Onerous Ownership

On January 1, 2024, a new beneficial ownership information reporting requirement went into effect, mandated by the Corporate Transparency Act passed by Congress in 2021. Beneficial ownership reporting is part of the U.S. government’s effort to curb the use of anonymous shell companies or other opaque ownership structures to hide illicit gains.

The Requirements

Reporting requirements for the U.S. new beneficial ownership information database oblige many corporations, limited liability companies (LLCs), and other entities doing business in the United States to report to the Financial Crimes Enforcement Network (FinCEN) identifying information about the individuals who directly or indirectly own or control 25 percent or more of the company.

The requirements are straightforward, and a beneficial ownership report can be filed online or via PDF.

A reporting company must report:

• Its legal name
• Any trade names, referred to as “doing business as” or “trading as”
• Either the current street address of the company’s principal place of business if that address is in the United States, or if a reporting company’s principal place of business is outside the United States, the current address from which the company conducts business in the United States
• Its jurisdiction of formation or registration
• Its taxpayer identification number and the foreign jurisdiction that issued the ID number, if appropriate

The reporting company must also complete the beneficial ownership information, including:

• The company applicant – individual who directly files the document that creates or registers the company
• Beneficial owner(s) name
• Residential address
• Form of identification and issuing jurisdiction
• Document image

That’s it.

Depending on the complexity of your company’s ownership structure, the time to ensure compliance with the Corporate Transparency Act can be as little as 10-15 minutes.

This is not an onerous requirement, but company owners are worried about how their information will be used and who will have access to it.

Why does FinCEN need beneficial owner information?

Obscure and complex ownership and control structures are a common methodology used to evade sanctions, integrate laundered illicit funds into the financial system, and hide misappropriated assets, among other financial crimes.

Tracking the proceeds of criminal activity can be complicated. The UN in 2023 assessed the need for better information in asset recovery efforts, citing a survey noting that responses from nearly 70 countries indicate their authorities are facing challenges in identifying and verifying beneficial ownership of suspected corruption proceeds.

The use of anonymous shell companies and complex corporate structures continues to be the number one money laundering typology, according to Global Financial Integrity (GFI)—a think tank that produces research, promotes policy solutions, and advises governments in their efforts to curtail illicit financial flows. GFI noted that 82 percent of U.S. money-laundering cases involved the use of a legal entity to mask ownership.

Legislators and civil society organizations have long advocated for the creation of a beneficial ownership registry in the United States to combat the problem of anonymous illicit actors using shell and front companies in the country to move illicit gains. Global AML/CFT watchdog the Financial Action Task Force during its 2016 review of the U.S. technical compliance with its recommendations found the United States as non-compliant with recommendation 24 (Transparency and Beneficial Ownership of Legal Persons). After the passage of the Corporate Transparency Act, however, the FATF upgraded its rating to “largely compliant.”

In addition, the U.S. real estate market is what GFI has described as a “Kleptocrat’s Dream,” used to launder billions of dollars by sanctioned individuals, corrupt government officials, and other illicit actors. Part of the reason is that billions of dollars’ worth of real estate in the United States is held through opaque corporate structures, according to the Brookings Institution. Brookings noted that offshore investors can easily hide their identity by using anonymous shell companies and other complex and opaque ownership structures to purchase properties in the United States. And because this practice is so common, offshore investment in the real estate sector is significant, allowing illicit actors to hide and integrate assets into the financial system.

• The Justice Department in early 2023 charged Russian fugitive and legal U.S. permanent resident Vladimir Voronchenko with participating in a scheme to make more than $4 million in U.S. dollar payments to maintain and sell properties in the United States that were owned by sanctioned Russian oligarch Viktor Vekselberg, who used shell companies to acquire luxury properties in the United States worth roughly $75 million before his designation.
• The Justice Department in May 2022 secured the forfeiture of a luxury Maryland property acquired with more than $3 million in alleged corruption proceeds by former president of The Gambia Yahya Jammeh through a trust set up by his wife. Jammeh conspired with his family members and close associates to use shell companies and overseas trusts, including through the purchase of a multimillion-dollar mansion in Maryland, to launder millions of dollars in misappropriated public funds and bribe proceeds.

FinCEN assessed in a 2020 Financial Trend Analysis that residential or commercial real estate, specifically in Türkiye and the UAE, has increasingly become a safe haven for Russian wealth—both licit and illicit. However, the use of opaque corporate entities to purchase commercial properties in the United States is also a common methodology used by illicit actors.

