CORPORATE VEILS, THE SEQUEL: JEREMIAH AND THE TRANSFORMATION OF WALLS OF TRANSPARENCY INTO SEE-THROUGH WALLS

Corporate Veils, The Sequel: 

Jeremiah and The Transformation of Walls of Transparency into See-Through Walls

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Whether you view the Bible as literature or religious scripture, one must admit that there are many lessons and morals to be derived from the stories contained therein. There is an episode in the Old Testament related to the Biblical prophet Jeremiah who knew by prophetic countenance that the holy city of Jerusalem would be imminently destroyed. In the midst of all the chaos of his time, the Bible recounts in excruciating detail the elements of his engagement with a real estate transaction. It was an otherwise mundane business transaction involving the passage of title from his uncle’s estate into his name. One does not need to believe in the Bible to come away from this episode with a lesson that life does go on whether humankind is experiencing turmoil or not. In a similar vein, with all that Congress is dealing with due to the pandemic, business does continue as usual. It is a testament to human perseverance that in spite of seemingly insurmountable challenges, activities affecting our future as a country still go on. It reverberates a sense of hope and optimism that eventually these challenging times will be archived on the pages of history and life will resume normally.

In August, Congressional legislation was introduced requiring corporations to disclose the identities of their beneficial owners to the Department of the Treasury. The purpose of this proposed legislation was to eliminate the use of “shell companies” for illegal purposes such as money laundering, evading trade sanctions, financing terroristic activity, committing financial fraud and other similar misconduct. To that end, both the Senate and the House approved the National Defense Authorization Act for Fiscal Year 2021 (NDAA). This measure incorporated the disclosure requirements introduced in August by way of the Corporate Transparency Act and the Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act. The terms and provisions of these acts were tacked on to the NDAA. Pursuant to the NDAA, anonymous shell companies are now banned in the US. In policing the legislation, a registry is created wherein companies, whether pre-existing or to be incorporated in the future, will record their beneficial owners.

An overwhelming majority in the Senate approved the measure by a vote of 84 to 13. President Trump had previously threatened to veto the bill and followed through with his promise in late December 2020. His argument against the bill was that the provisions remain silent on his proposal to repeal liability protections for social media companies. In spite of Trump’s veto, both Chambers of Congress overrode the veto and passed the bill making it law over Presidential objection in 2021. There is allowance for this maneuver in the Constitution wherein it is declared that a two-thirds majority approval by each Congressional Chamber substantiates the override of a Presidential veto.

The NDAA does not discriminate between foreign or domestic companies. Upon formation or upon a change in corporate structure, a company is required to file a report. In a concerted joint government agency effort, the reports are shared with a network of these agencies such as the Financial Crimes Enforcement Network (FinCen), law enforcement, non-US enforcement agencies, and financial institutions that have a legal obligation to more readily meet their customer due diligence requirements. However, these reports are currently not available for general public inspection. 

In their overview of taxes globally, the U.K. based Tax Justice Network noted that the US is in competition with other financially secretive jurisdictions like the Cayman Islands and Switzerland. In fact, it ranks second on the list. Several factors play into this statistic, the primary one of which is the manner in which reporting is conducted in the US. Most companies are registered on the state level and disclosure requirements vary from state to state. As such, of the nearly two million corporations and limited liability companies registered annually, a large majority of them are incorporating anonymously. The Secretary of State from Delaware, a state that sees a massive number of corporate registrations, has observed that this act is a step in the right direction. That is, creating a network of agencies sharing information that is comprised of data derived from a uniform system of reporting avoids disparities in the system. It further avoids deriving statistical conclusions from piecemeal information.

Pursuant to the creation of this network, the law sets out a deadline of one year for the Treasury Department to come up with the architectural construct of the network. Whatever design is utilized in implementing these processes, it remains clear that companies will be required to disclose the name, birth date, address and a government issued identification number, i.e., a driver’s license number or passport number, of the company’s beneficial owners. Similar to the above stated rule about divulging changes in a company’s structure, etc., this statistical information will likewise not be made available to the public. Rather, it will remain confidential under the control and jurisdiction of FinCen, federal law enforcement authorities, and financial institutions with costumer permission. 

