Will 2019 Be the Year the US Finally Passes Anonymous Company Reform? Not If the ABA Gets Its Way

By Matthew Stephenson

A version of this article is cross-posted from The Global Anticorruption Blog.

It’s a new year, a new US Congress, and a new opportunity for the United States to take action to close some of the most glaring loopholes in its anticorruption and anti-money laundering (AML) framework. So far, Washington has been consumed with the government shutdown fight, along with early chatter about who might seek the Democratic nomination to challenge Trump for the presidency in 2020, such that there hasn’t yet been much coverage of what new legislation we might see emerging from this new Congress over the next two years. And to the extent there has been such discussion, it has tended to focus on initiatives—such as the Democrat-sponsored “anticorruption” bills that focus on lobbying, voting rights, and conflict-of-interest law reform—that, whatever their usefulness in shaping the debate and setting an agenda for the future, have virtually no chance of passing in the current Congress, given Republican control of the Senate and the White House. Indeed, many commenters assume that on a wide range of issues, political gridlock and polarization means that the new Congress is unlikely to accomplish much in the way of new legislation.

That may be true as a general matter, but there are a few areas—including some of particular interest to the anticorruption community—where the opportunity for genuine legislative reform may be quite high. Perhaps the most promising such opportunity is so-called anonymous company reform. Anonymous companies are corporations and other legal entities whose true “beneficial owners” are unknown and often hard to trace. (The registered owner is often another anonymous legal entity registered in another jurisdiction.) It’s no secret that anonymous companies are used to funnel bribes to public officials, to hide stolen assets, and to facilitate a whole range of other crimes, including tax evasion, fraud, drug trafficking, and human trafficking. And although in the popular imagination shady anonymous shell companies are associated (with some justification) with “offshore” jurisdictions, in fact the United States has one of the most lax regulatory regimes in this area, making it ridiculously easy for kleptocrats and others to use anonymous companies registered in the US to shield their assets and their activities from scrutiny.

Of course it’s possible for law enforcement agencies, armed with subpoena power and with the assistance—one hopes—with cooperative foreign partners and sympathetic courts can eventually figure out who really owns a company involved in illicit activity, doing so is arduous, time-consuming, and sometimes simply impossible. It would be much better if there were a central register of beneficial ownership information, with verification of the information the responsibility of those registering the companies and stiff penalties for filing inaccurate information. Indeed, one of the striking things about the debate over anonymous company reform is how little disagreement there seems to be among experts about the benefits of a centralized company ownership register. There’s still significant controversy over whether these ownership registers should be public (see, for example, the extended exchange on this blog herehereherehere, and here). But even those who object to public registers of the sort the UK has created acknowledge, indeed emphasize, the importance of creating a confidential register that’s accessible to law enforcement agencies and financial institutions conducting due diligence. But the US doesn’t even have that.

There’s a chance this might finally change.

In the last Congress, bills were introduced in both the House and the Senate that would have required those forming a corporation or limited liability company (LLC) in a US state to provide the government (the state of incorporation in one of the bills, the federal government in the other) with information on the true beneficial owners (that is, the human owners) of the company and to keep this information up to date. In the case of a foreign owner, the company would have to be registered by a “formation agent” that would be responsible for verifying, maintaining, and updating the company’s beneficial ownership registration. Additionally, the bills pending in the last Congress would have extended the Bank Secrecy Act’s AML reporting requirements to these formation agents, but exempted lawyers and law firms so long as the lawyer contracted out the registering of the company (and hence the collection and verification of the required beneficial ownership information) to a separate formation agent. These bills—which were supported by a broad and somewhat unusual coalition of anticorruption and tax justice NGOs, law enforcement groups, banking and financial services, and parts of the business community—had bipartisan support and came close to passing, but died at the last minute when the House Financial Services Committee stripped the bill of crucial provisions, including the two just noted, causing the bill’s proponents to withdraw their support and the bill to ultimately be scuttled. But proponents of anonymous company reform have another shot in this Congress, and their odds may be better now that the Democrats have taken over the US House of Representatives.

Unfortunately, just as anonymous company reform attracted an unusually diverse coalition of supporters, its opponents also represent an atypical coalition that includes the US Chamber of Commerce and, perhaps more surprisingly, the American Bar Association (ABA).

