In what will be the most significant change to anti-money laundering law in the US since the Bank Secrecy Act, the US is considering two separate bills that, if passed, would require disclosure of the shareholders of private companies – the ILLICIT CASH Act and the Corporate Transparency Act, H.R. 2513.
ILLICIT Cash Act
The first, the Improving Laundering Laws and Increasing Comprehensive Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act, was introduced by Senator Mark Warner in September 2019.
If passed, the bill would require the disclosure of shareholders of private entities to the US Department of the Treasury when an entity is formed. It would also require disclosure of changes of shareholders within 90 days of such changes taking effect to the Treasury Department. Failures to report would be an offence, punishable by a term of imprisonment of up to four years. Information filed on shareholders of private companies would be made available to law enforcement agencies and in that way, has privacy protection for shareholders because the bill does not contemplate a public registry of shareholder information.
The bill also has interesting provisions with respect to foreign financial institutions, specifically it requires foreign banks to provide authentic bank records to US agencies and to comply with US subpoenas for money laundering investigations. Foreign banks, including those known for lax AML compliance that are unresponsive to US law enforcement agencies seeking financial information, would be subject to fines in the US, which would impact their correspondent capabilities.
In Canada, for example, anecdotally, bank records from China of wealthy politically exposed persons provided for immigration purposes, are often not authentic or complete and immigration laws do not require the submission of financial records be by affidavit evidence from China.
Accommodates Future AI for AML
The bill, importantly, recognizes the need for financial crime investigations expertise and would fund a federal team of financial crime investigators for money laundering investigations in respect of private corporations in particular, who are trained and have the expertise in respect of disclosure of shareholders of private companies. It has other modern technology provisions that allow for AML sharing of anonymized suspicious activity reports for machine learning datasets.
Includes Bitcoin & China
It also is forward-thinking in that it contemplates creating expertise in respect of comprehending how money moves from China to the US, and would include Bitcoin and all other digital currencies in the law.
SEC Limitation Periods Extended
It also would allow the SEC to pursue disgorgement of proceeds of crime derived from securities fraud for up to five years, and authorize the SEC to pursue restitution for investors for up to twelve years, a move that would impact the many ICO issuers who issued tokens and digital currencies in violation of securities legislation.
Position of Lawyers
US lawyers, specifically members of the American Bar Association, are not in favour of the bill on the grounds that it may erode privilege and confidentiality, and place an unfair burden on lawyers that do transactional work (real estate or M&A transactions).
Corporate Transparency Act
The second bill, passed by the US House, called the Corporate Transparency Act, also requires the disclosure of shareholders of private companies when formed but the obligation to disclose changes to shareholders would be on an annual basis. The person or company that incorporates private companies, and acts as agents of record for them (e.g., most law firms), would be required to make filings to disclose the identity of shareholders. This will either force law firms out of the business of forming corporations or force law firms to be reporting agents of corporate information. Often shareholder information of private companies is available (and is neither confidential or privileged in many cases), depending in large part on what are called the constating documents and local corporate law. In other words, it is not accurate to state that privilege and confidentiality are at risk by virtue of the proposed legislation. Law firms can elect to exit providing formation of company services to avoid being part of the reporting regime.
Failures to report, including by lawyers, would be an offence, punishable by a term of imprisonment of up to three years. Information filed on shareholders of private companies would be made available to law enforcement agencies and in that way, also has privacy protection for shareholders because the bill also does not contemplate a public registry of shareholder information. Lawyers in the US are also not supportive of this bill either for the same reasons as set out above.
Legal versus Beneficial Shares
The disclosure of shareholders of private companies is often referred to as “beneficial ownership,” a term that is not legally accurate because private (and public) companies have both legal and beneficial shareholders, and the movement for visibility on the identity of shareholders of private companies is driven by the need for disclosure of primarily legal shareholders, not beneficial shareholders.
The difference is this –> a legal shareholder is the person (natural or legal) on a share certificate who holds or owns shares. A beneficial shareholder (also a natural or legal person) is the person who is the beneficiary of the shares. Sometimes the two are not the same. For example, brokerage firms in a private placement are often on a securities registry beneficially for often 20 or 30 shareholders of a private company. When companies undertake financings and pledge shares in connection therewith, those shares are beneficially held by a bank or an investor but the corporate records don’t show that – they show the legal shareholder only.
End of Sale of Shell Companies
One thing both or either of the bills would likely do is immediately end the practice by law firms of the sale of shell and shelf companies for upwards of $200,000 each, and it would end the problem of minute and corporate records books doctoring that was highlighted in the movie “The Laundromat.”