Last month, the House Financial Services Committee passes the Corporate Transparency Act. This legislation would require companies to disclose their beneficial owners at the time the company is formed. The minimum information beneficial owners must disclose is their name, date of birth and either driver’s license or non-expired passport number. The goal of this law is to stop people from creating shell corporations to launder their money. Companies would be exempt from this law if they have over 20 employees, have over $5 million in gross receipts or sales and have a physical presence in the Unites States.
These provisions are meant to narrow the law’s target pool to potential shell corporations. However, these provisions also mean that an additional burden will be placed upon small businesses. The definition of beneficial owner is vague, although one determination would be anyone that owns at least 25% of the business. The other two definitions of beneficial owner is anyone who “directly or indirectly…exercises substantial control” of a company, or “receives substantial economic benefits from the assets” of the company. These companies would also be required to file annual reports that list the beneficial owners with the Financial Crimes Enforcement Network (FinCEN). Information regarding beneficial owners would only be available to federal and local law enforcement along with financial institutions, although those institutions would require customer consent to obtain that information. Anyone that either submits falsified information, or knowing fails to disclose the information would face civil and criminal penalties.
The need for a law like this is clear. According to the Tax Justice Network’s Financial Secrecy Index, the United States ranked as the second worst country for high levels of secrecy and offshore activities. Switzerland ranked first and the Cayman Islands ranked third on this list. The Financial Action Task Force (FATF), an international organization that combats money laundering, identified the United States as an outlier among developed countries in terms of tracking and disclosing shell corporations. While legitimate businesses will benefit from this law, it will also require businesses that do not meet the criteria for exemption to fill out unnecessary paperwork. The Corporate Transparency Act may be a nuisance to small business owners, but the country and small businesses at large should benefit from this new legislature.