December 16 2020

US Congress Bans Anonymous Shell Companies

Source: IBFD Tax Research Platform News

The US Congress has passed ground-breaking legislation aimed at ending the practice of using anonymous shell companies to engage in money laundering and to hide income from tax authorities. Through an unusual parliamentary manoeuvre, Congress included the legislation in a must-pass bill that funds the Department of Defense for fiscal year 2021. (H.R. 6395).

US Representative Carolyn B. Maloney (D-NY) introduced the legislation, known as the National Defense Authorization Act, which includes the ban on anonymous shell companies – a provision she has championed since 2009. According to the text of the legislation, the anti-money-laundering rules will "discourage the use of shell corporations as a tool to disguise and move illicit funds" by establishing beneficial ownership reporting requirements (Division F section 6002(5)(B) of H.R. 6395). If enacted, the reporting requirements will apply to all US corporations and limited liability companies, and will mandate disclosure of an entity's true owner(s) to the US Treasury Department.

In years past, the shell company ban languished in Congress, without gaining majority support. But this year Congress tacked the beneficial ownership rules onto the annual defence bill in what is called the Corporate Transparency Act (Title LXIV of H.R. 6395). Under current law, most US states do not require the full disclosure of an entity's true owner(s), which has allowed for the increased use of anonymous shell companies for illegitimate activities. The proposed anti-money-laundering rules will ultimately eliminate that practice in those states and, as a result, reduce the ability of criminals to disguise illegally obtained funds as legitimate income. The bill will also increase coordination and information sharing among federal agencies tasked with administering the United States' anti-money-laundering laws.

For a number of reasons the bill gained bipartisan support, passing both chambers of Congress (the House of Representatives and the Senate) with veto-proof margins. The bill is now on its way to President Trump's desk to be signed into law. If the President vetoes the bill, as he has publicly threatened, Congress can override the veto by a two-thirds majority vote in each chamber.