[Note: I drafted the post below earlier this week, before yesterday’s shocking events in the U.S. Capitol. I mention this only because it might otherwise seem odd, and perhaps a bit tone-deaf, to publish a commentary on new corporate transparency rules when we just saw an attempted insurrection incited by the siting U.S. President. I don’t really have anything to say about the latter events (at least nothing that others haven’t already said), so I decided to go ahead and publish the post I planned to publish today anyway.]

Last week, as I suspect many readers of this blog are well aware, the United States Congress enacted one of the most significant anticorruption/anti-money laundering (AML) reforms in a generation. The Corporate Transparency Act (CTA), which was incorporated as part of the annual National Defense Authorization Act (NDAA), will require—for the first time in the United States—that corporations, limited liability companies, and similar entities will have to provide the U.S. government (specifically, the Treasury Department’s Financial Crimes Enforcement Network (FinCEN)) with the identities of the ultimate beneficial owners of those entities. That beneficial ownership information, though not made publicly available, will be provided to law enforcement agencies, as well as to financial institutions conducting due diligence (with customer consent). This reform will make it substantially harder for kleptocrats and their cronies—as well as other criminals, including human traffickers and terrorists—to conceal and launder their assets in the United States through anonymous shell companies, and will make it substantially easier for law enforcement to “follow the money” when investigating possible criminal activity.

This important reform has already gotten a ton of coverage in the anticorruption/AML community (see here, here, here, and here), as well as the mainstream media (see here, here, here, and here), though mainstream coverage has understandably been overshadowed by both the coronavirus pandemic and President Trump’s attempts to subvert the recent election. And we’ve had quite a bit of discussion of the issue on GAB prior to the passage of the NDAA (see, for example, here, here, here, here, and here). So, I’m not sure I really have that much to add to what others have already said. Nevertheless, it felt strange to allow this landmark event to go entirely undiscussed on GAB, so at the risk of self-indulgence, I’d like to throw out a few additional thoughts and observations related to the CTA.

