Today’s guest post is from Neil Gordon, a Senior Researcher at the Project On Government Oversight (POGO).
Companies with anonymous ownership structures are a serious global problem. Anonymous companies, as readers of this blog are likely well aware, play a significant role in facilitating grand corruption. Anonymous companies are associated with a wide range of other criminal misconduct as well. Unfortunately, the United States bears much of the blame for the proliferation of anonymous shell companies and the harm they cause. Most states make it relatively easy to set up a business without revealing the real owners—even easier than getting a library card, according to the anticorruption think tank Global Financial Integrity. That’s why it was so important that Congress finally enacted two key corporate transparency provisions as part of the fiscal year 2021 National Defense Authorization Act (NDAA).
The first provision, the Corporate Transparency Act (CTA), requires most companies to register their beneficial owners—the people who really own, control, and financially benefit from the company—with the Treasury Department’s Financial Crimes Enforcement Network. This provision received a great deal of media coverage, and rightly so. But the second key beneficial ownership transparency provision in the NDAA has received almost no attention, even though it could be a real game-changer. That second provision can be found in Section 885 of the NDAA. Section 885 requires all companies receiving federal contracts or grants over $500,000 to report their beneficial owners in the Federal Awardee Performance and Integrity Information System (FAPIIS), a database containing the misconduct and performance histories of federal contractors and grantees.
Section 885 differs from the CTA in a number of ways. Most obviously, Section 885 applies only to federal government contractors and grantees, while the CTA applies more broadly. That said, the CTA exempts certain types of companies from disclosing their beneficial owners, but Section 885 does not include these exemptions. The two provisions also define “beneficial owner” somewhat differently. (The CTA defines a beneficial owner as one who exercises “substantial control” over the company or who owns or controls at least 25% of the company’s ownership interests, while Section 885 adopts the Securities Exchange Act’s definition of a beneficial owner as any person who directly or indirectly holds “voting power” at the company or the power to direct a vote.) But perhaps the most significant difference concerns the accessibility of the beneficial ownership information. Under the CTA, the beneficial ownership information supplied to FinCEN is not made public; rather, FinCEN shares this information with law enforcement authorities in the U.S. and abroad, and with financial institutions conducting due diligence. By contrast, information in FAPIIS is publicly accessible. (The original version of FAPIIS, established in 2008, was completely off-limits to the public. But in 2010, the law was amended to require the government to post FAPIIS information online, exempting only past performance reviews. Since then, updated contractor and grantee reporting requirements have increased the type and quantity of data posted on the public site.) Given that Section 885 appears on its face to require contractors to submit their beneficial ownership information to the FAPIIS database, and given that this information is not exempted from the usual requirement under the 2010 law that FAPIIS be accessible to the general public, it would seem to follow straightforwardly that, although the CTA did not create a public beneficial ownership registry for all U.S. companies, Section 885 does create such a public registry for the subset of companies that do significant business with, or receive significant grants from, the federal government.
Nevertheless, there is reason to worry that the business community might lobby the government to find an excuse to keep beneficial ownership information off the public FAPIIS site, perhaps taking advantage of the fact that Section 885 does not provide specific guidance as to how the reporting requirement will be implemented. As a legal matter, it’s hard to see what could justify keeping this information from public view. After all, as noted above, the law seems quite clear, and beneficial ownership information is not obviously more sensitive than other information already provided about government contractors and grantees on the public FAPIIS site. Yet civil society watchdogs, including my own organization, the Project On Government Oversight (POGO), must remain vigilant to counter any attempt to hide contractor and grantee beneficial ownership data from the public.
As long as we can head off any attempt to undermine Section 885’s faithful implementation, then we can look forward to seeing the FAPIIS site populated with the beneficial ownership data of companies with which our government entrusts trillions of dollars and the security of the country. In the hands of the public, this information will be a powerful weapon in the war against corruption, fraud, and other misconduct that is currently hidden behind a veil of corporate anonymity.
It is interesting that the definition of a beneficial owner varies so much between these two pieces of legislation. Any idea why the more stringent definition was adopted by Section 885?
Perhaps knowing the reasoning that went into the definition for Section 885 could inform efforts to push for the adoption of this definition in the CTA going forward.
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