Beneficial Ownership Information (BOI) transparency for U.S.-registered shell corporations has long been a sore spot for anti-money laundering and combating the financing of terrorism (AML/CFT) efforts in the U.S. According to The Washington Post,1 lax BOI reporting requirements have allowed Russian arms dealers, Mexican cartels, and Iranian sanctions-evaders to use U.S.-registered shell companies to effectively evade AML/CFT enforcement from the country’s own investigative agencies. The implementation of the Corporate Transparency Act during 2024 promises to upend this dynamic and usher in substantial changes and enhancements to U.S. BOI reporting requirements, but has also engendered a growing movement seeking to overturn the law through federal litigation.
Background
In a December 2016 report, the intergovernmental Financial Action Task Force (FATF), of which the U.S. is a member, found that U.S. law enforcement could not access adequate, accurate, and current BOI for U.S.-registered entities, creating “fundamental gaps” for AML/CFT enforcement in the world’s largest economy.2 Reporting requirements varied significantly state-by-state, and federal regulations only required “responsible party” disclosures for companies with income, employees, or a bank account, allowing shell companies registered in permissive U.S. states to operate with little to no insight into their actual owners. Further, even the “responsible party” reporting could be abused, since responsible parties were not technically the same as beneficial owners.3 As a result of its review, the FATF gave the U.S. a “Compliance and Effectiveness Rating” of Low for Legal Persons and Arrangement and a “Technical Compliance Rating” of Non-Compliant for Transparency & BOI of Legal Persons, ratings the U.S. shared with Algeria, Sri Lanka, and Suriname.4 5 The FATF urged the U.S. to implement BOI reporting reforms as a top priority.
The Law
With the backing of pro-transparency civil society organizations, major financial institutions, and the U.S. Chamber of Commerce, the U.S. House of Representatives passed the Corporate Transparency Act in October 2019,6 followed by the Senate in December 2020,7 ushering in a new era for BOI reporting in the U.S. The American Bar Association has called the CTA the “furthest- and widest-reaching federal business entity law ever enacted.”8
The new rules promulgated by the U.S. Department of the Treasury (DOT) and the DOT’s Financial Crimes Enforcement Network (FinCEN) generally require all U.S.-registered entities and all foreign-registered entities doing business in the U.S. to disclose up-to-date BOI to the FinCEN.9 10 11 The BOI will be kept in a “secure, non-public database” accessible by U.S. law enforcement, financial institutions, and foreign law enforcement by request. The act was designed to target the shell corporations favored by money launderers and terrorism financers, with reporting exceptions for companies with more than 20 full-time employees or at least $5 million in annual revenue, as well as for publicly traded companies and domestic investment funds administered by Securities and Exchange Commission-registered investment advisers.
The new rules went into force on January 1, 2024, with companies formed before then required to comply by January 2025 and those formed after required to comply within 90 days of formation. In a follow-up report published in March 2024,12 the FATF praised the reforms as a significant step towards closing the U.S.’ BOI transparency gap and upped its “Technical Compliance Rating” from Non-Compliant to Largely Compliant.13
The Reaction
According to the New York Times,14 the CTA has faced significant pushback from corporate lobbyists, some Republican politicians, and business associations arguing that the new requirements were too onerous, raised privacy concerns, and were poorly understood by business-owners now facing civil and criminal penalties for willful violations of the CTA. So far, the most successful effort to overturn the CTA has been a federal lawsuit filed by National Small Business United, a corporate lobbying organization, against the DOT in November 2022.15 In March 2024, the same month as the FATF reassessment, an Alabama federal judge ruled that the CTA was unconstitutional and enforcement should be ceased for the plaintiffs. The judge found that Congress had no constitutional authority to regulate corporate entities that do not actively engage in commercial activities, such as non-profits, political organizations, and shell companies. The DOT has appealed the Alabama decision,16 arguing that the act falls within Congress’ broad powers to regulate commerce, conduct foreign affairs, and ensure national security. Anti-CTA amicus briefs were filed by conservative and libertarian lobbying organizations and think tanks, small business advocacy groups, and the Republican Attorney General of West Virginia. Pro-CTA briefs were filed by national security and anti-corruption think tanks, financial law academics, and a group of Democratic congresspeople. The appeal is ongoing and went through an expedited briefing schedule, with oral arguments scheduled for September 23, 2024.
The Bottom Line
While the Alabama ruling only applied to the case’s plaintiffs, it has already been cited as precedent in a similar anti-CTA case filed by another corporate lobbying group in Michigan federal court in March 2024.17 If any of these cases are appealed up to the U.S. Supreme Court, the CTA could be wholly stuck down as unconstitutional, erasing the AML/CTF progress made by the U.S. since the 2016 FATF report. How these legal battles end will have a major impact on the future of AML/CFT compliance standards in the U.S. and could be the end of the U.S.’ brief experiment with implementing international BOI standards.
[1] https://www.washingtonpost.com/business/economy/criminals-and-kleptocrats-will-find-it-harder-to-launder-money-in-the-us-if-this-bill-passes/2019/05/06/ad95fc46-7014-11e9-8be0-ca575670e91c_story.html
[2] https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/MER-United-States-2016.pdf.coredownload.inline.pdf
[3] One major exception was corporations issuing Securities and Exchange Commission-registered securities, which were required to provide BOI for ownership over 5%.
[4] https://www.fatf-gafi.org/content/dam/fatf-gafi/Global-Network/4th-Round-Ratings.pdf.coredownload.inline.pdf
[5] The other countries with these FATF ratings are Angola, Benin, Cameroon, the Central African Republic, Chad, the Democratic Republic of the Congo, Eswatini, Gabon, Haiti, Laos, and Mozambique.
[6] https://www.congress.gov/bill/116th-congress/house-bill/2513
[7] https://www.congress.gov/bill/116th-congress/house-bill/6395; Division F of the National Defense Authorization Act for FY 2021
[8] https://www.americanbar.org/groups/business_law/resources/business-law-today/2023-july/the-corporate-transparency-act-deniers-beware/
[9] https://www.federalregister.gov/documents/2022/09/30/2022-21020/beneficial-ownership-information-reporting-requirements
[10] https://www.federalregister.gov/documents/2023/11/08/2023-24559/use-of-fincen-identifiers-for-reporting-beneficial-ownership-information-of-entities
[11] https://www.federalregister.gov/documents/2023/12/22/2023-27973/beneficial-ownership-information-access-and-safeguards
[12] https://www.fatf-gafi.org/content/dam/fatf-gafi/fur/USA-FUR-2024.pdf.coredownload.inline.pdf
[13] The Compliance and Effectiveness Rating was not reevaluated
[14] https://www.nytimes.com/2023/12/07/us/politics/corporate-transparency-act-lobbying.html
[15] National Small Business United, et al. v. Yellen, et al., 5:22cv1448, U.S. District Court for the Northern District of Alabama
[16] National Small Business United, et al. v. U.S. Department of the Treasury, et al., 24-10736, U.S. Court of Appeals for the 11th Circuit
[17] Small Business Association of Michigan, et al. v. Yellen, et al., 1:24cv314, U.S. District Court for the Western District of Michigan
