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NASS Supports Federal Solution to Sharing Info with Law Enforcement on Shell Corporations

contractAs the officials who oversee the 50-state incorporation process in the U.S., Secretaries of State are dedicated to assisting federal law enforcement in cracking down against criminals who attempt to hide behind front companies and shell entities. Since 2010, NASS has promoted measures to help federal law enforcement gain access to company ownership information disclosed through federal tax filings and financial disclosure reports.

new federal measure aimed at the tracking and disclosure of company ownership information to the IRS was announced in July 2016.

NASS Statement on S. 3268, the CLAMP ActNASS Summary of S. 3268 (CLAMP Act)

An Existing Solution

In order to fight corruption and other financial crimes, NASS urges federal leaders to focus on sharing the corporate entity ownership information they are tracking through federal tax filings and financial disclosure reports, as follows:

  • Internal Revenue Service (IRS) Revised Form SS-4: Requires ownership disclosures when applying for an Employer Identification Number (EIN), including updates to responsible party info when changes occur.

  • U.S. Treasury Department Final Rule to Treat Certain Domestic Entities Disregarded as Separate from Their Owners as Corporations: Requires single member, foreign owned LLCs to file an SS4.This rule  ensures that these entities, many of whom do not have to file tax returns (no business in the US) or secure an Employer Identification Number (EIN) (no bank account or employees in the US) now have to file an SS4 to get an EIN and thus file their responsible party info with the IRS.

  • U.S. Treasury Department Report of Foreign Bank and Financial Accounts (FBAR) Reports: Require domestically-formed entities opening financial accounts and conducting business overseas to provide ownership information to the U.S. Treasury if the combined amount of their foreign financial accounts exceeds $10,000 per calendar year. So-called "F-BARs" also require foreign-owned entities to disclose a U.S. taxpayer ID number or foreign identification.

  • U.S. Treasury Department Customer Due Diligence (CDD) requirements: Requires financial institutions to collect ownership information for all customers, thereby ensuring that banking information is readily available for investigations related to fraud, money laundering, tax evasion and corruption. 

President Obama's FY2017 White House Budget included language that concurs with the NASS approach.

Any obstacles that federal law enforcement officials face in accessing entity ownership information held by the IRS and other federal agencies do not serve as a sufficient justification for creating 50+ new channels for this purpose.

Why a State-Focused Solution Won't Work

It's not just changing one line on a form. Since 2008, NASS has opposed the Incorporation Transparency and Law Enforcement Assistance Act (ITLEAA).View the NASS July 2015 resolution on this topic.

Detailed ITLEAA Summary (H.R. 4450 & S. 2489)| Brief ITLEAA Summary | Bill Text (February 2016): H.R. 4450, S. 2489 

The federal government already has an existing process for collecting beneficial ownership information on business entities.  If there are important national security and law enforcement needs at stake, particularly those that are driven by international commitments, why wouldn't the feds use their own agencies for this purpose?

  • ITLEAA Is Unnecessary:  If enacted, the law will create sweeping, unnecessary changes to the business formation process in the U.S., when better, more viable information channels already exist at the federal level (SEE ABOVE).

  • ITLEAA Won't Stop Criminals: It is unlikely that ITLEAA would be an effective tool for exposing criminals and terrorists. How likely is it that entities involved in fraud or illicit financial activities are going to provide accurate information in their state business filings? What will prevent an entity from providing a fabricated list of names, and who will verify this information?

  • ITLEAA Will Create More Red Tape: Compliance with ITLEAA would create a significant and costly expansion of state government oversight, with questionable results. Law enforcement would need to follow 50+ new channels of information, while states will be left to deal with a host of unworkable regulatory and compliance burdens.

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