Congress is expected to include a significant reform to the US anti-money laundering framework in the National Defense Authorization Act for Fiscal Year 2021 (NDAA), one of the last major bills lawmakers are likely to pass this year. This legislation is aimed at cracking down on people hiding behind shell companies to commit crimes, such as money laundering, trade sanctions evasion, terrorism financing, financial fraud, or other misconduct. If passed, the bill would require many US companies to disclose to the federal government for the first time the identities of their beneficial owners.
The House of Representatives already voted in July 2020 to add an amendment to its version of the NDAA that would require US corporate entities to file reports to the Treasury Department's Financial Crimes Enforcement Network (FinCEN) disclosing their beneficial owners. That proposed beneficial ownership disclosure requirement incorporates the text of H.R. 2513, the Corporate Transparency Act of 2019, which we previously analyzed in detail in our June 3, 2020 Advisory. And recently, Congressional aides confirmed that House and Senate Democrats and Republicans and the Trump Administration have reached a deal to include a beneficial ownership disclosure requirement in the final version of the must-pass NDAA that would largely track H.R. 2513, but would reflect certain negotiated changes to make the legislation more business-friendly.
The NDAA's beneficial ownership disclosure requirement would mark a significant expansion of US companies' disclosure obligations. Under current laws, many companies that incorporate within the United States do not need to disclose who actually owns them. The NDAA's anticipated beneficial ownership disclosure requirement would require new and existing corporate entities to file reports with FinCEN disclosing the identities of their beneficial owners, defined as any person who (i) owns a 25% equity stake or (ii) exercises substantial control (not currently defined in the bill) over the entity. Unlike H.R. 2513, the negotiated NDAA beneficial ownership disclosure requirement would not include individuals with "a substantial economic benefit" within the definition of beneficial owners, and it would require businesses to update FinCEN about changes in their beneficial ownership only on an annual basis, rather than within 60 days. The NDAA's beneficial ownership disclosure requirement also would exempt from the reporting requirements certain companies, such as publicly traded companies and certain non-profit organizations, in regulated fields where ownership is already required to be disclosed to the government. It also excludes companies that (i) have more than 20 full-time employees, (ii) report more than $5 million in yearly revenue to the Internal Revenue Service (IRS), and (iii) have an operating presence at a physical office within the United States-features you don't usually see in a shell company used for illicit purposes.
The legislation would authorize FinCEN to share companies' beneficial ownership information with law enforcement and financial institutions (with the customer's consent for purposes of complying with customer due diligence requirements), but would not make the beneficial ownership information publicly available. The negotiated NDAA beneficial ownership disclosure requirement also would impose further checks on law enforcement's ability to access the database of beneficial ownership not included in H.R. 2513, such as requiring law enforcement to first get approval from local court officials such as a judge, magistrate or authorized clerk. Nonetheless, access to companies' beneficial ownership information would equip law enforcement with a powerful new tool to investigate and prosecute violations of money laundering, trade sanctions evasion, financial fraud, and other laws.
Congresswoman Carolyn B. Maloney (D-NY), who authored H.R. 2513, issued a press release asserting the significance of including an expanded beneficial ownership disclosure requirement in the NDAA: "This bill, which I've been working on for 12 years, will crack down on anonymous shell companies, which have long been the vehicle of choice for money launderers, terrorists, and criminals. The bill will finally allow law enforcement to follow the money in their investigations, and will prevent terrorists, kleptocrats, and other bad actors from using the U.S. financial system to hide their dirty money."
US companies should start taking the following practical steps to prepare for the anticipated enactment of this legislation: (i) evaluate whether the beneficial ownership disclosure requirement will apply to them or whether they will meet one of the exemptions (including consulting with counsel to assess whether they have a good argument to be exempted); (ii) educate the beneficial owners of the company about the new requirements to manage their expectations; and (iii) gather the relevant information for disclosure. For more detail on H.R. 2513, the Corporate Transparency Act of 2019, check out our June 3, 2020 Advisory, Shining a Spotlight: US Legislation to Require Disclosure of US Companies' Beneficial Ownership.
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