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Incorporation Transparency and Law Enforcement Assistance Act, S. 1465:
Frequently Asked Questions
Every year, over two million corporations, LLCs, and other business entities are formed in the United States—and almost every state collects less 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 jurisdictions in the world to form a company without revealing the identities of its owners.
What are “anonymous shell companies” and why are they a problem?
Individuals often take advantage of states’ lax incorporation systems to form anonymous shell companies, business entities that exist solely on paper with no obligation to list the real people who actually own or control them.
Anonymous shell companies can open a bank account or buy a yacht. They can wire money and transact business like any other company, making them an attractive method for hiding, moving, and using money or other assets. As a result, anonymous shell companies are often misused for illegal activities, including laundering money from the trafficking of drugs, weapons, or human beings, financing terrorist activities, skirting sanctions, hiding the proceeds of government corruption, and evading taxes. Criminals often create webs of nested anonymous corporations (with one owning another and so on), rendering it practically impossible for law enforcement officials to figure out who is directing the companies’ activities—i.e., the identity of the real criminal.
Such companies are also used to subvert civil and judicial processes through making anonymous donations to election campaigns, defrauding immigration and customs authorities, hiding assets from courts, or fraudulently pursuing government contracts, grants, or Medicare reimbursements.
What will S. 1465 do to combat the problem?
The Incorporation Transparency and Law Enforcement Assistance Act (S. 1465) will help fight the use of anonymous American shell companies by requiring states to collect information about the “beneficial owner(s)” of a corporation or LLC. A beneficial owner is a real person (that is, not just another company) who has a substantial economic interest in the business or ultimately controls the company’s activities or assets. This information will be readily available to law enforcement, allowing officials to track illicit funds and activities much more efficiently and effectively.
What information would S. 1465 require states to collect and from whom?
S. 1465 would require states to collect the name, residential or business address, and a unique identifying number from a passport, state driver’s license, or state identification card for each beneficial owner of a corporation. States would not need to collect photos, Social Security numbers, or beneficial owners’ personal financial information.
S. 1465 contains a number of exemptions designed to narrow the scope of the bill—and hence significantly lower the cost of compliance—to only those companies with characteristics that make them more likely to be used as instruments of criminal activity: shell companies with few assets or actual operations in the United States. Entities that are not required to submit beneficial ownership information include publicly traded companies; churches, charities, and other nonprofit organizations; credit unions; insurance companies; public accounting firms; public utilities; and any other company with more than twenty employees, $5,000,000 annual revenue, and a physical presence in the U.S., among others. Also, for any company, minor children, heirs, and employees with a legal interest in the company are not considered beneficial owners under S. 1465.
Don’t states already collect information about company ownership?
No. States generally do not require individuals applying to create a legal entity to provide information on the identity of the person or persons who ultimately own or control the legal entity. Typically, less information is provided to incorporate than is required to obtain a driver’s license or open a bank account. While some states’ application forms require applicants to list the company’s shareholders, a shareholder is not necessarily a beneficial owner, and vice versa. A shareholder can be another company or, in some cases, “nominees,” hiding the identities of the actual owners. A beneficial owner is a real person, not another company, who has a significant economic interest in the business or ultimately controls the company’s activities or assets, not merely those with the appearance of ownership.
Doesn’t the federal government already collect information about company ownership?
No. Presently, the federal government does not collect any information from companies immediately upon their formation. Federal law does empower the government to obtain information from companies subject to federal taxes or with foreign financial assets but, contrary to claims by opponents of S. 1465, these laws encompass only a portion of the companies formed in the U.S. and do not collect actual beneficial ownership information as defined in S. 1465.
The IRS requires legal entities potentially subject to federal tax liability to obtain an employer identification number (EIN) and most banks require companies opening new accounts to have an EIN. While this encompasses most new legal entities formed in the United States, it is not comprehensive—for instance, single-member LLCs generally will not need to apply for an EIN, and any company that intends to only transact business overseas can generally fail to obtain an EIN without detection or punishment. Form SS-4, the application for an EIN, requires that a company list only a single “responsible party,” who could be a director, officer, or manager of the company. In other words, a legal entity’s application can completely comply with this law but still contain no information about its actual beneficial owner or owners. Furthermore, SS-4 information is subject to the same strict privacy laws as tax returns—federal law enforcement cannot obtain SS-4 information without a court order, and state and local law enforcement cannot access it at all.
Treasury’s “Foreign Bank and Financial Account Reporting” (FBAR) rules require United States citizens and companies to report any financial interest in a foreign bank or financial account. This system is almost entirely irrelevant to the fight against anonymous shell companies, as it relies on taxpayers to self-report their foreign holdings, making it impossible for Treasury to investigate an individual or company that simply does not report this information.
Will compliance with S. 1465 cost the states anything?
While states will likely incur initial costs associated with upgrading or altering their existing systems for collecting and storing corporate information to accommodate the collection of beneficial ownership information, the Department of Justice and Department of the Treasury have agreed to make $40,000,000 available to states to defray these transitional costs. The money will be provided from the agencies’ asset forfeiture funds—money recovered from prosecuting money launderers and terrorist organizations, precisely the sort of criminals this bill will help catch. Contrary to claims by opponents of S. 1465, these funds are explicitly dedicated to this purpose and are not being taken from local law enforcement.
