As 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.
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.
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 federal proposals to collect beneficial ownership information. View the NASS July 2015 resolution on this topic.
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?
- The Bills Are 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).
- The Bills Won't Stop Criminals: It is unlikely that the bills 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?
- The Bills Will Create More Red Tape: Compliance with the bills 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.
State business entity formation processes, which are ministerial in nature, are not an effective means of identifying criminals who are misusing the process. Plus, law enforcement would have to follow 50-plus separate collection channels to get to the information they need. State business registries aren’t tied to centralized oversight and regulatory structures, as they are in other parts of the world. Entity information filed with the state business registry is public information, thus beneficial ownership information filed with the state would be public information. We know privacy protections for business owners are highly valued in the U.S. SS-4 filings to the IRS are not publicly available, but are available to federal law enforcement.
- Recent State Legislation:House Financial Services Committee Report on Stopping Terror Finance: Securing the U.S. Financial Sector (December 2016)
- Nevada SB 41: authorizes the Secretary of State to conduct periodic or special examination of registered agent records (approved by Governor 6/4/17).
- Wyoming HB 22: requires communications contact to provide registered agent with a physical address and modifies who may serve as communications contact (signed by Governor 3/8/17).
- FATF Mutual Evaluation of the United States (December 2016)
- Letter from The Clearing House Association to Congress on ITLEAA (August 2016)
- ABA Letter to House Financial Services Committee on HR 4450 (May 2016)
- NASS Briefing: ITLEAA/ NASS Solution (February 2016)
- Notice of Availability of Regulatory Impact Assessment and Initial Regulatory Flexibility Analysis Regarding the Customer Due Diligence Requirements for Financial Institutions (December 2015)
- White Paper: Encouraging Business While Fighting Fraud (May 2014)
Updated NASS Company Formation Task Force Report and Recommendations (September 2012)