The current law still bears inherent limitations in that publicly listed companies and many federally regulated firms would not be bound by this disclosure requirement. Further, companies with more than 20 full time employees having annual sales in excess of $5 million and bearing a physical situs for their business will not be required to report. 

Opponents and critics of the measure, such as the National Federation of Independent Business, cite the extra compliance burden posed by the law. Even though this compliance may entail as little as 30 minutes of a company’s attention annually, the criticism is that it piles on more forms to the already high and heavy stack of compliance paperwork required of these companies. Objection to the legislation is also based on the argument that a greater disclosure requirement lends itself to a proliferation of breaches in privacy protections for businesses. The sheer upsurge of admission to this information provides a greater abundance and selection of access points for hackers to decrypt consequently obtaining privileged information in the form of official emails, etc.

Conversely, banking institutions were in universal support of the legislation because it alleviates their compliance burden through the centralization of information. In streamlining the access to this information, banks can more readily identify the true owners of these entities. Further, a collective information structure facilitates real time reporting of suspicious activity resulting in a better than satisfactory rate of legal enforceability. It bears in mind that previous to this new law, banking institutions have already been bound by similar regulation in the form of the Bank Secrecy Act.

The utmost priority addressed by the regulation is combatting shell companies that for the most part disguise criminal syndicates who traffic in the sex industry and market illegal drugs. On a larger global scale, these entities have readily financed terroristic activity, political corruption, and tax evasion. The Internal Revenue Service has extended these enforcement efforts by not only targeting corporations and LLC’s, but also multi-layered abusive trust tax schemes that mask true sources of income and coverup beneficiary identities. Consequently, the European Union and Great Britain have come on board with comparable measures to the US initiative. To better enforce the new law, provisions have been included within the statute that create a whistleblower reward program thereby incentivizing potential volunteers to come forward with information leading to the prosecution of legal offenders.

The current pandemic is a catastrophe of Biblical proportions and yet, just as the Bible’s literature indicates, normal daily living perseveres. Transactional work that greases the wheels of commercial activity is maintained in the hope that through its maintenance, it will be able to resume its normal pace at a foreseeable time. Engaging in such activity is an expression of hopeful optimism about the future. It is encouraging that Congress has ramped up its enforcement efforts via this legislation. Further, passing the law sends a powerful message to abusers of the legal system. The pivotal message is that even when government is preoccupied with imminent disasters, it will not cease exerting its energy at fixing a broken system with added efficiency and enforceability.

About the Author 

Alicea Castellanos is the CEO and Founder of Global Taxes LLC. Alicea provides personalized U.S. tax advisory and compliance services to high net worth families and their advisors. Alicea has more than 17 years of experience. Prior to forming Global Taxes, Alicea founded and oversaw operations at a boutique tax firm, worked at a prestigious global law firm and CPA firm. Alicea specializes in U.S. tax planning and compliance for non-U.S. families with global wealth and asset protection structures which include non-U.S. trusts, estates and foundations that have a U.S. connection.

Alicea also specializes in foreign investment in U.S. real estate property, and other U.S. assets, pre-immigration tax planning, U.S. expatriation matters, U.S. persons in receipt of foreign gifts and inheritances, foreign accounts and assets compliance, offshore voluntary disclosures/tax amnesties, FATCA registration, and foreign companies wanting to do business in the U.S. Alicea is fluent in Spanish and has a working knowledge of Portuguese.

Alicea is an active member of the Society of Trusts & Estates Practitioners (STEP), the New York City Bar, the New York State Society of Certified Public Accountants (NYSSCPAs), the American Institute of Certified Public Accountants (AICPA) and the International Fiscal Association (IFA). She is the New York/Northeast Regional Representative of the Women of IFA Network (WIN). Distinctly, in 2020, Alicea was awarded with a prestigious NYSSCPA Forty Under 40 Award. She was selected as someone that has notable skills and is visibly making a difference in the accounting profession.

Please note: This content is intended for informational purposes only and is not a replacement for professional accounting or tax preparatory services. Consult your own accounting, tax, and legal professionals for advice related to your individual situation. Any copy or reproduction of our presentation is expressly prohibited. Any names or situations have been made up for illustrative purposes — any similarities found in real life are purely coincidental.