• First off, congratulations are in order to the advocates, activists, and lobbyists who have been working on this issue for nearly two decades. (I believe, though I may be mistaken, that the first bill on beneficial ownership disclosure was proposed back in 2008—and that was only after activists had been lobbying for this kind of reform for a considerable time to get in on Congress’s radar.) It’s easy for folks like me, from the comfort of our offices, to write chin-stroking or snarky blog posts about this or that issue, or declaring that the government should enact this or that policy reform. But ideas don’t get translated into action without sustained effort—with lots of frustration and setbacks along the way. So I’d like to take this opportunity to tip my cap to the people who made this happen.
• Continuing on that theme, the advocates and lobbyists didn’t just make this happen through sheer dedication and perseverance. They were also savvy coalition-builders. I don’t have any inside information about their strategy, nor have I done a careful study of their campaign (though, as an aside, I think that such a study might make for a good article, and it would probably be a great case study to use in a policy school!). So, what I have to say here is mainly impressionistic, but my sense is that the campaign for anonymous company reform did a few things really well. First of all, though much of the discussion in the activist community regarding this issue focuses on things like corruption, fraud, and tax evasion, the campaigners wisely broadened the focus and adjusted the framing to foreground issues that were more likely to appeal to different parts of the ideological spectrum. Emphasizing the national security implications of anonymous companies not only provided a justification for integrating the CTA into the NDAA (one of the few pieces of legislation that one can be confident Congress will actually enact each year), but also appealed to appealed to national security hawks. Highlighting the ways in which anonymous companies facilitated human trafficking and the exploitation of children was useful in cultivating support from groups that might not usually focus on corporate law, such as religious organizations. And, crucially, convincing major financial institutions that this reform would make things easier for them—by facilitating compliance with existing know-your-customer rules and keeping the banks out of AML trouble—got the finance industry largely on board. To be sure, not every issue that the anticorruption/AML community cares about will lend itself to this sort of broad-based coalition-building. Nevertheless, the CTA advocates’ successful efforts may be a useful example for at least some future lobbying campaigns.
• Another thing that the CTA proponents managed to do quite well was to neutralize, or at least blunt, opposition from key lobbying groups with a combination of public pressure and back-room compromise. Here I’m thinking in particular of the American Bar Association (ABA), which had come out strongly against earlier versions of what eventually became the CTA. (I wrote a bit about the ABA’s opposition here and here.) The ABA may not be as powerful a lobbying organization as it once was, but its strong and vocal opposition might be expected to give at least some members of Congress pause. In the last year or so, while so far as I know the ABA never endorsed the CTA, it seems to have gone silent for the past year. (The last public statement I can find from the ABA stating its opposition to the CTA comes from October 2019.) What explains this? Again, I do not know for sure, but I can hazard a couple of guesses based on what’s in the public record. First, the pro-CTA advocates seem to have done a good job identifying and leveraging internal divisions within the ABA, and, for lack of a better word, shaming the organization by soliciting or encouraging public statements from lawyers criticizing the ABA’s opposition (see, for example, here and here). I suspect that the ABA leadership may have had second thoughts about seeming to be “soft” on money laundering, and once it became clear that the organization’s opposition might prove publicly embarrassing and internally divisive, the ABA leadership may well have concluded that, while it would continue to oppose the bill as a matter of formal policy, it wouldn’t go out of its way to lobby hard on the issue. Second, opposition from the ABA was blunted by dropping elements of previous versions of the bill, in particular a provision that would have extended suspicious activity reporting requirements to “gatekeepers,” including those who file corporate registration documents. The ABA strongly opposed this requirement because the ABA claimed (speciously, in my view) that this provision conflicted with attorneys’ duties of confidentiality and loyalty to their clients. This provision was eventually dropped from the bill. I don’t know for sure whether that was part of a tacit or explicit compromise, but I suspect that this concession, coupled with the heat that the ABA was taking for its opposition to AML reform, played a part in muting ABA opposition. To be clear, I don’t want to make it seem like the ABA in particular was a huge player. I don’t think that it was, actually. I’m just using the ABA as an example, because I happened to follow its role in these debates a bit more closely due to personal and professional interest. The larger point I’m trying to make here is one about lobbying and advocacy strategy: The CTA proponents not only did a good job assembling a large and diverse coalition of supporters, but they also managed to stymie opposition by a combination of public pressure (particularly effective when it can exploit existing internal divisions within an opponent organization) and a willingness to cut deals and make concessions.
• Now, the CTA as enacted is far from perfect. For one thing, it contains a very long list of exceptions—that is, companies that do not have to report beneficial ownership information. Some of those exceptions are sensible because they involve entities that already have to report ownership information, for example to the Securities and Exchange Commission, or that pose minimal money laundering risk. But advocates have already noted that the exclusion of some entities, such as trusts, is potentially problematic. Also, the definition of “beneficial owner” includes someone who “exercises substantial control” over the entity or owns or controls at least 25% of the ownership interests in the entity; some might find the 25% threshold too high, particularly because proving substantial control may be difficult. Additionally, as I noted above, I would have like the final bill to contain the suspicious activity reporting obligations for gatekeepers, though dropping it may well have been a necessary concession to ensure the bill’s passage. Yet another possible drawback of the CTA approach is that the beneficial ownership information will remain confidential, accessible only to government agencies and financial institutions performing due diligence. Many advocates and scholars, me included, believe that a public beneficial ownership registry—something along the lines of what the United Kingdom has adopted—would be better, though there is a lively debate about this. So there’s still room for improvement. But the CTA still counts as a major victory, and provides a solid foundation on which to build. Once the basic reporting framework is in place, and the world gets used to it, expanding it, strengthening it, and improving it won’t be nearly as hard as getting it established in the first place, or so I would guess. (Making the database public would admittedly be a much heavier lift, though that might become easier as more peer countries go that route; this trend would ratchet up the pressure on the U.S. and also perhaps demonstrate that a public corporate ownership database doesn’t cause the sky to fall.)
• That last point relates to one final observation and comparison. I realize that this may be a bit forced or silly, but in reading about beneficial ownership transparency in the twenty-first century, I kept thinking about civil service reform in the nineteenth and early twentieth century. This is probably because I’ve been doing some joint work recently (which I blogged about here and here) on U.S. anticorruption reform between 1865 and 1941, so maybe that stuff is just in my head and I’m too quick to see analogies even if they’re inapposite. For what it’s worth, here’s why I thought there might be some interesting parallels: For one thing, the push to get civil service reform in the U.S. took a long time, and involved a combination of vigorous lobbying from what we would today call “civil society,” in alliance with reform-minded legislators. The first serious federal civil service reform bill was introduced in 1865, but went nowhere; it wasn’t until 17 years later, in 1882, that Congress finally enacted the Pendleton Civil Service Reform Act. That bill was quite limited in many ways—for instance, it only covered about 10% of the federal civilian workforce. But once in place, the civil service system gradually expanded until, roughly half a century later, most federal civil servants were protected by the merit system. It wasn’t always a smooth process, and it wasn’t devoid of political calculation and opportunism, but it made a big difference—indeed, civil service reform was (in my humble opinion) one of the most important anticorruption developments in American government. The Pendleton Act was nether the beginning nor the end of the process, but it was hugely important because it established a new framework and laid the foundation for a transformative process. So too, I hope, with the CTA.