As the U.S. government attempts to enforce sweeping sanctions against Russian oligarchs, corporate lobbying groups — including one that purports to represent small businesses — are working to water down an anti-money laundering law that will require corporations to disclose their owners to financial regulators.

U.S.-based shell companies, or companies that only exist on paper, have become some of the money laundering and tax evasion vehicles of choice for oligarchs around the globe. Right now, criminals and sanctioned individuals attempting to launder money in the United States can do so fairly easily by forming an anonymous company and using it to open a bank account or store assets, because ownership information is secret. More than 80 percent of money laundering cases in the U.S. between 2015 and 2020 involved the use of a shell company.

The Corporate Transparency Act (CTA), passed in 2020, is designed to put a stop to this.

The law will require U.S.-based limited liability corporations (LLCs), shell companies, and firms with fewer than 20 employees to disclose their owners to the government, so that criminals or people subject to sanctions cannot hide their money in U.S. bank accounts. The database will not be made public; it will only be accessible to federal enforcement agencies and financial institutions. Because the information will be available to the IRS, it could also be used to crack down on individual and corporate tax evasion.

The National Federation of Independent Business (NFIB), a lobbying group that calls itself “the voice of small business,” fought the legislation before it passed in 2020, asserting that it raised privacy concerns and could require businesses to spend roughly two and a half more hours on paperwork each year. The group has since pushed to repeal the law, and is now attempting to strip down the measure in the rulemaking process before the Biden administration implements it.

Congress already exempted certain types of corporations from the law, including banks, public companies, large companies, private equity firms and hedge funds, and a number of other entities which are more subject to regulatory scrutiny. As the Treasury Department works to finalize the details about what constitutes a company owner, the NFIB and other corporate lobbying groups are trying to use that process to further gut the law and carve out additional exemptions for their members.

Experts say the inconveniences of the CTA would be a small price to pay for implementing a law that experts say could play a key role in enforcing sanctions against Russian oligarchs who have historically used shell corporations to launder money in the United States.

A few days after Russia’s invasion of Ukraine, the FACT Coalition, a financial transparency watchdog, declared in a press release that the Treasury Department should “move forward expeditiously with implementing the Corporate Transparency Act,” noting: “There is ample evidence of how Russian oligarchs have exploited U.S. entities to advance their own economic and political ends.”

“The Only Substantial Reason For Opposing This Is If You Have Something To Hide”

The NFIB, which rakes in nearly $100 million annually, claims to represent “several hundred thousand small and independent businesses in all fifty states,” although its membership list is not public. (The vast majority of U.S. businesses, including LLCs are “small businesses” based on the government’s definition.)

The organization has emerged as one of the primary opponents of the CTA, which passed with bipartisan support in 2020 as part of the annual defense spending bill.

The NFIB maintained that it opposed the CTA for two main reasons: the “paperwork burdens” it would place on its members, and the privacy risks of maintaining an ownership database (even though it would not be public). In 2019, the NFIB released a study claiming that the annual cost of compliance with the law would be “equivalent to an annual average of $573 million in monetized regulatory costs,” but did not provide a methodology for the study.

Finance experts don’t buy the idea that the law would generate an onerous amount of paperwork.

“All you have to do is provide four pieces of very simple information,” explained Lakshmi Kumar, policy director for Global Financial Integrity, a think tank which studies illicit finance. “This is very easy, not at all complex, especially for a small business that has only one or two owners. On top of that, there is no penalty for inadvertently making a mistake.”

Kumar pointed out that the United States is an outlier in not maintaining a beneficial ownership database — something that all European Union countries already do. “Our allies in the EU and the UK have already passed legislation, and the one thing that has not happened is it has not undermined the economy or productivity.”

The UK parliament is currently working on legislation to close loopholes in its own beneficial ownership registry to buttress the government’s ability to enforce sanctions.

“Requiring companies to name their beneficial owners is about as burdensome as asking your kid to put his name on his school lunchbox,” said Matt Gardner, an expert at the tax watchdog Institute on Taxation and Economic Policy, adding that that “the only substantial reason for opposing this is if you have something to hide.”

The NFIB did not respond to requests for comment.

The group has also complained about potential “privacy issues surrounding the highly personal and sensitive data collected by the federal government, stored in a database maintained by [the Financial Crimes Enforcement Network], and made accessible, under certain circumstances, to law enforcement agencies, federal agencies, and financial institutions.”

As the NFIB wrote in a recent comment letter to the Treasury Department, “This FinCEN dragnet collection of intelligence on small businesses in America imposes growth-stunting costs on the American economy and tramples the liberty and privacy of Americans.”

The Financial Crimes Enforcement Network, or FinCEN, is the bureau within the Treasury Department that enforces anti-money laundering laws and would maintain the CTA registry.

FinCEN has disputed the NFIB’s privacy arguments. According to the agency’s notice of proposed rulemaking on the CTA, “The privacy impact of reporting [beneficial ownership information] to FinCEN is relatively light, because, unlike beneficial ownership registries in many other countries, FinCEN's database will not be public and will be subject to stringent access protocols.”

