August 19, 2020 – New York, United States
REPLACING CORPORATE VEILS WITH WALLS OF TRANSPARENCY: REQUIREMENTS FOR DISCLOSING BENEFICIAL OWNERSHIP OF US COMPANIES
The corporate veil is a legal term that means a corporation can hide behind its status as a corporate entity to avoid exposing its members to personal liability. This comes into play in the event the corporation becomes subject to litigation, etc. Historically, there have been many instances in which this defense was unjustifiably invoked by companies. Upon doing so, courts have mandated that these veils of protection be pierced so that the entity and its members can be held responsible for its abuses.
In the same vein, Congress has recently introduced legislation entitled the Corporate Transparency Act of 2019 that preempts the need to litigate in order to pierce corporate veils. To accomplish this, corporations would be required to disclose the identities of their beneficial owners to the Department of Treasury. In turn, the Treasury would have the license to share this information with law enforcement and financial institutions as circumstances would require. The purpose of this proposed legislation is to eliminate the use of “shell companies” for illegal purposes such as money laundering, evading trade sanctions, financing terroristic activity, committing financial fraud and other similar misconduct.
The trend in the United States towards greater transparency dovetails legislation already enacted in the European Union (EU) requiring disclosure of beneficial ownership of corporations. The Fifth Anti-Money Laundering Directive adopted by the EU in May 2018 mandates its member countries to establish national registries of beneficial ownership information of various legal entities. These registries are accessible to the general public.
The movement in the US towards legislating transparency rules is still in its infancy stages. However, bipartisan support of such an enactment does not necessarily translate into an automatic passage of the bill into law. This is because the details of such a rule of law are still being debated. Nevertheless, you can expect that the deprioritizing of emergency measures to deal with Covid-19 upon its dissipation and subsequent resumption of business as usual will lend itself to once again addressing this proposed legislation. If the bill becomes a law, US corporations will be tremendously impacted. The compliance burden, especially upon small business, will be enormous. In fact, the Congressional Budget Office has estimated that should the current bill come into law, there would be as many as 30 million new beneficial ownership filings yearly.
Another effect of such legislation would be a decrease in the frequent usage of shell companies incorporated in the US to conduct all-cash transactions like the buying of real estate. Additionally, as stated above, the exploitation of US incorporated entities to advance criminal behavior would reduce significantly. Companies would be diligent to abide by the “50 percent rule”, which is administered by the Treasury’s Office of Foreign Assets Control or OFAC. This rule states that entities owned 50 percent or more by persons who are subject to trade sanctions would also be subject to US sanctions. As a result, any company transacting business with these entities would be subject to civil penalties and potential criminal liabilities. In such an atmosphere, all types of companies would enhance their customer due diligence procedures to know exactly with whom they are transacting business. These measures would further prevent these companies from unsuspectingly being drawn into criminal activity only to find themselves occupied with a governmental inquiries and examinations of their activities.
The issue to be resolved in the event this legislation is enacted is the means by which such legislation will be enforced. The US does have certain disclosure rules already in place in the form of the Bank Secrecy Act, applicable to financial institutions, that can be looked upon as precedent and guidance for the current legislative proposals.
Pursuant to the bill proposed by the House, anyone seeking to form a new corporation or LLC in the US would disclose beneficial ownership to FinCEN, or the Financial Crimes Enforcement Network and would be obligated to annually renew such disclosures. The House bill defines a beneficial owner as any natural person who directly or indirectly exercises “substantial control” over the corporation or LLC or, owns 25% or more corporate equity or, receives “substantial economic benefits” from the corporation or LLC.
In contrast, the Senate’s bill, called the TITLE Act (True Incorporation Transparency for Law Enforcement), would require the respective states wherein the company is incorporated, and not FinCEN, to monitor these disclosure requirements. Unlike the House bill, there would be broader access to this information, modeling itself after the European system of public registries. States would be required to provide beneficial ownership information within 30 days of request to (1) a local, state, or federal agency, (2) a congressional committee or subcommittee, (3) a federal agency requesting such information on behalf of another country, (4) FinCEN, or (5) a financial institution (with the customer’s consent) for purposes of complying with customer due diligence legal requirements. Nonetheless, unlike measures passed in the EU, the US model does not give access rights to this data to the public at large. Rather, in both the House and Senate proposals, information would be more readily shared amongst various government agencies and authorities as well as financial institutions under limited circumstances.
Veils by definition obscure the appearance of whatever is present on the veil’s opposite side. As used in the corporate context, the veil makes a company’s actions appear ambiguous just enough to allow it to avoid culpability. Whatever the outcome of the bill, its mere proposal by Congress with a bipartisan support sends a message to companies that they no longer can travel under detective radar. That is, they cannot take advantage of legal principles to conceal otherwise dubious behavior. Suffice it to say that no matter the contents of the final rule of law, the US, like the EU, is trending towards a greater control over unpardonable corporate actions.
About the Author
Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high net worth families and their advisors. Alicea has more than 17 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm. Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.
Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S. Alicea is fluent in Spanish and has a working knowledge of Portuguese.
Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York City Bar, the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA) and the International Fiscal Association (IFA). She is the New York/Northeast Regional Representative of the Women of IFA Network (WIN). Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.
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