Treasury Dept. Stiffens Reporting Requirements for Shell Companies

he Treasury Department’s anti-corruption watchdog, the Financial Crimes Enforcement Network (FinCEN) said it will enact a new rule early next year to require shell companies to report what’s known as beneficial ownership information (BOI) about who controls them. CNBC reported that the new reporting requirement is intended to crack down on individuals suspected of using shell companies to hide illicit funds or illegal activity behind opaque corporate structures. 

The rules will require both new and existing shell corporations to register their real owners and investors with a government database. FinCEN has launched a 60-day public comment period on the rule that ends Feb. 7, 2022. 

“Millions of corporations, limited liability companies, and other entities are formed within the United States each year. While such entities play an essential and legitimate role in the U.S. and global economies, they can also be used to facilitate illicit activity,” the Treasury Department said in a fact sheet. 

CNBC reported that the Treasury Department’s hope is that stiffer transparency rules will dissuade bad actors from creating shell companies to launder illicit money and hide taxable income. The database will also ultimately make it easier for law enforcement, courts and banks to track the movement of illicit funds. 

In a blog posting on the American Action Forum website, Thomas Wade, director of financial services policy, sorts out what constitutes beneficial ownership and/or shell companies. “A beneficial owner is any person or group of people (not, however, a company) that enjoys the benefits of ownership even though the title to some form of property (for example securities, or real estate) is held in another’s name,” he writes. Beneficial ownership is distinct from legal ownership, although they will usually be the same person.  

Examples of this practice could include the registration of publicly traded securities under the name of a broker, or the wealthy or famous withholding their names on the titles to properties they own appearing on public records by forming a trust to manage the property. Beneficial ownership is typically defined as an individual who has “substantial control” over an organization or who owns at least 25%.  

Within this framework, a shell corporation (more commonly referred to as a shell company) is a common format. “In this scenario, a corporation is formed that does not have active business operations, significant assets, or anything more than the bare minimum of personnel,” Wade writes. “Shell companies are used not just by individuals but also by companies: Apple and many other companies use shell companies based out of tax havens, recognizing their profits in countries with more favorable tax codes. “ 

All of this is above-board from a legal standpoint. ‘Critics, however, point to the lack of transparency caused by this regulatory legerdemain as a significant contributor to a wide range of financial and social ills, from tax evasion to the financing of global terrorism,” writes Wade. “For this reason, laws (or proposed laws) regulating beneficial ownership and shell companies are often considered in the same breath as being under the umbrella of anti-money laundering (AML) regulations. This is particularly pressing in the United States given that the existing AML framework is decades out of date, largely ineffective, and creates billions of dollars in compliance costs for American banks.”