In fact, the law could even generate new revenue for states, by increasing collection of fines, penalties, and asset forfeitures that result from the improved ability of local and state law enforcement agencies to pursue and prosecute criminals. In addition, the law should decrease the amount of time and money that law enforcement currently spends trying to track down companies’ beneficial owners, allowing these critical resources to be allocated to other important priorities.
Will compliance with S. 1465 cost existing businesses anything?
No. Contrary to claims by opponents of S. 1465, small businesses should not need to hire a lawyer or expend significant amounts of time or money complying with the bill’s requirements. Under S. 1465, existing business entities must annually file either a list of their beneficial owners or a certification that the entity falls within one of the exemptions. Every state already requires business entities to file annual reports and can simply include ownership information as part of those filing requirements. The exemptions added to the bill are specifically designed to ensure that most entities required to file annual ownership information will be able to easily ascertain the identity of their owners unless they are being operated in an intentionally opaque manner.
Does S. 1465 require states to create a system to license corporate formation agents?
No. Contrary to claims by opponents of S. 1465, the bill does not require states to license corporate formation agents or alter any existing system of licensing formation agents. Rather, S. 1465 includes an alternative option for states that already have in place or choose to implement systems for licensing formation agents. If those states’ licensing programs meet certain requirements, the state may allow formation agents to retain beneficial ownership information on behalf of the state for companies they are responsible for forming, decreasing the record-keeping requirements for these states.
Does S. 1465 require states to verify the ownership information they collect?
No. In fact, S. 1465 explicitly states that it does not “impose any obligation on a State to verify” ownership information collected. Prior versions of the bill required states to verify information, but this requirement has been eliminated in response to concerns by some state officials about the cost of implementing a verification system.
While failing to require verification may seem to let criminals easily submit false information to impede law enforcement, S. 1465 makes this a criminal offense, so investigators encountering false information immediately have probable cause to justify further searches.
Does S. 1465 require states to make the ownership information they collect publicly available?
No. S. 1465 does not require any information to be made publicly available. Since all ownership information collected will remain with the states, state law and state officials are fully responsible for determining whether any of the information will be publicly available.
Won’t the bill deter businesses from incorporating in the United States?
No. Legitimate businesses incorporate in the United States because we offer a strong, stable economy, access to one of the world’s largest markets, and the credibility associated with being registered in the United States. Secrecy is not a justifiable reason for legitimate companies to operate in the United States and certainly should not be a method of attracting businesses to incorporate here.
What are the penalties for failing to comply with the S. 1465 reporting requirements?
Registering a company using false or fraudulent ownership information, deliberately failing to update a company’s ownership information, or knowingly disclosing the existence of a subpoena for ownership information may be punished with a civil fine up to $10,000 or—in egregious cases—criminal punishment.
Who else supports S. 1465?
S. 1465 is supported by the Financial Accountability and Corporate Transparency (FACT) Coalition, which unites civil society representatives from small business, labor, government watchdog, faith-based, human rights, anti-corruption, public-interest, environmental and international development organizations. S. 1465 also enjoys broad support among the law enforcement community, including the Fraternal Order of Police, Federal Law Enforcement Officers Association, and National Association of Assistant United States Attorneys. The Society of Former Special Agents of the Federal Bureau of Investigation, National Narcotic Officers’ Associations Coalition, United States Marshals Service Association, Association of Former ATF Agents, and the District Attorney of Manhattan, Cyrus Vance, have expressed support for nearly identical bills in prior Congresses, and we expect continued support of S. 1465. The Department of Justice and Department of the Treasury have also stated their support for the bill and, as noted above, are dedicating $40,000,000 of forfeiture funds to help eradicate anonymous shell companies.
For more information, please contact Joshua Simmons, Global Financial Integrity (firstname.lastname@example.org), Stefanie Ostfeld, Global Witness (email@example.com), or Nicole Tichon, Tax Justice Network USA (firstname.lastname@example.org).
 See Gov’t Accountability Office, Report to the Permanent Subcommittee on Investigations, Company Formations: Minimal Ownership Information is Collected and Available (Apr. 2006), available at http://www.gao.gov/new.items/d06376.pdf.
 Michael Findley, Daniel Nielson, & Jason Sharman, Global Shell Games: Testing Money Launderers’ and Terrorist Financiers’ Access to Shell Companies 23–25 (Sept. 2012), available at http://www.griffith.edu.au/__data/assets/pdf_file/ 0008/454625/Global-Shell-Games_CGPPcover_Jersey.pdf.
 U.S. Dep’t of the Treasury et al., U.S. Money Laundering Threat Assessment 47–50 (Jan. 2006), available at http://www.treasury.gov/resource-center/terrorist-illicit-finance/Documents/mlta.pdf.
 As of 2006, only Alaska, Arizona, and Maine require corporations to provide ownership information. Gov’t Accountability Office, supra note 1, at 14–16. No other states have altered their laws to require such information since the GAO report.
 Company Formation Task Force, Nat’l Ass’n of Secretaries of State, Report and Recommendations on Assisting Law Enforcement in Fighting the Misuse of Corporate Entities (Sept. 2012), available at http://nass.org/index.php?option=com_docman&task=doc_download&gid=1336.
 Single-Member Limited Liability Companies, Internal Revenue Service, http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Single-Member-Limited-Liability-Companies.
 Internal Revenue Service, Instructions for Form SS-4, available at http://www.irs.gov/pub/irs-pdf/iss4.pdf.
 See 26 U.S.C. § 6103(i) (2006).
 See Company Formation Task Force, supra note 5, at 12.
 See id. at 13.
 See id. at 12.