A group of senators from both sides of the aisle proposed legislation to require shell companies to divulge their true ownership to the U.S. Treasury Department.
If passed, the proposed legislation, titled the Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings Act, or ILLICIT CASH Act for short, would also update the Bank Secrecy Act to provide for greater communication and coordination between law enforcement and financial institutions in the identification of suspicious financial activities.
In addition, S.2563 promotes the use of new technologies such as artificial intelligence to track, identify, and report suspicious financial activity. Presently, “financial institutions are not always incentivized to adopt the most up-to-date technology” to track suspicious activities, according to a summary of the bill made available by the senators who introduced it.
Meanwhile, any number of bad actors have managed to hide successfully behind shell companies. “Right now, criminals and terrorists are exploiting our financial system using shell companies that hide their identities,” said Sen. Tom Cotton (R-Ark.) in a press release issued when the bill was introduced on Sept. 26. Also offering support: Sens. Mark Warner (D-Va.), Doug Jones (D-Ala.), Mike Rounds (R-S.D.), Bob Menendez (D.-N.J.), John Kennedy (R-La.), Catherine Cortez Masto (D-Nev.), and Jerry Moran (R-Kan.).
At the same time that certain criminals have found a way to shield their identities courtesy of shell companies, law enforcement and intelligence agencies have been challenged to investigate suspicious activity because they do not have information about who the true owners of these anonymous companies actually are. “As bad actors use ever more sophisticated techniques, we need to make sure federal agencies have the tools they need to prevent this abuse of our financial system and protect our national security,” Warner said. “That starts with making sure we have a full usable record of who actually owns these shell companies,” he continued.
The problem with shell companies
While some see shell companies as appropriate vehicles for doing business with some measure of privacy, these entities can also be privacy shields covering up more nefarious activities. Finding out who the actual owners of these organizations is not always easy.
“A person needs to provide far more personal information to a state to obtain a library card than to create a company,” wrote Washington D.C.-based think tank Global Financial Integrity in a report on the ease of forming anonymous companies issued earlier this year. According to the report, no state in the United States requires information about the individuals who own or control these companies, and 23 states as well as the District of Columbia do not require a company’s address to be on record. While states do require the name of the person actually incorporating the shell company, that individual is often a lawyer or a registered agent rather than an actual owner of the company, according to the report.
The move toward greater transparency
If the ILLICIT CASH bill does become law, shell companies would have to register their beneficial owners with the Financial Crimes Enforcement Network (FinCEN) when they are incorporated and provide an update within 90 days should a change in ownership take place. These reporting requirements would provide “insight into the flow of illicit funds” through shell companies and discourage their use as a tool to hide those funds, according to the purposes section of the proposed law. The bill has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.
Legislators have been trying to promote transparency for shell companies for a while now. Earlier this year, a bill called the Corporate Transparency Act of 2019 (H.R. 2513), was introduced in the House that would require disclosure of beneficial owners of shell companies to FinCEN. The findings in that bill note that “all 28 countries in the European Union are required to have corporate registries that include beneficial ownership information.” The bill was reported out of the House Committee on Financial Services in June.
Also in June, a bill on corporate transparency requiring disclosure of shell company ownership to FinCEN was introduced in the Senate. S.1978 has been referred to the Senate Committee on Banking, Housing, and Urban Affairs.
Lori Tripoli is a writer based in the greater New York City area who focuses on legal and regulatory issues.
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