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. In March of 2019, the IRS announced that the definition of responsible party is now the person who ultimately owns or controls the entity or who exercises ultimate effective control over the entity. The person identified as the responsible party should have a level of control over, or entitlement to, the funds or assets in the entity that, as a practical matter, enables the person, directly or indirectly, to control, manage, or direct the entity and the disposition of its funds and assets. Individuals named as responsible party must have either a Social Security number (SSN) or an individual taxpayer identification number (ITIN).
- 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 U.S.) or secure an Employer Identification Number (EIN) (no bank account or employees in the U.S.) 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 state 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 for states 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?
- This Bill 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).
- This Bill 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?
- This Bill 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 state 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+ separate state 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.
Other Federal Legislation Calling on FinCen to Collect Beneficial Ownership Information
- NASS Summary of the Illicit Cash Act of 2019 (Senate)
Introduced 9/26/19 by Sen. Mark Warner (D-VA)
Bill Text: S. 2563
- NASS Summary of the Corporate Transparency Act of 2019 (House)
Introduced 5/6/19 by Rep. Maloney (D-NY) and Rep. King (R-NY)
Bill Text: HR 2513
- NASS Summary of the Corporate Transparency Act of 2019 (Senate)
Introduced 6/26/19 by Sen. Wyden (D-OR) and Sen. Rubio (R-FL)
Bill Text: S. 1978
- NASS Issue Briefing on Federal Proposals to Collect Beneficial Ownership Information (January 2020)
- NASS Summary of Business Entity Information Collected by States (June 2019)
- Recent State Legislation:
- Nevada SB 41: authorizes the Secretary of State to conduct periodic or special examination of registered agent records (approved by Governor 6/4/17).
- Oregon HB 2191: requires names of directors/managers with knowledge of entity activities; prohibits creating corporations or LLC for illegal purposes or with the intent to conceal activity; prohibits the use of shell entities and provides penalties for shell entity activities; authorizes Secretary of State to investigate violations (signed by Governor 2017).
- 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)