Corporate Law News

Shell Company Data Fight Hinges on Law Enforcement Access

March 27, 2019, 10:30 AM

A potential revamp of corporate formation disclosure rules is likely to turn on who controls sought-after ownership data.

Rep. Carolyn Maloney (D-N.Y.) is readying legislation meant to ensure the government knows the identity of individuals with substantial control over limited liability companies and corporations. Her bill will likely jumpstart a new round of debate in Congress over which agency should collect ownership information.

Maloney’s Corporate Transparency Act, if passed, could address a years-long call for heightened oversight on the use of “shell” companies for money laundering, tax evasion and terrorist financing. Most lawmakers agree that more corporate transparency is needed, but the bill could expose a rift among them on who should be empowered to take charge of the data.

“Law enforcement is asking for this,” Maloney told Bloomberg Law. “They are there to protect us. Let’s give them the tools they need to get the job done.”

Maloney proposes requiring applicants to form LLCs and corporations at states to disclose so-called beneficial owners to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

It could aid in the effort to track dirty money. But its opponents fear the proposal could give enforcement officials unchecked access to the personal ownership data.

Legislative Prospects

With Democrats in control of the House, the outlook for advancing FinCEN-focused beneficial ownership legislation has improved. Past iterations of this longstanding proposal drew support from both parties.

Maloney, a member of the House Financial Services Committee, said she’s considering possible tweaks before rolling out the latest version of her bill. She’s hoping to get it to a committee vote by the end of April.

“We’re trying to send the bill over to the Senate with as much Republican support as we can,” Maloney said. Five House Republicans co-sponsored the beneficial ownership legislation Maloney introduced in 2017.

The updated bill is likely to pass the House, but its outlook in the Senate is less certain. A previous effort to give beneficial ownership data to states drew support from Sen. Chuck Grassley (R-Iowa), while Sen. Marco Rubio (R-Fla.) previously co-sponsored a bill to store ownership data at FinCEN.

If any competing proposals surface they could draw some Republican support away from Maloney’s legislation and lessen its chances of moving through both chambers.

Privacy vs. Access

Giving FinCEN control over beneficial ownership information has become a popular proposal. But some lawmakers prefer states or the Internal Revenue Service to receive and control ownership details.

When states or IRS officials have them, law enforcement needs to show due cause in most cases to obtain and serve a subpoena to get data, said Hal Crawford, a managing director with Alvarez & Marsal’s Financial Industry Advisory Services.

But, if housed at FinCEN, these documents would be available to law enforcement upon request — similar to the process for getting reports on suspicious transactions that banks flag to FinCEN.

Rep. French Hill (R-Ark.) suggested in a Financial Services subcommittee hearing this month that giving law enforcement access to ownership data without a warrant puts people’s privacy at risk. He said he’s circulating his own draft bill that would add extra reporting requirements for companies on their IRS tax forms.

“Why not collect beneficial ownership information in the same place we collect all other ownership information?” Hill said during the hearing, alluding to the IRS.

Resources & Verification

Witnesses told the House subcommittee that FinCEN might not have the resources needed to handle an influx of beneficial ownership data.

Maloney said she hasn’t heard concerns from FinCEN about its ability to collect the data. “It’s their job — financial security and combating criminal activity,” she said. “They’ve got to figure out how to do it.”

The American Bankers Association, in a March 13 letter signed by several financial industry advocacy groups, urged the Financial Services Committee to push for a single federal registry of ownership information. The groups, without supporting a particular bill, said a registry would work hand-in-hand with disclosure rules FinCEN put in place last year.

FinCEN requires federally regulated banks, credit unions, mutual funds, and securities and commodities broker-dealers to identify persons behind the accounts of “legal entity customers” such as LLCs. Maloney said banks, in some cases, would also be able to request FinCEN beneficial ownership data when they’re looking to verify accounts for compliance purposes.

Requiring companies to report ownership information to FinCEN also raises a question of data verification.

“The first thing I thought of is who is going to have the onus of verifying,” said Michael Carter, a senior director with Alvarez & Marsal’s disputes and investigations practice. “How do we verify that those reports are correct, that certain persons or entities have been omitted from those beneficial ownership forms or reports?”

State Your Business

Most states now require some form of beneficial ownership data, but have pushed back on taking on additional responsibility.

Meanwhile, Delaware and other hotbeds for new LLCs and corporations still don’t require ownership data. In some cases, LLCs can be created online using only a name — not necessarily the beneficial owner’s — and an address, which could be tied to another entity without any ownership data on record.

Hill, during the hearing, said he would prefer states consistently collecting ownership data in a machine-readable format, but states have resisted this idea.

“The states don’t want it,” Maloney said of pushing states to collect and manage more of the beneficial ownership data. “They don’t want this responsibility.”

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

To contact the editors responsible for this story: Roger Yu at ryu@bloomberglaw.com; Seth Stern at sstern@bloomberglaw.com

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