I find the ABA’s opposition to anonymous company reform distressing, mainly because the substantive arguments they’ve advanced against these reform proposals are so … well, I’m trying to find a polite euphemism for “self-serving and intellectually bankrupt,” but I’m having trouble. I’ve written about this extensively before, when these bills were pending in the last Congress, so I won’t belabor the points again in great detail. (You can find my prior posts here and here, as well as some terrific additional contributions from Hilary Hurd here and here.) In brief:

  • The ABA’s claim that the costs of compliance would be excessive is not substantiated by any evidence, and seems implausible in light of the relatively minimal identity-verification requirements. The costs of compliance would only be high if the lawyer really had no idea who here actual client was and would have to go to great lengths to figure that out—and in that case, we probably don’t want these entities formed in the first place. (The ABA also grumbles that the definition of “beneficial ownership” is too vague to be workable, an assertion that Hilary effectively refuted.)
  • The ABA also claims that requiring formation agents (including lawyers) to verify and submit information on the identity of the company’s beneficial owners would violate lawyer-client confidentiality. This is just stupid. If the government has a right to know who owns a company before allowing the company to be registered, the government can demand that information be provided (and verified) as part of the application process. It’s not a client “secret.” The fact that the law requires the applicant to provide that information through a formation agent, who happens to be a lawyer, doesn’t suddenly convert that information into the sort of confidential client information that a lawyer has the obligation to protect.
  • The ABA claimed, with only slightly more plausibility, that imposing the BSA’s reporting requirements on lawyers would impinge on the lawyer’s duty of confidentiality and loyalty to the client. That would be a really good objection except that the draft bills exempted lawyers, as long as that lawyer outsourced the formation and identity verification responsibilities to some other formation agent (possibly another lawyer). So, the only lawyers to whom the BSA’s reporting requirement would apply would be those that don’t know anything about the client other than their (human) identity, which is hardly the sort of thing one would need to keep secret. It’s worth noting here that, as Hilary pointed out, the UK has imposed AML reporting requirements on lawyers—subject to certain exceptions—without the sky falling.

The ABA’s opposition to these bills was also an embarrassment given the total lack (so far as I can tell) of any serious attempt to participate constructively in the legislative process by proposing alternatives to address the very real problem of anonymous shell company abuse. The best the ABA had to offer (other than highlighting the fact that financial institutions are obligated to ascertain the beneficial owners of their clients, and making the false claim that the IRS already collects beneficial ownership information on all companies registered in the US) was its repeated emphasis on the fact that it had published some voluntary guidelines for lawyers to consider in order to avoid helping clients launder money. Seriously. That was it.

The ABA got a fair amount of pushback on its absurdly strident objections, including from within the profession. Indeed, I doubt that most lawyers who have thought about these issues (and do not have a vested financial interest in registering shady anonymous companies, no questions asked) actually support the ABA’s position. So I was kind of hoping that, when these bills come up again in the new Congress, the ABA would reconsider, or at least soft-pedal, its objections. Alas, no. Instead, the ABA appears emboldened and is doubling down (see here and here).

Despite the ABA’s opposition, I’m cautiously optimistic that they’ll lose this fight. This is partly because, as awareness of the ABA’s position has spread, more members of the legal profession—including some who may have some sway in the ABA—may start mobilizing against the ABA’s uncompromising position here. Also, I have heard rumors (unconfirmed) that the versions of bill introduced in the new Congress may drop—or the sponsors may be willing to drop—the requirement that formation agents comply with the BSA’s reporting requirements. As a matter of policy, I think that would be a shame, but the central register of beneficial ownership information is probably more important. And much as I think the ABA’s confidentiality objection to the reporting requirement provision is substantively wrongheaded, I acknowledge that explaining why this is so is quite a bit more complicated than explaining why there’s no confidentiality problem with requiring formation agents (including lawyers) to verify that the basic identity information they are submitting to a government agency is actually true. But the ABA’s rhetoric, as exemplified by the documents linked at the end of the previous paragraph, seems to deliberately conflate the two issues. Dropping the provision on extending AML reporting requirements to formation agents would make the bill somewhat less effective, but it would make it much harder for the ABA to argue with a straight face that there’s any attorney-client confidentiality problem with the bill, unless they’re utterly shameless (which I admit is possible).

I’m no expert on legislative negotiations, but my instinct is that if I were one of the bill’s proponents on Capitol Hill, I’d leave in the reporting obligation for now (or make noises that I was going to do so), but approach the ABA (and perhaps other opponents) and suggest that we might be willing to drop it, but only if the ABA drops its objections and gets behind the revised bill, or at least stays silent. If the ABA wouldn’t agree to that, I’d charge ahead and see if there’s enough support for the full bill. After all, no point in making concessions in exchange for nothing, especially when the substantive objections are bad on the merits. But again, what do I know?

All in all, I’m cautiously optimistic that, against all odds, this divided Congress, one that can’t even get sufficient consensus to force the reopening of the US government, might actually be able to achieve one of the most significant anticorruption/AML reforms in decades—as long as they ignore the ABA.

Matthew Stephenson is a Professor of Law at Harvard Law School.