Jan. 1 passage of Corporate Transparency Act to see creation of U.S. beneficial ownership registry

Against this backdrop, the U.S. quietly, on Jan. 1, became the latest country to announce plans to introduce such a registry, with the passage by Congress of the so-called National Defense Authorization Act – which contained the beneficial ownership register-creating Corporate Transparency Act, (along with the "Anti-Money Laundering Act of 2020", which, among other things, establishes a new, AML-specific whistleblower program).

The passage of the Transparency Act, sponsored by Democratic New York City Congresswoman Carolyn Maloney, pictured left, will have come as a surprise to some observers, who never thought the U.S. would ever agree to a beneficial ownership register. 

But it became law with the support for the Defense Authorization Act of veto-proof majorities in both the U.S. House of Representatives and Congress.

And as a result of the bill's Transparency Act provisions, going forward, corporations, limited liability companies (LLCs) and “similar entities” will be soon begin having to disclose their "beneficial owners" to the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).

FinCEN will be responsible for storing and reviewing the information it receives under the new regime, which will not be available to the public, unlike some other beneficial ownership registries. 

'End' to 'anonymous
shell companies' 

In a statement, Rep. Maloney, who is co-chair of the House of Representative's Americans Abroad Caucus, welcomed the passage into law of her beneficial ownership bill, which she said came "after more than a decade of coalition building".

She said it would both "make our country safer" as well as "lower[ing] housing costs for New Yorkers".

She added: "This legislation [will] require companies to disclose their true, beneficial owners at the time the company is formed, and will prevent bad actors from using anonymous shell companies to thwart law enforcement and hide their illicit activities.

"The U.S. is one of the easiest places in the world to set up anonymous shell companies [now], because no state in the U.S. currently requires companies to disclose their true, beneficial owners.

"Anonymous shell companies have become the vehicle of choice for terrorist financing, money laundering, and organized crime. 

"[But] beyond cracking down on criminal activity, this bill will [also] directly affect us here at home by lowering housing costs in New York City. Kleptocrats and criminals routinely park their ill-gotten funds in luxury real estate in New York, limiting the availability of housing, and driving up housing costs for ordinary New Yorkers.

"There are too many buildings with no lights on at night, because no one actually lives in these apartments; they were purchased purely to hide money, and to act as a bank account.

"But this law will put an end to this practice, once and for all."

Withersworldwide, the London-based, international law firm that specializes in cross-border tax issues, noted that certain exceptions had been provided for in the legislation as it's written, including, "perhaps most importantly for international families with closely- and privately-held companies, an exception from reporting for an individual whose only interest in a corporation, limited liability company, or other similar entity is through a right of inheritance."

Adds Withersworldwide, in an online analysis compiled by U.S.-based partners William J. Kambas, David Guin and Eva Farkas-DiNardo: "There is also an exception for companies with more than 20 employees, gross receipt or sales of more than US$5m, and [a] physical presence in the United States.

"Finally, companies that are operating in certain already highly-regulated industries such as banks, credit unions, registered money transmitting businesses, registered brokers or dealers, registered exchange or clearing agencies, registered investment companies, insurance companies, public accounting firms, public utility companies, and "501" organizations and their operating companies are not required to make these new FinCEN reports."

The penalties for willful failure to report required beneficial ownership information, or providing false information, include a possible fine of up to US$10,000, and possible imprisonment for up to two years, the Withersworldwide analysis goes on to note.

'Question of balance'

For Filippo Noseda, a London-based, Mishcon de Reya law firm partner who has been involved in a number of legal cases involving data privacy issues – and who is an expert on, as well as an outspoken critic of, many government information exchange programs – the success or otherwise of such registers comes down to the way they're administered.

"Yes, beneficial ownership registers can be useful to combat crime, tax evasion and money laundering," he says.

"But the same can be said of a DNA register of all the citizens of a country, or a central register containing the fingerprints of all of its citizens.

"Or a CCTV on every corner of every street.

"The question is not 'could it work?', but rather, 'What is the right balance between the fundamental rights of compliant citizens and the legitimate interest of a country's authorities who are seeking to combat crime, or ensure tax compliance?'

"In our society [in the EU], we decided that fundamental rights are the rule, and surveillance the exception. Thus, under EU law and the European Convention on Human Rights, a restriction of a fundamental right must be necessary to achieve a public objective; and a register that contains the details of every owner of companies, and makes it accessible to everyone in the world, must certainly go beyond what is necessary to combat crime.

"A proportionate measure, however – and what the U.S. apparently is planning to do – would entail a closed register, which can be accessed only by the authorities, and would be subject to safeguards, in the same way that the police needs an arrest warrant from a judge before entering your home."

While cross-border lawyers and government officials were studying the fine print of the new American beneficial ownership registry rules over the past week, "ultimate beneficial ownership" registers – as the expression translates into English – were making headlines in certain European journals and news websites.

In the Netherlands, for example, an advocacy organization that calls itself Privacy First announced that it is launching a legal challenge against the government over its recently-introduced UBO register, on the grounds that "the regulations on which [it] is based" are "invalid".

"The consequences of this new legislation are profound," Privacy First says, in an announcement of its action on its website, posted on Wednesday.

"After all, it concerns very privacy-sensitive information. Information about the financial situation of natural persons will be disclosed.

"More than 1.5 million legal entities registered in the Trade Register must disclose information about their UBOs (ultimate beneficial owners). [This] UBO register is accessible to everyone, for €2.50 per request.

"The UBO register aims to prevent money laundering, but will result in blackening.

The privacy violation that is the result of the UBO register, and the public accessibility of sensitive data, is disproportionate."

In Belgium, meanwhile, the Belgian Federal Public Service Finance (FPS), a government financial and taxation entity, was forced to take Belgium's UBO register down after, as the news website of the Het Nieuwsblad paper put it, a serious "security leak" in the system had been discovered by an un-named digital consultant.

According to www.nieuwsblad.be, this leak meant that anyone who entered "the name and date of birth of any Belgian via a web application" could access personal data about that individual that they should not have been able to get.

The article, posted on Thursday, quoted an FPS Finance spokesperson as saying that "the [UBO' application is no longer accessible. We will solve the problem."