Federally-Mandated Incorporation Transparency - A New Anti-Crime Tool in the Making?


Corporate & Finance Alert

December 16, 2008

Under current law, there is no requirement that the record or beneficial ownership of closely held business entities be made public. However, under a proposal that has been before Congress for several years, the States would be required to obtain a list of the beneficial ownership of business entities formed in their jurisdictions and make the information available to Federal law enforcement officials.

The latest version of the proposal is embodied in S. 2956, the “Incorporation Transparency and Law Enforcement Assistance Act”, that was introduced in the United States Senate by Michigan Senator Carl Levin in May, 2008, along with two co-sponsors, Senator Norm Coleman of Minnesota and then-Senator, now President-Elect, Barack Obama. The premise of the legislation is that the United States needs protection from corporations and limited liability companies being misused to commit terrorism, money laundering, tax evasion and other misconduct.

Among the “findings” stated in the bill are the following:

  • A person forming a business entity in the United States typically provides less information to the State of formation than is needed to obtain a bank account or a driver’s license;
  • Law enforcement efforts to investigate entities suspected of committing crimes have been impeded by the lack of available beneficial ownership information;
  • A leading international anti-money laundering organization, the Financial Action Task Force on Money Laundering (FATF), of which the United States is a member, issued a report that criticizes the United States for failing to comply with a FATF standard on the need to collect beneficial ownership information; and
  • In contrast to the United States, countries in the European Union are required to identify the beneficial owners of the business entities they form.

There are several exemptions from the applicability of the bill, most notably entities that are the issuer of a class of securities registered with the United States Securities and Exchange Commission. Legislation of this nature, if enacted, would require business lawyers who routinely assist clients in organizing new business entities to become enforcement agents of sorts which, naturally, would have serious implications for lawyer-client relationships. For this reason, and because of the burden that the bill would impose on non publicly-owned firms, a Task Force on the legislative proposal has been formed within the Business Law Section of the American Bar Association.

Specifically, the bill requires the States to obtain a list of the beneficial owners of each corporation and limited liability company formed under their laws, ensure that this information is updated annually and provide the information to law enforcement officials upon receipt of a summons or subpoena. Corporations and limited liability companies with owners who are not United States citizens or lawful permanent residents of the United States would have to provide a written certification from a “formation agent” in the jurisdiction of formation that the agent has verified the identity of those owners. The bill also sets forth penalties for non-compliance.