FACT Sheet: Why Beneficial Ownership Transparency Matters

FACT Sheet

Why Beneficial Ownership Transparency Matters

THE PROBLEM

Over two million corporations, LLCs, and other business entities are formed in the United States every year—and almost every state collects less identifying information from the individuals forming these entities than from people applying for a driver’s license or registering to vote.  Indeed, many states rank among the easiest places in the world in which to form “anonymous shell companies” or “phantom firms:” business entities that exist solely on paper with no obligation to list the real people who actually own or control them, otherwise known as the “beneficial owners.”

Phantom firms can open bank accounts, wire money, buy property, and transact business like any other company, making them an attractive method for hiding, moving, and using money or other assets. As a result, phantom firms are often misused for a multitude of illegal or unethical activities.

EXAMPLES

Resource Extraction: Phantom firms are used to hold extraction rights, equipment, and other productive assets anonymously, and provide a channel for transferring extracted resources without paying the proper royalties or taxes. By hiding the individuals managing extraction operations or profiting from the resources extracted, phantom firms can allow them to avoid responsibility for violations of quotas, labor regulations, or tax laws.

Grand Corruption: Phantom firms are a favorite method of autocrats and their families for moving corruptly diverted government revenues and holding corruptly obtained assets, such as private jets, prime real estate, and other trappings of the dictatorial lifestyle. By hiding the individuals behind the money, phantom firms allow autocrats to circumvent bank regulations designed to detect their dirty money.

Business Corruption: Phantom firms are widely used to hold and distribute commercial bribes, circumvent trade sanctions, or engage in ordinary trade mispricing to evade tariffs. By enabling businesses and individuals to transfer money anonymously, phantom firms ensure that bribes and tax-evading money cannot be traced back to their otherwise legitimate operations.

Organized Crime: Phantom firms are a common tool of organized crime rings to facilitate move their dirty money and products, providing fronts for trafficking drugs, weapons, and human beings into the U.S. Phantom firms may also be used to operate legitimate businesses (dry cleaners, restaurants, import-export firms) through which the proceeds of their crime are laundered and transferred. By hiding the individuals behind these activities, phantom firms enable criminals to avoid further investigation or prosecution for activities that are eventually uncovered by police.

Tax Evasion/Avoidance: Phantom firms are a common part of multinational enterprises’ byzantine corporate structures, used to shift overseas profits to tax havens, avoiding taxes in the U.S. and other countries where they actually transact productive business. Your neighbor may also use phantom firms to hold assets and receive income that should be reported on their tax returns, evading individual income tax.

Campaign Finance: Phantom firms can make donations to PACs, Super-PACs, and other political entities. By allowing the individual behind the donation remain anonymous, phantom firms let individuals and corporations—potentially even from outside the U.S.—influence elections and subvert the intent of campaign finance laws.

Open Government and Data Transparency: Phantom firms are a huge source of useful data for civil society. By sheltering individuals and corporations from being connected to various nefarious activities, phantom firms create a huge gap in efforts to map money flows and hold those driving illicit activities accountable. International pressure has focused heavily on the benefits of public access to corporate ownership information, and while the bills currently before Congress do not directly make the information collected publicly available, they do leave it to states or the Treasury Department to decide whether to do so.

Corporate Accountability and Financial Stability: Exposing owners of phantom firms is inherently necessary in order to hold companies accountable for their actions and ensure that other companies know with whom they are doing business. When Lehman declared bankruptcy in 2008, financial companies around the world panicked because they had no idea to what extent they may have had contracts in place with Lehman subsidiaries, and there was no way of finding out because beneficial ownership information was not recorded anywhere. This significantly slowed efforts to address the crisis.

Procurement Fraud: Phantom firms are used by companies to circumvent disbarment or unfairly influence patterns of bidding. Phantom firms have also been used to obtain fraudulent reimbursements and grants from Medicare and other government programs.

Global Development: Phantom firms can be opened by anyone and can move money around the world in moments. Through the above methods and many others, phantom firms are used to drain capital and resources out of developing economies, starving countries of vital money for infrastructure, education, and public health.

THE SOLUTION

The solution is simple—every corporation, LLC, or other business entity must be legally required to disclose its beneficial owner(s) at the time it is formed, making it no longer possible to incorporate anonymously in the United States. Making this information readily available to law enforcement would provide a powerful tool in investigating and prosecuting cases like those above and many more that go uncovered due to a lack of information.

The Incorporation Transparency and Law Enforcement Assistance Act (S. 2489 and H.R. 4450) would take a significant step towards accomplishing this goal. We urge you to support these crucial pieces of legislation.

For more information, please contact Liz Confalone, Global Financial Integrity (lconfalone@nullgfintegrity.org), Stefanie Ostfeld, Global Witness (sostfeld@nullglobalwitness.org), or Jacob Wills, The FACT Coalition (jwills@nullthefactcoalition.org).