The end of secrecy for individuals hiding behind companies to engage in criminal activity and human rights harm

Week of 4 January 2021

The end of secrecy for individuals hiding behind companies to engage in criminal activity and human rights harm

By passing the Corporate Transparency Act of 2019 late last month, the U.S. Congress is signaling a stronger commitment to promote corporate transparency and accountability. The law, which requires the disclosure of beneficial ownership when forming a new corporation, was welcomed by its proponents after years of pressure from international institutions, other governments, transparency advocates, law enforcement officials and legal experts.

What is the Corporate Transparency Act of 2019?

    • Title LXIV of the National Defense Authorization Act (NDAA), H.R. 6395—known as the Corporate Transparency Act of 2019—was signed into law in December 2020 by the U.S. Congress with the support of sitting President Donald Trump.
    • The introduction to the Act states that its purpose is to “ensure that persons who form corporations or limited liability companies in the United States disclose the beneficial owners of those corporations or limited liability companies, in order to prevent wrongdoers from exploiting United States corporations and limited liability companies for criminal gain, to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct involving United States corporations and limited liability companies, and for other purposes.”
    • The final version of the law built on previous efforts in both the U.S. Senate and U.S. House of Representatives to develop anti-money laundering legislation and require transparency of corporations’ beneficial ownership (i.e. the person that ultimately owns or controls a company or organisation).

What does the Corporate Transparency Act entail?

    • In short, the law is intended to ensure that the beneficial owner of a corporation is made a matter of record for law enforcement agencies and financial institutions, hindering the ability of beneficial owners to use their business to launder money, sponsor terrorism or engage in other criminal activity such as human trafficking and other harms to people.
    • The Act requires every applicant forming a corporation or limited liability company in the U.S. to file a report with the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN), which is responsible for identifying potential financial crimes. The report must include the beneficial owner’s: full legal name, date of birth, current address, and an official identification number.
    • The law does not apply to companies that already disclose this information (e.g. publicly-traded companies) or to organisations determined by the Secretary of the Treasury to be lower risk. Companies that do not comply can face both civil and criminal penalties.

Why does this matter?

    • Corporate transparency and beneficial ownership underpin a number of other issues related to corporate responsibility and human rights. For example, companies can be used to funnel money into criminal activities like human trafficking and drug trafficking, to unlawfully siphon public funds away from needed public goods services, to prop up authoritarian regimes committing severe human rights abuses, or to finance terrorist activities. They can also be used to conceal tax evasion and skimming of natural resource revenues, as we’ve seen with the Panama Papers and the Luanda Leaks.
    • The text of the Act highlights several reasons why this legislation is so important—and why it is long-overdue:
      • Very few States require information about the beneficial owners of the corporations and limited liability companies formed under their laws.”
      • “A person forming a corporation or limited liability company within the United States typically provides less information at the time of incorporation than is needed to obtain a bank account or driver’s license and typically does not name a single beneficial owner.”
      • “Criminals have exploited State formation procedures to conceal their identities when forming corporations or limited liability companies in the United States, and have then used the newly created entities to commit crimes affecting interstate and international commerce such as terrorism, proliferation financing, drug and human trafficking, money laundering, tax evasion, counterfeiting, piracy, securities fraud, financial fraud, and acts of foreign corruption.”
    • In fact, as the Act itself points out, the U.S. government’s failure to require ownership disclosure has been criticised multiple times by international anti-money laundering standard-setting body, the Financial Action Task Force on Money Laundering, which counts among its membership 37 countries and 2 regional organisations (the European Commission and the Gulf Cooperation Council).

Read the full text of the Corporate Transparency Act here: H.R.2513 – Corporate Transparency Act of 2019, 116th Congress (2019-2020)

Transparency and accountability nonprofit FACT Coalition (a nonprofit organisation leading advocacy for the law) has also developed a high-level two-pager on the Act: FACT Coalition, FACT Sheet: A Brief Summary of The Corporate Transparency Act (Title LXIV of the NDAA, H.R. 6395) (December 2020)