The agency cited a report in its notice by Global Financial Integrity that found that more information is required to open a library card in all 50 states than to set up an anonymous shell company.

Meanwhile, experts say the government needs access to this basic information for anti-money laundering and tax enforcement purposes. “The purpose of the CTA is to give a fiscally challenged agency the breadcrumbs it needs to enforce the law in a cost-effective way,” said Gardner.

Corporate Carve-Outs

The Treasury Department missed a key rulemaking deadline this winter, so the CTA will not be implemented until 2023 at the earliest. Part of the delay may be due to the perpetual underfunding of FinCEN, which has hamstrung efforts to enforce other anti-money laundering laws and could make it challenging to fully enforce this one. But the agency has also seen a flood of input from corporate lobbying groups asking the Treasury Department to water down the law and exempt more corporations from its requirements.

A Treasury spokesperson told The Financial Times about the delays, “The insights and views of stakeholders — including federal agencies, states, tribes and the private sector — provided in response to [a request to comment] are invaluable to the rulemaking process, and help inform both the [proposed rule] and the final rule.”

The NFIB, for its part, asked Treasury Secretary Janet Yellen to submit a law to Congress to repeal the law. But “pending repeal,” NFIB called upon the Treasury Department to extend the comment period and the time period  companies have to report relevant information, weaken the law’s accuracy verification requirements, and limit the kinds of “beneficial owners” companies have to disclose.

Other corporate lobbying groups have weighed in with similar demands.

The National Association of Manufacturers and U.S. Chamber of Commerce, two major corporate lobbying groups representing tens of thousands of corporations, both submitted comments asking for more exemptions than provided in the proposed rule and a narrower definition of what constitutes a beneficial owner.

The Chamber had supported the CTA in 2020, after initially opposing it, helping pave the way for its passage.

Meanwhile, the private investment industry, which includes private equity firms and hedge funds and has already successfully lobbied to exempt itself from this and other signature anti-money laundering laws, is also calling on the Treasury Department to exempt all pooled investment vehicles from the law.

Pooled investment vehicles are portfolios set up by private investment advisers and split into shares for multiple investors to buy, such as hedge funds, real estate trusts, or exchange-traded funds.

Exposing The Tax Cheats

While the CTA might not create real paperwork burdens or privacy concerns, the law could cause another problem that corporate lobbying groups may be less eager to acknowledge: It could enable federal authorities to crack down on the growing trend of individual and corporate tax evasion.

​​“Tracking international tax cheats is an important goal of our beneficial ownership legislation,” Sen. Sheldon Whitehouse (D-R.I.), one of the bill’s sponsors, told The Daily Poster. “American shell companies shouldn’t facilitate tax evasion — or any illegal behavior.”

Corporations increasingly use domestic and offshore shell companies to shield income and assets from high tax rates. The registry of owners of shell companies created by the CTA would be accessible by the IRS. Mounting research and troves of leaked documents have shown that not only are shell companies a key site of money laundering, but they are also increasingly a tool of individual and corporate tax avoidance.

“For pass-through entities, the government is seeking to tax the people who own the entities, not the entities themselves,” Susan Morse, a tax policy expert at the University of Texas Law School, told The Daily Poster. “When an entity moves money around, or a bank account that's not clearly associated with an actual beneficial owner moves money around, then it’s easier to hide both from tax authorities and other government authorities such as those who might be interested in locating the proceeds of criminal activity.”

Morse submitted a comment letter urging the Treasury Department to design the final regulations in a way that makes the information useful to tax authorities in addition to anti-money laundering authorities. “Understanding who owns what is essential to tax enforcement,” she said.

The IRS doesn’t currently know the extent to which companies are using anonymous shell companies to avoid taxes. A recent working paper from the National Bureau of Economic Research, published by tax experts including IRS economists, found that IRS audits “do not capture most tax evasion through offshore accounts and pass-through businesses, both of which are quantitatively important at the top.”

Pass-through businesses, or entities which are not taxed themselves but instead whose owners are taxed — comprise about 40 percent of the tax gap between how much taxpayers owe and how much is actually collected, according to the Brookings Institution.

Public corporations are required to report their LLC subsidiaries to the IRS, but perpetually underreport. According to a 2017 report by the Institute on Taxation and Economic Policy, where Gardner works, large corporations were reporting different subsidiary data to the Securities and Exchange Commission (SEC) and the Federal Reserve, both of which have reporting requirements.

“An ITEP analysis of 25 Fortune 500 companies that disclose subsidiary data to both the [SEC] and the Federal Reserve revealed that weak SEC disclosure rules allowed these companies to omit 91 percent of their subsidiaries on average compared to Federal Reserve data,” the report found.

The CTA, Gardner said, provides an essential antidote to this problem. “Until this legislation is fully implemented, the IRS doesn’t have the tools to ask these questions about the thousands of offshore subsidiaries corporations have established.”

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