Webinar Recap

Note: This article is a summary of IFI’s recent webinar, “Beneficial Ownership – Dos, Don’ts, & Expert Insights.” Click here to access the full recording.

Background

Congress in 2021 passed the Corporate Transparency Act (CTA) that created a new beneficial ownership information reporting requirement in an effort to make hiding illicit assets through the use of shell companies and other opaque ownership structures more difficult. Shell companies in the United States have been used to move billions of dollars in illicit proceeds, and according to the Foundation for the Defense of Democracies, financial secrecy has allowed terrorists, drug kingpins, and dictators to launder billions of dollars through the U.S. financial system. These illicit funds are then used to kill Americans, weaken U.S. national security, and foment war and chaos around the globe.

Who must register?

Any corporation, limited liability company (LLC), or other entity created by filing a document with a secretary of state or similar office in the United States, unless they qualify for a specific exemption must register. Most businesses formed through official state filings need to file a beneficial ownership information (BOI) report with FinCEN. Specific exemptions are listed on FinCEN’s website. They include publicly traded companies meeting specified requirements, many nonprofits, and certain large operating companies, which in many cases are already providing beneficial ownership and other in-depth information to regulators about their structures.

Gary Kalman voiced concerns about the exemptions and potential loopholes in the current version, and Jim Richards highlighted that the database needs to grow and mature to be effectively used by law enforcement and financial institutions, comparing the current requirements to planting grapes in a vineyard and allowing them to grow and mature.

The Importance of Transparency 

Our expert panelists highlighted the importance of transparency in maintaining the integrity of the U.S. financial system. They emphasized the role transparency plays in combating threats like drug trafficking, terrorist financing, and money laundering.

Deb LaPrevotte noted that when Russia invaded Crimea in 2014, the U.S. government saw more than $40 billion siphoned out of Ukraine under former president Yanukovych. According to LaPrevotte, U.S. shell corporations were used as modes of facilitation to help move money out of Ukraine, and she provided concrete examples of investigations in which she was involved as an FBI agent. Gary Kalman added that notorious Russian arms dealer Viktor Bout, who was recently released in a prisoner exchange with Russia, used shell companies, including in Texas, Florida, and Delaware, to move arms and money around the world. Kalman also highlighted a 2011 seminal study by the Stolen Asset Recovery (StAR) Initiative that found in roughly 70 percent of grand corruption cases an anonymous company was involved in hiding assets.

Beneficial ownership information can be a critical national security and public safety tool, according to our experts, and all the resources put into law enforcement will do no good if investigators run into a brick wall and cannot follow the money.

The Court Decision

A Circuit Court judge in Texas recently granted a motion for a “nationwide injunction” sought by the National Federation for Independent Businesses (NFIB) as part of its lawsuit challenging the constitutionality of the CTA. The judge ruled that the CTA is “likely unconstitutional because it’s outside of Congress’s power,” meaning that companies required to report their beneficial ownership information under the CTA “need not comply” with the law by the January 1, 2025, reporting deadline.

Although our experts could not provide legal advice about whether or not webinar participants should register their beneficial ownership information by the deadline, Gary Kalman anticipates that the case will eventually wind up in the U.S. Supreme Court and remains optimistic about the CTA’s survival. In addition, all the panelists highlighted how simple and quick the registration process is on FinCEN’s website.

Some have argued that the CTA has nothing to do with national security or foreign policy, so Congress doesn’t have the constitutional authority to issue regulations to businesses. However, our panelists pointed out that Congress has the authority to regulate interstate commerce, and the plaintiffs do not have a single client that doesn’t engage in interstate commerce by virtue of operating nationally accessible websites. In addition, the Constitution gives Congress the authority to provide funding, authorize programs, and conduct oversight when it comes to the implementation of foreign policy. And since sanctions evasion, arms trafficking, and fentanyl trafficking are all national security and foreign policy concerns, our panelists are confident that the CTA will be upheld.

If you’re wondering whether you have to file, just remember: attending a webinar is not legal advice, and you should check with your attorney about whether you should file.

What about the future?

Our panelists reminded our audience that the beneficial ownership information is a first step in the effort to protect the U.S. financial system.

The participants presented valuable suggestions for beneficial ownership data handling. Gary Kalman highlighted the importance of data verification along with the need for public registries to allow open access to interested parties – a practice currently in place in the EU. Jim Richards, on the other hand, indicated potential challenges of publicly making all beneficial ownership information, due to cultural and privacy sensitivities within the United States.

Deb and Jim both highlighted the need for details about how much of a company a beneficial owner owns. The percentage could be anywhere from 25 percent to 100 percent, and who “controls” a company is a subjective criterion that may not be helpful when determining whether to accept a risky client. Our experts also recognized that FinCEN—the U.S. financial intelligence unit—has fewer resources than many of its counterparts in much smaller economies, which presents a challenge when verifying the information in the database.

Conclusion

Our panelists’ expertise, coupled with their collective commitment to and passion for transparency and financial integrity, resulted in a informative and engaging discussion, with numerous questions and engagement from the audience. To learn more about the Corporate Transparency Act, explore its benefits, challenges, and future, visit the FinCEN frequently asked questions page and join the Institute for Financial Integrity for further engagement and developments.

Note: although FinCEN had to cancel their participation in the webinar, the agency provided a statement about the recent court decision regarding the CTA:

“The Corporate Transparency Act (CTA) plays a vital role in protecting the U.S. financial system, as well as people across the country, from illicit finance threats like terrorist financing, drug trafficking, and money laundering. We continue to believe—consistent with the conclusions of other federal courts—that the CTA is constitutional. Yesterday’s ruling is one of several cases pending before courts around the country, including ones in which district courts have denied requests to enjoin the CTA and that are now before courts of appeals. We are reviewing the ruling to determine our next steps. We would refer you to DOJ for any further information about the case.”