What Is “Beneficial Ownership”? Why the Proposed TITLE Act’s Definition Is Sensible and Appropriate

“Vague, overly broad, and unworkable.” Those were the words ABA president Hilarie Bass used in her February letter to Congress to criticize the definition of “beneficial ownership” that appears in the TITLE Act – a proposed bill that would require those seeking to form a corporation or limited liability company to provide information on the company’s real (or “beneficial”) owners to state governments. The TITLE Act defines a beneficial owner as “each natural person who, directly or indirectly, (i) exercises substantial control over a corporation or limited liability company through ownership interests, voting rights, agreement, or otherwise; or (ii) has a substantial interest in or receives substantial economic benefits from the assets of a corporation or the assets of a limited liability company.” Ms. Bass and other critics assert that this definition is unprecedented, unfair, and unduly vague, making it impossible for regulated entities to understand the scope of their legal obligations and rendering them vulnerable to arbitrary, unpredictable prosecutions.

But Ms. Bass is incorrect: The TITLE’s Act definition of “beneficial ownership,” though “vague” in the sense that it is flexible rather than rigid, is perfectly workable, and aligns with other US laws, European laws, and the G20’s 2015 principles on beneficial ownership. Moreover, the alleged “vagueness” is necessary to prevent the deliberate and predictable “gaming” of the system that would inevitably take place to circumvent a more precise numerical ownership threshold. Continue reading

Guest Post: Encouraging Signs for a Possible U.S. Legislative Crackdown on Anonymous Companies

Gary Kalman, the Executive Director of the FACT Coalition, contributes today’s guest post:

A little over a year ago, the International Consortium of Investigative Journalists (ICIJ) released the Panama Papers, a treasure trove of information and a window into the world of financial secrecy. In some ways, much of what the Panama Papers revealed was already well known. Previous estimates put the amount of money hidden in offshore secrecy havens somewhere between $8 trillion and $32 trillion. In 2015, The New York Times published an impressive five-part series on the use of anonymous shell companies to purchase prime real estate in New York City. Prior to that, the U.S. Justice Department filed a lawsuit (which they just won on June 29th) to force the forfeiture of New York property secretly owned by the government of Iran in direct violation of economic sanctions. And so on. Yet it is hard to deny the captivating intrigue of the specific stories in the Panama Papers involving Russian kleptocrats, world leaders, athletes, movie stars, and others.

The big question is: more than a year later, did anything change? As I recently observed, there are indeed encouraging signs around the world, particularly in Great Britain, several EU member-states, and some developing countries such as Ghana. What about the United States? After all, with U.S. transparency laws ranging from weak to non-existent, there is little need to go to Panama to launder one’s dirty money. While Delaware gets the most notoriety, no state collects information on the true (“beneficial” owners of corporations. In fact, in its recent assessment of the U.S., the Financial Action Task Force, an international anti-money laundering body, noted that for all the progress the U.S. has made, the lack of beneficial ownership transparency remains a glaring weakness. And in the past, when some U.S. legislators – most notably former U.S. Senator Carl Levin (D-MI) – pushed legislation to require states to collect beneficial ownership information, the proposed bills never received so much as a hearing.

That may be about to change, and anticorruption advocates should take note. Continue reading

Equity Crowdfunding: Considerations for Anti-Money Laundering Regulation

Equity crowdfunding involves the use of an internet-based platform to market equity shares in a given company to a wide range of potential investors (the “crowd”). The result is financial democratization of sorts – harnessing the power of the crowd to make many small investments instead of relying on large capital infusions from a relatively small number of sophisticated investors. The key to equity crowdfunding is to keep transaction costs low, so that small businesses are able to participate, without sacrificing investor protection. This latter consideration is especially important given the potentially low financial sophistication of the crowd.