• Commercial real estate attracts significant sums of money from real estate investment trusts and private investment groups, in addition to funds from opaque shell companies formed and operated by registered agents, proxies, and attorneys, according to a recent report by the Financial Accountability and Corporate Transparency (FACT) Coalition. This makes commercial real estate in the United States an attractive medium for malicious actors to move or launder illicit funds.
• FinCEN in early 2023 warned financial institutions that sanctioned Russian oligarchs and their proxies and family members have been investing in U.S. commercial real estate. FinCEN specified that commercial real estate transactions nearly always involve private companies or institutional investors. As such, trusts, shell companies, pooled investment vehicles, or other legal entities are regularly used both to purchase and sell commercial real estate.
• The Justice Department in 2022 filed a civil forfeiture complaint in connection with property that was maintained and improved using the proceeds of embezzlement and fraud from PrivatBank in Ukraine. The United States in August 2020 also alleged that commercial real estate in several U.S. cities was acquired using funds illegally obtained from PrivatBank as part of a multibillion-dollar fraudulent loan scheme. Ukrainian oligarchs Ihor Kolomoisky and Gennadiy Boholyubov, who owned PrivatBank, embezzled and defrauded the bank of billions of dollars and allegedly laundered a portion of the criminal proceeds using numerous shell companies’ bank accounts, primarily at PrivatBank’s Cyprus branch, before transferring the funds to the United States. The duo also allegedly used associates in Florida to create a web of opaque entities, usually under some variation of the name “Optima,” to further launder the stolen money.

Beneficial ownership information can help “law enforcement, intelligence, and national security professionals as they work to protect the United States from bad actors who exploit anonymous shell companies to engage in money laundering, corruption, sanctions and tax evasion, drug trafficking, fraud, and a host of other criminal offenses with impunity, while legitimate businesses suffer from their misdeeds,” according to FinCEN Director Andrea Gacki.

Beneficial ownership information can also help financial institutions conduct basic due diligence. FinCEN explains that financial institutions can gain access to its beneficial ownership information in certain circumstances, with the consent of the reporting company. By understanding the ownership and control structures of their potential clients and business partners, firms and financial institutions can determine their illicit finance risk exposure and inform their risk appetite.

But what about privacy?

Will personal information be disclosed to just anyone? Will disclosing the beneficial owner of a company expose the firm to additional regulatory scrutiny? Will disclosing beneficial owner information to FinCEN increase the risk of identity theft and fraud? And what about the impact on beneficial owners’ personal security, especially if they operate in risky industries or high-profile positions?

These are legitimate questions, and the Corporate Transparency Act, which mandates the creation of the beneficial information registry, included several measures to safeguard the information.

First, access to beneficial owner information is restricted to law enforcement, financial institutions conducting due diligence (with the consent of the reporting company), and certain foreign officials for national security, intelligence, and law enforcement purposes. Money services businesses and other financial institutions with AML program requirements will also have access to the information stored in the registry. According to FinCEN, access to the beneficial ownership database will be implemented in phases, and a pilot program granting access to a handful of key federal agency users started this year.

Second, in its Small Entity Compliance Guide describing safeguards and access, FinCEN notes that when a financial institution receives any foreign government subpoena or foreign legal demand to disclose BOI that the financial institution received from FinCEN, the financial institution must notify FinCEN within three business days of receipt of such request. In other words, regulators should be made aware of requests of access to beneficial ownership information and will likely engage as appropriate.

Many countries exclude information on beneficial ownership registers from public access, allowing individuals to show on a case-by-case basis that public disclosure of their information would put them at risk. FinCEN will only disclose beneficial ownership information to authorized recipients, including federal agencies, law enforcement, and financial institutions for the purposes of conducting customer due diligence, and provided the bank has the consent of the reporting company to access the information.

Since the information will be available only to limited recipients, the risk of identity theft, fraud, and risk to family members of reporting companies likely will be limited.

And since illicit actors may seek to evade regulatory scrutiny by hiding their beneficial ownership of entities, filing beneficial ownership information is unlikely to attract additional regulatory attention, unless the beneficial owner is included on a watchlist or is a known family member or close associate of a designated individual.

Conclusion

Filing information identifying a company’s beneficial owners can help enhance transparency in the financial system and reduce illicit use of opaque corporate entities that exposes the financial system to dirty funds. It can also provide critical information to firms and financial institutions performing due diligence on potential customers and business partners.

Who ultimately owns or controls a potential customer’s firm can provide insights into whether illicit actors are possibly using your financial institution to gain access to the financial system.

Filing beneficial ownership information is not complicated and costs nothing. Filing only needs to be done once, unless the beneficial ownership information needs to be updated. Failing to comply, on the other hand, or providing intentionally false information, can result in significant penalties. Anyone who willfully violates beneficial ownership reporting requirements could be fined up to $591 for each day that the violation continues. Violators can also face criminal penalties of up to two years imprisonment and a fine of up to $10,000.