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The image shows a magnifying glass over the word "transparency."
Transparency. Photo by Flickr user HonestReporting. Aug. 6, 2014. CC BY-SA, flickr/freepress. Used under CC BY-SA 2.0 DEED.

Beneficial Ownership Transparency’s Evolving Paradigms. An Overview of the Latest Reforms in the US, the EU, and the UK (Part 1)

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The following is a guest post by Sarah Bandini, a foreign law intern working with Foreign Law Specialist Jenny Gesley at the Global Legal Research Directorate of the Law Library of Congress.

You might have heard of 1Malaysian Development Berhad (1MDB), Malaysia’s state fund that was at the center of one of the major corruption scandals in the world. 1MDB was created in 2009 under the direction of the then-prime minister Najib Razak to promote regional development. Vast sums of money were misappropriated by the fund’s high-level officials and consultants and siphoned into bank accounts in Switzerland, Singapore, and the United States (U.S.). The U.S. Justice Department believes that more than US$4.5 billion was stolen and, in part, used for luxury purchases, including buying billions of dollars worth of property in Beverly Hills and Manhattan, and even financing the Oscar-nominated movie The Wolf of Wall Street, directed by Martin Scorsese. Several shell companies and fictitious entities were at the core of the scandal, allowed by nonexistent regulation on beneficial ownership transparency.

According to the Financial Action Task Force (FATF) Guidance, beneficial owner refers to the “natural person(s) who ultimately owns or controls a customer and/or the natural person on whose behalf a transaction is being conducted.” (Guidance, at 8.) Illicit actors often employ corporate setups like shell and front companies to conceal their identities and launder their unlawful gains. Commitments to improve beneficial ownership transparency have been made by countries across different multilateral forums, including the G7, the G20, the United Nations, and the FATF.

This blog post will provide an overview of the regulations on beneficial ownership transparency in three selected jurisdictions, namely the U.S., the European Union (EU), and the United Kingdom (UK) and highlight, in particular, the latest developments in that area.

Beneficial Ownership Registers in the U.S. – The Corporate Transparency Act

As highlighted in a 2019 report by the Congressional Research Service, for several years, the international community has called on the U.S. to strengthen its anti-money laundering framework by guaranteeing beneficial ownership disclosure. (Report, at 2.) In its 2016 Mutual Evaluation Report (MER), the FATF pointed out that, even though the U.S. has a well-developed and robust anti-money laundering and counter-terrorist financing regime, the “lack of timely access to adequate, accurate, and current beneficial ownership (BO) information” represented a major vulnerability in the U.S. financial system. (MER, at 3, 18.)

The U.S. government has long recognized the challenges associated with implementing an effective disclosure regime on a state and federal level and the risks arising from the absence thereof, such as discussed in a 2006 U.S. Government Accountability Office report. After years of research and policy discussions, in 2019, a first proposal for a Corporate Transparency Act was presented to Congress. The proposal formed the basis for the Corporate Transparency Act, which has become law as part of the National Defense Authorization Act (NDAA) for the fiscal year 2021. (31 U.S.C. § 5336.)

The Corporate Transparency Act became effective on January 1, 2024, with a one-year grace period until January 1, 2025, for covered entities created or registered before the effective date. Its purpose is to collect data on beneficial ownership and provide law enforcement with information for preventing, detecting, and investigating misconduct perpetrated through business coverage, such as money laundering and terrorist financing.

The rules contained in the act have been implemented by the Treasury Department’s Financial Crimes Enforcement Network (FinCEN), with the final rule being published in September 2022, and now form the legal framework for beneficial ownership information reporting provisions in the United States.

The image shows a magnifying glass over the word "transparency."
Transparency. Photo by Flickr user HonestReporting. Aug. 6, 2014. CC BY-SA, flickr/freepress. Used under CC BY-SA 2.0 DEED.

The rules apply to U.S. registered corporations, limited liability companies, and similar entities formed under the law of a state or the law of a foreign country and registered to do business in the U.S. unless they fall in one of the 24 exempted categories. (31 U.S.C. § 5336(a)(11)(A).) Among these exemptions are public companies, governmental entities, banks and bank holding companies, broker-dealers, insurance companies, charities, and certain other non-profit entities. (31 U.S.C. § 5336(a)(11)(B).)

Reporting companies are required to file reports with FinCEN. In these reports, entities provide two types of data: (i) identification of the company itself and (ii) identification of the beneficial owner. For the latter information, the applicant must indicate the name, birthdate, address, and unique identifying number and issuing jurisdiction from an acceptable identification document for each beneficial owner. (31 U.S.C. § 5336(b)(2)(A).) The law provides a multi-prong definition of “beneficial owner,” described as any individual who, directly or indirectly, either exercises substantial control over a reporting company or owns or controls at least 25% of the ownership interests of a reporting company. (31 U.S.C. § 5336(a)(3)(A).)

Per a general rule, beneficial ownership information is not public. It is confidential and may not be disclosed. (31 U.S.C. § 5336(c)(2)(A).) Disclosure is permitted only in limited cases listed under the act, including where the FinCEN receives a specific request from a federal agency engaged in national security, intelligence, or law enforcement activity for use in furtherance of such activity; a request from a state, local or tribal law enforcement agency, authorized by a court of competent jurisdiction; from a federal agency on behalf of a foreign law enforcement agency, prosecutor or judge under an international treaty, agreement or convention (31 U.S.C. § 5336(c)(2)(B).)

The Corporate Transparency Act represents a stepping stone in the fight against corruption and financial crime, limiting the use of business entities like shell companies as coverage to disguise and launder ill-gotten money. At the same time, though, it signifies a shift in the landscape of U.S. corporate law, introducing relevant changes and costs for businesses to comply with the filing requirements. Some critics observed that the act would pose unique challenges for foreign-owned companies, as they often have complicated beneficial ownership structures. Other issues may foreseeably arise from the need to guarantee the homogeneous application of the act in every state and overcome the many differences that characterize states’ corporate laws.

On February 7, 2024, FinCEN proposed new rules to add reporting requirements for all-cash residential property purchases. The proposal would require real-estate professionals to report non-financed sales of residential real estate and disclose the names of people behind legal entities, trusts, and shell companies. According to the Financial Accountability and Corporate Transparency (FACT) Coalition, if adopted, the rules would represent a powerful tool in the fight against crime and help close decades-old loopholes in the system that have allowed illicit actors to launder money through U.S. real estate markets.

Stay tuned for part two of this post which will look at the legal framework in the EU and the UK.

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