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Shell Company Disclosure Exemptions Prompt Calls for Changes

Jan. 22, 2021, 7:41 PM

A recently crafted law to force anonymous shell companies to reveal their true owners has rankled small business advocates, who plan to push for tweaks.

Large companies are mostly exempted from the Corporate Transparency Act, which became law this month. Only those with 20 or fewer employees and $5 million or less in annual sales would need to report ownership information to the Treasury Department’s financial crimes unit.

Other corporate entities—such as registered public accounting firms, certain investment companies, bank holding companies, and public utilities—also are exempt from the disclosure requirements.

Small business advocates say the new requirements unfairly target them and create extra costs and legal risks for companies that don’t typically pose a money laundering threat.

The law allows the government to greenlight exemptions for other types of companies that it sees as low risk. Treasury has a one-year window to craft corresponding rules, and small businesses are scouring for opportunities to tweak it to their advantage.

“We’re definitely hoping that Treasury will do more to address the concerns of small businesses,” said Kevin Kuhlman, vice president of federal government relations for the National Federation of Independent Business (NFIB). “We’re certainly going to be pushing for that —trying to get a broad exemption for small businesses that already disclose this type of information.”

The new law, a part of the annual defense spending legislation, requires certain limited liability corporations (LLCs) and other companies to inform Treasury’s Financial Crimes Enforcement Network (FinCEN) of their so-called beneficial owners—those pulling the strings—and establishes a private database of those names.

Proponents say the law, a product of years-long bipartisan negotiations, plugs a massive loophole in U.S. anti-money laundering laws. Banks, law enforcement, and the U.S. Chamber of Commerce were among the law’s supporters and helped it cross the finish line.

‘Potential Loophole’

Still, even some rule proponents acknowledge that some of the exemptions could dilute the law.

“Some of these exemptions, in an ideal world, wouldn’t be there,” said Lakshmi Kumar, a policy director at think tank Global Financial Integrity.

Funds and pooled investment vehicles, which often hold large amounts of cash, often use special purpose companies to conduct transactions.

These pooled investments could benefit from added oversight, Kumar said. “Their inclusion would have been incredibly valuable.”

Some types of trusts have been pegged as possible money laundering risks given the lack of disclosure needed to create them. But the law exempts some charitable trusts from the disclosure requirements.

Unlike forming a new corporation, creating a trust involves a different process and has no requirement to register with states and other regulators.

The lack of a similar reporting structure may be one reason why trusts weren’t included in the law, said Peter Hardy, a partner at Ballard Spahr LLP.

“It’s a potential loophole,” he said. “These are entities that could be used by bad actors to move illicit assets. You can create them without having to file any sort of form.”

The new law similarly doesn’t cover unregistered foreign entities doing business in the U.S., or certain non-profits.

Lawmakers also removed a provision during negotiations that would have instructed FinCEN to issue increased disclosure mandates for commercial real estate transactions.

FinCEN already issues temporary “geographic targeting orders” seeking details of residential property purchases in major cities, including all-cash buys.

But Global Financial Integrity and other groups have pushed for permanent, nationwide orders covering all commercial and residential real estate deals.

‘Wiggle Room’

Janet Yellen, President Biden’s pick to become Treasury Secretary, appears eager to get started on writing regulations to implement the new law.

She told the Senate Finance Committee this week that anonymous shell companies present an “important problem,” and that creating a beneficial ownership database at FinCEN is a “very high priority.”

“We will try to get up and running as quickly as possible,” she said.

Trade groups and other interested parties viewed her comments as a sign that the rules aren’t far off. They’re gearing up to submit public comments and provide greater details on how reporting and collection will work in practice.

“There’s definitely an opportunity for Treasury to address some open questions,” said Bloomberg Law legal analyst Denis Demblowski. “They do have some wiggle room.”

One area ripe for the agency to clarify is the description of a beneficial owner, Demblowski said. A beneficial owner could be someone who exercises “substantial control” over an entity, but that phrase isn’t thoroughly defined, he added.

The NFIB and small business groups have also identified this issue as one to watch, along with any changes to help reduce reporting tasks. They’ve asked that Treasury instead use existing forms and databases for collecting ownership information.

Meanwhile, some interested parties also called for other changes, such as increasing public access to the ownership database or broadening the types of companies that have to report ownership information.

But there’s an understanding that some of these changes might be best pursued in separate rulemaking and legislation.

Getting enough funding to FinCEN and setting up the database and reporting structure are the most pressing priorities, GFI’s Kumar said.

“Otherwise it will fail before it starts,” she said. “A lot of what we want to do is contingent upon the success that we have with this.”

To contact the reporter on this story: Jacob Rund in Washington at jrund@bloomberglaw.com

To contact the editor responsible for this story: Roger Yu at ryu@bloomberglaw.com

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