U.S. Aims to Peel Back Shell Companies by Requiring New Ownership Rules

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The rules proposed by the Treasury Department require more information about the owners and agents who register the companies.

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National security and law-enforcement officials say these rules will be a useful tool in exposing shell companies—firms that exist only on paper—and help prevent and disrupt illegal activities.

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For small businesses such as local grocery stores and construction companies, the new disclosure rules may create an additional regulatory burden they may not cost both time and money, according to trade and industry associations in Washington.

Many companies are not currently under any federal obligation to identify the actual beneficiary of their operations. Many state regulations enable owners to hide their identities through shell companies or through agents registering companies on their behalf.

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Treasury officials said the department believes shell companies can serve legitimate purposes. Financial institutions set up local firms to conduct business, and some firms and individuals use them to take advantage of legal tax havens to reduce their income payments to the government.

Too often, the regulatory system has been abused, including by arms smugglers, drug cartels and corrupt officials, making it difficult for banks, law enforcement and others to try to stop illegal financial activities, officials said.

Treasury Secretary Janet Yellen said in a statement that the proposed rules would help fix a problem that has undermined national security and fueled inequality in the US and abroad. He called it “a major step toward addressing the gaps in our corporate transparency framework that allow corruption to flourish and illegal money to flow into the United States.”

Under the proposed rules, primary owners of both foreign and domestic companies registered in the US must provide their name, date of birth, address and a unique identification number from an approved identification document. Law enforcement and financial institutions—which are required to investigate their customers to prevent money laundering and other illicit finances—will then be able to access a confidential federal corporate beneficiary ownership database.

The action follows a mandate enacted by Congress last year. The Biden administration unveiled the proposal this week as part of a broader anti-corruption campaign linked to the Democratic Governments Summit. Other initiatives include a proposed expansion across the US of reporting requirements for real estate deals paid for in cash and a planned series of sanctions against corrupt officials, human rights offenders and their facilitators.

Gary Kalman, head of the US office of nonprofit Transparency International, said the Treasury’s new ownership disclosure rules could have huge implications for national security, economic development and human rights. “It may sound like a technical rule, but it has a variety of dramatic implications,” he said.

Mr Kalman said the Treasury’s proposal also opens up the possibility of requiring ownership reporting for many trusts in the US, which also allows for anonymity, even though some trusts are exempt under the law.

The Treasury Department said it has considered concerns from groups such as the National Small Business Association that the rules could prove tough for its membership. The department estimated that it would cost companies $50 per year to comply. The NSBA said it was still reviewing the proposal.

The Treasury Financial Action Task Force is also pushing for international anti-money laundering watchdogs, in order to get member governments around the world to strengthen their standards on beneficial ownership. A resolution published in October requires countries to establish a beneficial ownership registry or similar system.

Treasury officials set a public-comment deadline in early February, and officials said the department aims to finalize the rules as a priority.

Ian Talley [email protected] . Feather


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