U.S. Legislation Targets Shell Companies

June 17, 2019

Proposed changes to the Bank Secrecy Act (BSA) have agencies lining up to call for a federal database to collect beneficial ownership (BO) data during the registration of corporations.

The changes to the Bank Secrecy Act (BSA) would come through the proposed Corporate Transparency Act, introduced in early May. The purpose of the bill is to ensure corporate ownership information is presented at the time a corporation is formed – something that is currently controlled at the state level. However, a number of agencies also want to ensure Congress makes that information available.

For financial institutions (FIs), a central repository could mean less burden on them caused by the implementation of the CDD Rule. FIs collect BO information when an account is opened as required under FinCEN’s Final Rule, which took effect a year ago.

Central database needed for corporations

For law enforcement and even the head of FinCEN, the benefits are clear – a central repository would help combat the use of shell corporations to hide the otherwise anonymous owners. Updating the database when changes are made to the corporation would give banks and law enforcement the latest information.

Banking officials agree a repository would ease the burden on FIs, . FIs must identify each individual (up to four) who owns 25 percent or more of the equity interests in a legal entity, and, for each legal entity, one individual who exercises management control of that legal entity.

“The most significant obstacle we have observed is the absence of reliable sources against which a bank can independently verify the accuracy of the beneficial ownership information provided when a legal entity opens an account,” Grovetta Gardineer, senior deputy comptroller with the Office of the Comptroller of the Currency (OCC), told a Senate hearing into the bill.

“These concerns may be best addressed through legislation establishing a consistent, nationwide requirement for legal entities to provide and update accurate beneficial ownership information, or by the creation of a centralized database for legal entities to provide and update this information.”

FIs face difficulties with 25% rule

Gardineer said financial institutions face difficulties under the CDD Rule’s 25 per cent threshold. “This type of inflexible threshold permits bad actors to structure legal entities using multiple entities, trust arrangements and other legal forms to create numerous ownership layers so that 10 ownership percentages are below the threshold,” she explained.

“Where ownership interests exist below the 25% threshold, some true owners may not be identified by the bank opening the account.”

The OCC would support “a consistent, nationwide requirement that cannot be easily circumvented.” But Gardineer offered no suggestion in her testimony about what that requirement would be.

Kenneth Blanco, FinCEN’s director, told the senate hearing the lack of information means the U.S. has fallen behind in the fight against money laundering through shell corporations. The CDD Rule “is but one critical step toward closing this national security gap,” Blanco said. “The second critical step in closing this national security gap is collecting beneficial ownership information at the corporate formation stage.”

He warns that a failure to take action will make the U.S. vulnerable. “As more and more of our allies begin to collect beneficial ownership information at the incorporation stage in their countries and make it accessible to law enforcement, the U.S. risks becoming a safe haven for bad actors looking to hide their assets,” he said.

FBI wants help unveiling shell corporations

The Federal Bureau of Investigation (FBI) is also calling on U.S. legislators to strengthen rules for beneficial ownership and identification of shell companies.

Steven D’Antuono, acting Deputy Assistant Director, Criminal Investigative Division, said combating dirty money coming through anonymous shell companies is a priority for law enforcement.

“While states require varying levels of information on the officers, directors, and managers, none require information regarding the identity of individuals who ultimately own or control legal entities upon formation of these entities,” D’Antuono told the Senate hearing.

“For an illegal enterprise to succeed, criminals must be able to hide, move, and access these illicit proceeds - often resorting to money laundering and increasingly utilizing the anonymity of shell and front companies to obscure the true beneficial ownership of an entity. The pervasive use of shell companies, front companies, nominees, or other means to conceal the true beneficial owners of assets is a significant loophole in this country’s anti-money laundering (AML) regime.”

Investigations marred by layers of secrecy

The FBI claims it has “countless investigations” where shell and front companies are used to conceal nefarious activities and identities.

D’Antuono said the strategic use of these entities makes investigations exponentially more difficult and laborious. “The ability to easily identify the beneficial owners of these shell companies would allow the FBI and other law enforcement agencies to quickly and efficiently mitigate the threats posed by the illicit movement of the succeeding funds,” he said.

The U.N. Office on Drugs and Crimes estimates that global illicit proceeds total more than $2 trillion US annually, and proceeds of crime generated in the United States an estimated total of approximately $300 billion US in .

For more information on Beneficial Ownership and complying with FinCEN’s rule, please download our White Paper on the subject. For more information on how Alessa can help your organization, please contact us.

About Anu Sood

Anu Sood (LinkedIn | Twitter) is the Director Marketing at CaseWare RCM and is responsible for the company’s global marketing strategy. She has over 20 years of experience in product development, product management, product marketing, corporate communications, demand generation, content marketing and strategic marketing in high-tech industries.

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