Keeping Dirty Money Offshore: Corporate Transparency Act Makes U.S. Less of a Safe Haven

June 3, 2021


On April 3rd, 2016, information about 214,488 offshore companies established by Panamanian law firm Mossack Fonseca leaked. The leak comprised over 11 million documents and 2.6 TB of data and opened a rare glimpse into how the wealthy and powerful shelter their income and conceal their wealth. Named in the leak were 12 current or former world leaders, 128 other public officials and politicians, and hundreds of celebrities, business people, and other wealthy individuals of over 200 countries. It triggered investigations in 82 countries as citizens took to the streets across the globe to protest about the kleptocracy and corruption exposed by the Panama Papers leak.  Subsequent leaks followed.  The Paradise Papers in November 2017.  The Luxembourg Leaks in 2019 and the FinCEN Files in 2020 in which the Financial Crime Enforcement Network, the U.S. Government’s Financial Intelligence Unit had its repository of Suspicious Activity Reports hacked and leaked exposing thousands of SAR filings about suspected money laundering, financial crime and terrorist activity.  And of course, in 2017 and 2018, Denmark’s Danske Bank revealed its role in the laundering of $200 billion of money through its small branch bank in Estonia, where the global domestic output is only $26 billion per year.  Throughout each of these scandals, the outrage grew, and many countries began passing laws to make it much more difficult to obscure the ownership of companies.  Since the Panama Papers leak, a total of 81 jurisdictions worldwide have passed laws requiring that beneficial ownership must be registered with a government authority.  The U.S. Government has been openly critical of countries that act as money laundering safe-havens, and yet we were not taking any steps toward transparency.  That changed on January 1, 2021, when both houses of Congress passed the National Defense Authorization Act for Fiscal Year 2021, which includes the Corporate Transparency Act (the Act). The Act requires a report to be filed with the Financial Crimes Enforcement Network (FinCEN) that identifies each beneficial owner of an applicant forming a reporting company.

Ballard Spahr litigation partner and anti-money laundering expert Peter Hardy recently discussed the implications of the Corporate Transparency Act on an episode of the Fraud Eats Strategy podcast.

The Corporate Transparency Act requires most corporations and limited liability companies to disclose their beneficial owners directly to FinCEN. It sounds simple enough how it is going to work in practice may be more complicated. We start with a “reporting company” which is the U.S. or foreign entity, created by the filing of a document with a secretary of state in U.S. state, a tribal government or formed under the law of a foreign country and registered to do business in the United States. That is step number one. By doing so, they become known under the statute as a reporting company.  What comes next will depend on the regulations that FinCEN still has to issue, and FinCEN has had a lot loaded onto its plate with the CTA and its enhanced responsibilities under the Anti-Money Laundering Act of 2020. We know from the statute is that once a legal entity is formed, they need to file a report listing the full name, date of birth, current business, or residential address and the unique identifying number for each beneficial owner. Instead of providing personal, unique identifying which could pose an identity theft risk, beneficial owners can instead provide something called a FinCEN identifier, a unique identifier obtained separately from FinCEN.  Any reporting company formed before the effective date of the FinCEN regulations must submit that report within two years.  Similarly, any corporations formed going forward likewise will have to report to FinCEN. Changes to the beneficial ownership structure of a company will require the submission of a revised report within one year.

What is a beneficial owner?  In layperson’s terms, it’s the actual human beings who are behind the legal entity and who exercise substantial control. Since the term “substantial control” is subject to interpretation, the CTA provided further clarity on its meaning.  Any person or entity that owns or controls 25% or more of the company.  The statute tracks much of the language of the FinCEN Customer Due Diligence (CDD) rule enacted in 2018 in which banks taking on new customers must collect identifying information and of beneficial owners of 25% or more.  The statute explicitly excludes nominee agents and intermediaries. If you are an agent, an intermediary, or a nominee and your name is listed as the beneficial owner on a form, this could pose a problem and give rise to enforcement actions or penalties.

A lot needs to happen before the routine reporting of beneficial ownership begins.  FinCEN must create a national database to receive, store and facilitate the retrieval of these beneficial ownership reports. This alone is a huge undertaking. Then it’s a matter of who can use it. According to the statute, federal law enforcement, state, local and tribal law enforcement are authorized to use the database. With appropriate court authorization, foreign law enforcement agencies through international treaties with the U.S. government may also be granted access. This is an incredibly important part of the CTA since AML and money laundering enforcement has become much more international with a great deal more international cooperation amongst countries and financial institutions.

There are about 2 million entities formed every year in the United States. Further challenging the objectives of the CTA is the fact that most U.S. states do not require beneficial ownership information to be provided at the time of incorporation. Of further concern is the continued efforts of malign actors attempting to use corporate structures to obscure the origins of illicit money.

While the CTA was necessary and a long time coming, there are certain categories of legal entity over which it does not have jurisdiction.  These exempt entities include partnerships, sole proprietorships, trusts, and unincorporated associations. Going forward, these types of entities represent a potential loophole that could continue to allow malign actors to obscure their money laundering activity.

Not all legal entities are subject to the CTA. These exemptions are pretty similar to the exemptions that exist in the FinCEN Customer Due Diligence (CDD) rule. They include banks, issuers of securities that are registered with the SEC, federal credit unions, money services businesses registered with FinCEN, certain investment advisors, insurance companies, and 501c organizations.  Another broad-based exemption is any company that has more than 20 full-time U.S. employees and in the prior year filed their U.S. tax return reflecting $5 million or more in gross income. The reasoning underlying making these exclusions is that they are not the sort of entities Congress is worried about as instruments of money-laundering.  

With the passage of the Corporate Transparency Act and the creation of the beneficial owner tracking database, the U.S. has taken an important step in ushering in a new era of transparency. They are telling international money launderers and kleptocrats that their dirty money is no longer welcome here. 

To hear both of the full Fraud Eats Strategy podcast episodes with Peter Hardy, click here.  

Note: The postings on this site are my own and do not necessarily represent White Collar Forensic’s positions, strategies or opinions

Leave a comment

Your email address will not be published. Required fields are marked *