Proposed Federal Law Will End Transparent Incorporation Practices
From the National Law Journal comes a report on the Incorporation Transparency and Law Enforcement Assistance Act, a proposed bill that is currently pending before the United States Senate Committee on Homeland Security and Governmental Affairs. The bi-partisan bill (S.569), which was introduced by Sens. Carl Levin (Michigan), Charles Grassley (Iowa), and Claire McCaskill (Missouri), would require states to collect and maintain information on the “beneficial owners” of corporations and limited liability companies in furtherance of preventing terrorism and money laundering.
If this legislation passes, each applicant seeking to form a corporation or an LLC would have to disclose, during the formation process, the names and addresses of its beneficial owners. Corporations and LLCs already in existence would have to provide this information in its annual filing or, if no annual filing is required, each time a change is made in the beneficial ownership of the company. Under the bill, the term “beneficial owner” is ambiguously defined as
an individual who has a level of control over, or entitlement to, the funds or assets of a corporation or limited liability company that, as a practical matter, enables the individual, directly or indirectly, to control, manage, or direct the corporation or limited liability company.
States would be required to maintain beneficial ownership information for a 5-year period and would have to provide such information upon receiving a subpoena or summons from a state agency, federal agency, or congressional committee. If a corporation or LLC provides false beneficial ownership information, it may face civil or criminal penalties.
The proposed law would have a tremendous impact on businesses in states, such as Virginia, where little, if any, information about the identity of a company’s ownership is required. (For instance, an applicant for an LLC in Virginia does not have to disclose any ownership information upon formation.) States and businesses alike will bare a potentially onerous administrative burden in their respective efforts to comply with the law. The bill’s sponsors aver that such a burden is a small price to pay for information that will help law enforcement detect, prevent, and punish terrorism and money laundering.
Although I am certainly in favor of eradicating terrorism and other forms of criminal activity, I have a number of issues with the proposed legislation. As an attorney with small business clients, I can think of several non-criminal examples where privacy is of paramount significance to business owners – particularly those businesses that are formed to invest in legitimate projects.
Additionally, as is often the case with legislation of this nature, the ultimate burden will fall on the very companies that are least likely to break the law. While the vast majority of corporations and LLCs are expending time and resources to understand the definition of a “beneficial owner” so as to avoid the imposition of a penalty, those with illicit intent will simply exploit other business structures for criminal gain.
Currently, the Incorporation Transparency and Law Enforcement Assistance Act is in the beginning stages of the legislative process. Given the attention that it is already receiving, it will be interesting to see whether it will garner the requisite support to become a law.
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