In my last post, I discussed how equity crowdfunding could help small and medium-sized enterprises (SMEs) in developing countries overcome corruption-related barriers to accessing finance. Because equity crowdfunding makes use of internet-based platforms, it is particularly useful for cross-border transactions. As a result, SMEs in developing countries that are unable to access finance through traditional means (often because of corruption in domestic capital markets) can use equity crowdfunding platforms to connect with investors outside of their home countries. As with other technology-based tools that have the potential to sidestep the effects of corruption and contribute to economic development, though, there is also reason to be concerned about the opportunities for corruption for which equity crowdfunding could be abused. In particular, equity crowdfunding platforms could be used to facilitate money laundering, in at least two ways: Continue reading

Transparency International’s Laudable Campaign for Beneficial Ownership Transparency

As many readers of this blog are likely aware, Transparency International–the leading worldwide anticorruption NGO–has made the corporate secrecy problem a centerpiece of its “Unmask the Corrupt” campaign. TI is focusing in particular on the problem of shell companies whose true (or “beneficial”) owners are unknown, and which can be used by corrupt officials and businesspeople to shelter and launder stolen public funds. The TI Secretariat, along with several of TI’s national chapters, have been pushing for action at both the national and international level, especially for reforms that would make transparent the beneficial owners of these companies. I wanted to use this post as an opportunity to call attention to two of TI’s recent efforts in this area, which might be of interest to GAB readers:

  • First, the TI Secretariat wants to use the G20 leaders’ summit this weekend in Brisbane, Australia as an opportunity to raise awareness of the issue and to put pressure on the G20 leaders to commit to take action on this issue. To this end, TI organized an open letter, signed by a number of prominent civil society activists and other public figures (including John Githongo, Desmond Tutu, and Richard Goldstone), calling on the G20 leaders to outlaw secret company ownership and mandate public registries of the true beneficial owners of all legal entities.
  • Second, as I noted last month, the US government is currently in the midst of a rulemaking process to strengthen due diligence and disclosure requirements on beneficial ownership. TI-USA submitted a set of supportive but critical comments on the rule, urging the US Treasury Department to expand the definition of “beneficial owner” to include individuals who control the entities through means other than a formal management position, to apply the new rules apply to existing accounts as well as new accounts, and to require financial institutions not only to verify the identity of the (alleged) beneficial owner, but to independently verify that the person listed as the beneficial owner is in fact the true beneficial owner.

TI’s efforts in this direction are most welcome, and I hope they have some impact on the G20 summit and the development of new rules in the US (and elsewhere). I’m happy to take this this opportunity to publicize TI’s efforts, and I hope some of our readers out there might be able to contribute to the push that TI and other organizations are making on this issue.

U.S. Treasury Department Is Soliciting Comments on New Anti-Money Laundering Rule

A quick public service announcement:

The Financial Crimes Enforcement Network (FinCEN) of the U.S. Treasury Department is seeking public comments on a proposed rule that is intended to make it harder to hade the proceeds of corruption (or other criminal activities, like drug trafficking) in the U.S. financial system. The full text of the proposed rule is here. That proposed rule is fairly lengthy and complicated (taking up close to 20 pages in the Federal Register, in 3-column small print), but the basic gist of the rule is that it would impose new “know-your-customer” obligations on U.S. financial institutions, and in particular would require banks to identify the “beneficial owner” — the actual person (human person, not corporate person) who benefits from an account owned by an artificial legal entity.

I’m not an expert in this area, but this strikes me as a very good idea. Some supporters, though, have argued that the rule does not go far enough. Global Witness, in a useful post summarizing and discussing the proposed rule, points out some of the deficiencies of the proposed rule, including the fact that although the rule requires financial institutions verify the identify the beneficial owner of an account — that is, to attach the account to a real live human being — the rule does not require banks to independently verify that the listed beneficial owner is in fact the real beneficial owner.

The Treasury Department, following standard procedures under U.S. Administrative law, is seeking pubic comments on the rule. Comments can be submitted in hardcopy, but can also be submitted online. Just go to the regulations.gov site, and in the “search” field type FINCEN-2014-0001. That should take you to the docket, where you can view the rule, read the comments that have already been submitted online (very few so far), and submit any comments of your own.  (A direct link to the docket is here, but I included the above instructions because the direct links to dockets sometimes stop working.) The notice of the proposed rule also lists specific questions and issues that the FinCEN would like commenters to address. Among other things, FinCEN seeks comments on:

  • The proposed definitions of “beneficial owner” and “legal entity customer,” as well as the proposed exemptions (and possible additional exemptions);
  • Whether the rule should apply retroactively to existing accounts, or only to accounts established after the new rule goes into effect;
  • Whether the proposed processes for verification of beneficial owners, updating of beneficial ownership information, and ongoing monitoring of suspicious transactions are sufficiently clear and appropriate.

Comments are due by midnight on October 3rd.