions in its application, we cannot yet conclude that the US is practicing effective beneficial ownership registration. Nevertheless, the law does mark a seismic shift for this super-sized economy towards tax transparency and for the imminent global reforms of the highly influential global anti-money laundering (AML) standards of the Financial Action Task Force (FATF) towards acknowledging the essential importance of the principle of central registration of ownership data at government agencies – the potential of which could be monumental further down the line.

Ironically, the US has been the cause for many countries in the world to become more transparent, either because of US domestic laws (eg the Foreign Account Tax Compliance Act, FATCA) which resulted in many countries having to change their laws in order to start exchanging bank account information automatically both with the US and with each other, or through international organisations such as the OECD or the Financial Action Task Force (FATF) where the US exerts a high degree of influence. However, when it comes to achieving change within the US, the situation is entirely different.

The US is ranked as the world’s second greatest enabler of global financial secrecy on our Financial Secrecy Index in 2020, overtaking Switzerland and coming in just after the Cayman Islands. While countries in the index on average reduced their contribution to global financial secrecy by 7 per cent, the US bucked the trend by increasing its supply of financial secrecy to the world by 15 per cent.

Given the progress other countries have been making on beneficial ownership registration, we would have expected the US to make up for lost time. For example, the EU 5th anti-money laundering directive (AMLD 5) already requires EU countries to provide public access to beneficial ownership information, and some countries like the UK have been offering free access to beneficial ownership information in open data for years. Instead, the new US law considers beneficial ownership information to be confidential. The information will have to be filed with the notoriously under-resourced financial intelligence unit (FinCen).

At the Tax Justice Network, our preference is for countries to use commercial registers for holding beneficial ownership information for three reasons. First, given that commercial registries usually hold legal ownership information, if they also register beneficial ownership, all information would be in one place, facilitating easier checks and preventing contradictory information. Second, it improves enforcement; a commercial register usually confers the status of a legal person upon fulfilling certain criteria, so entities have an incentive to comply and those not compliant with beneficial ownership requirements would be flagged directly as such on the commercial register, avoiding delays or friction between one body alerting the other and making sure non-compliant entities can be prevented from operating, holding assets or incorporating other legal vehicles.  Third, it is more likely that a commercial register will give public access to information, compared to other authorities such as the tax administration, the central bank or the financial intelligence unit which are usually subject to different confidentiality and secrecy laws.

While it may have been too much to ask for the US to provide public access to its beneficial ownership register like EU countries are already required to do, we did not expect the new beneficial ownership registration law to have so many loopholes.

The Corporate Transparency Act only requires “reporting companies” to disclose the identities of their beneficial owners.  The law defines “reporting companies” as follows:

‘‘(A) means a corporation, limited liability company, or other similar entity that is—‘‘(i) created by the filing of a document with a secretary of state or a similar office under the law of a State or Indian Tribe; or ‘‘(ii) formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a State or Indian Tribe”

While the definition of “reporting companies” covers a “corporation, limited liability company, or other similar entity that is created by the filing of a document with a secretary of state or a similar office”, it is not clear if “other similar entities” would include other types of legal vehicles available in the US: trusts, private foundations and partnerships with limited liability.

On top of this, some reporting companies can still get out of disclosing information. While the above extract of “Paragraph A” in the bill describes what is within the scope of beneficial ownership registration in only four and a half lines, the next paragraph, “Paragraph B”, spanning across almost three pages, describes the 24 scenarios where companies are not required to file beneficial ownership information.

Any legislation with these many exceptions should be a cause for concern. It certainly makes enforcement harder and the design of circumvention strategies easier. In many cases, the reasoning for the exclusion may be that these types of companies already file information or are supervised by another authority. However, this means that for these companies, filing beneficial ownership information should not be that big of a deal, and it would ensure that all beneficial ownership information is centralised in one place.

The 24 exceptions do not refer only to companies listed on the stock exchange and investment funds, which are unfortunately often excluded from many countries’ beneficial ownership frameworks (for more information on why companies listed on the stock exchange and investment funds should not be exempted from beneficial ownership registration, see our recent brief). The exceptions extend to banks, brokers, public utility companies, public accounting firms, and even companies above a certain number of employees and sales:

‘‘(xxi) any entity that— ‘‘(I) employs more than 20 employees on a full-time basis in the United States; ‘‘(II) filed in the previous year Federal income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales in the aggregate, including the receipts or sales of— ‘‘(aa) other entities owned by the entity; and H. R. 6395—1223 ‘‘(bb) other entities through which the entity operates; and ‘‘(III) has an operating presence at a physical office within the United States.

Even dormant companies, instead of being de-registered to prevent them from operating in any country, benefit from an exemption from registering.

Leaving the exclusions from the scope aside, the other problem with the new US legislation has to do with the way beneficial ownership is defined. According to the new law:

The term ‘beneficial owner’— ‘‘(A) means, with respect to an entity, an individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise— ‘‘(i) exercises substantial control over the entity; or ‘‘(ii) owns or controls not less than 25 percent of the ownership interests of the entity.

While many countries adopt the (too high) threshold of 25 per cent, the US could have opted for lower thresholds. For example, the US could have followed the examples of Argentina, Botswana, Ecuador or Saudi Arabia which impose no threshold at all. In other words, no matter how minimal the ownership, beneficial owners will be identified. The US could also have added control scenarios, such as a percentage of voting rights (or at least one vote), the right to appoint or remove the board of directors, and so on. The high US threshold means that even companies that do not qualify for exemption and are required to disclose may still evade identifying their beneficial owners if these individuals own less than 25 per cent of a company’s shares (and are not considered to exercise “substantial control” either).

Lastly, the beneficial ownership definition does not specify in cases where a reporting company is owned by a trust, which party from that trust should be identified as a beneficial owner. The US could follow the lead of the Financial Action Task Force and the EU’s 5th Anti Money Laundering Directive in such cases, which would require every party to the trust – the settlor, trustee, protector, beneficiaries and any other individual with control over the trust – to be registered as a beneficial owner.

Given the new US administration under Biden, we are optimistic that through regulation some of these issues may be resolved. In any case, kudos to our US friends who have achieved what was long considered impossible. We should now all feel strengthened to achieve even more ambitious progress together.

[Image: “Show me the money…” by opensourceway is licensed under CC BY-SA 2.0]

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