Beneficial Ownership Disclosure: A Huge Donor Disclosure Threat
Across the country, efforts are underway in all branches of our government to intimidate and stop the American people from expressing their views as guaranteed under the First Amendment.
In state legislatures, they are advancing measures to force nonprofit organizations to reveal the names, home addresses and phone numbers of their donors. Attorneys General and regulatory agencies are demanding organizations reveal donor information. Municipalities are using their positions of power to target donors who give to organizations that participate in the democratic process.
And now, at the federal level, a new and equally troubling effort is underway to chill the free speech rights of individuals and entities through the mandated disclosure of the “beneficial ownership” information of nearly every legal entity created under the laws of any state in America. To date, two such bills have been introduced this year in Congress: S. 1454, the “True Incorporation Transparency for Law Enforcement (TITLE) Act, introduced by Senators Sheldon Whitehouse (D-RI) and Chuck Grassley (R-IA); and the “Corporate Transparency Act” (H.R. 3089 and S. 1717) introduced in the House by Representatives Carolyn Maloney (D-NY) and Peter King (R-NY) and in the Senate by Senators Ron Wyden (D-OR) and Marco Rubio (R-FL). The ostensible purpose of each of these bills is to assist law enforcement in detecting, preventing and punishing terrorism, money laundering, drug trafficking and other serious crimes involving the use of legal entities created under the laws of the fifty states. Proponents also say the legislation is necessary for the U.S. to be in compliance with commitments it has made in international agreements pursuant to the Financial Action Task Force (FATF) and the “Foreign Account Tax Compliance Act” (FATCA).
These ambitious bills mandate that at the time of formation individuals creating legal entities disclose to either the state or the Financial Crimes Enforcement Network (FINCEN) personal information about every individual who is a direct or indirect beneficial owner of the entity. The bills compel them to provide periodic updates and annual reports of this information throughout the life of the entity. To understand how these legislative proposals could lead to donor disclosure and intimidation, one must first understand the expansive definition these bills provide for the key term “beneficial owner” as well as the actual nature of the disclosure requirements.
First, the definition of “beneficial owner” used in the TITLE Act and the “Corporate Transparency Act” is not—as the sponsors of these bills contend—what you would colloquially think of as the “true owner” of a business. Rather, these bills define a “beneficial owner” as any natural person who directly or indirectly—
- exercises substantial control over a corporation or limited liability company (LLC); or
- has a substantial interest in or receives substantial economic benefits from the assets of the corporation or LLC.
This vague definition of a “beneficial owner” will likely cause many people reading this to scratch their heads. What exactly does it mean to have a “substantial” interest in or receive “substantial” economic benefits from a corporation or LLC anyway? As critics of these bills ranging from the U.S. Chamber of Commerce, the National Association of Secretaries of State, the American Bar Association and the National Association of Criminal Defense Lawyers have noted, the list is actually quite extensive. There is no limit to the number of individuals who could be deemed a reportable direct or indirect beneficial owner under these measures. People with connections to a legal entity as attenuated as a contingent interest by inheritance, an ex-spouse receiving an interest from a divorce settlement, and partners in a company that extends credit to or has a lien on the new legal entity would all constitute direct or indirect beneficial owners under these bills. While the definitions in these bills are murky, one thing is clear: Per usual, lawyers will have a field day as they help citizens forming legal entities determine how far these vague standards extend to the ever-changing universe of individuals who may be deemed a direct or indirect beneficial owner. Anyone who is a direct or indirect “beneficial owner” will be subject to having their personal information—including their name, address, and unexpired driver’s license or passport number—revealed to the government.
These bills are being pushed despite the fact that last year FINCEN finalized new Customer Due Diligence requirements compelling banks to obtain from any entity seeking to open a bank account identifying information on any beneficial owner holding a twenty-five percent ownership interest in the entity as well as one person who has day-to-day control over it. This results in disclosure of a maximum of five individuals associated with an entity on forms provided to FINCEN by banks. Advocates of beneficial ownership disclosure did not think this was enough and during the rulemaking process urged FINCEN to use their far more expansive and inchoate definition of beneficial ownership reflected in the measures now pending in Congress, or to at least adopt a lower, ten-percent ownership threshold. FINCEN, which is the agency in charge of securing the integrity of the U.S. financial system, declined. It noted that contrary to the assertions of advocates of more expansive beneficial ownership disclosure, a broader definition is not necessary to meet “the FATF standard, which in turn is used to define the controlling persons of an entity in the intergovernmental agreements that the United States has entered into with more than 110 other jurisdictions in order to enforce the requirements of FATCA.” FINCEN explained that “the incremental benefit of this approach” did not outweigh the burdens it placed on the financial institutions regulated by FINCEN. Nevertheless, advocates of the TITLE Act and the Corporate Transparency Act persist in seeking to place these same burdens on individual American citizens who create a legal entity.
Interestingly these bills really target smaller entities. Insurance companies, public companies, big banks, stock and commodities traders and public utilities are all exempt from these disclosure requirements. The so-called operating company exemption in both bills for entities with a physical office in the United States only applies once an entity has more than 20 employees and at least $5,000,000 in gross receipts. Under the TITLE Act, this exemption also requires the entity to have more than 100 shareholders.
It must also be understood that the disclosure regime mandated by these bills is not a one-time requirement satisfied when an entity is created. This process will actually be repeated on a regular basis, as any individual who forms a legal entity will have to file annual reports of beneficial owners. There is also an obligation under both bills to provide an update to the government within 60 days of any change in the name or other information previously disclosed about a beneficial owner or in the list of people who are beneficial owners. The sponsors of these bills are also unconcerned about the fact that they place a mandate on individuals to disclose personal information on direct and indirect beneficial owners that people creating entities may neither possess and nor have the legal right to obtain. Individuals forming an entity stand in a very different position than a bank dealing with someone who wants to open an account when it comes to demanding personal information. Nevertheless, under the measures pending in Congress individuals can be held civilly and criminally liable if fail to timely provide other peoples’ names, addresses and unexpired driver’s license or passport numbers.
Moreover, the Corporate Transparency Act and the TITLE Act are both retroactive. Each bill contains an “existing entities” clause providing that “2 years after the effective date [of these bills]” any entity formed under the laws of any state “shall be considered to be a corporation or limited liability company for purposes of [this legislation]” and subject to the beneficial ownership reporting requirements. These bills are also not limited to for profit entities. The Corporate Transparency Act would exempt most types of already-existing tax-exempt organizations and trusts, but only if they have not been denied tax-exempt status and have already “filed the most recently due annual information return with the Internal Revenue Service.” This clever filing requirement effectively precludes use of the exemption for newly-formed 501(c) entities. The TITLE Act, on the other hand, only carves out tax exempt 527 and 501(c)(3) entities. It does not even purport to provide any exemption for other types of 501(c) entities.
Some may ask, “So what’s the big deal? Our government needs all the resources possible to combat terrorism and other high crimes. Who cares if the government has the names, home addresses and other personal information of individuals?”
The lead sponsors of these bills have been told by National Association of Secretaries of State that, “[e]ntity information filed with the state business registry is public information, thus beneficial ownership information filed with the state would be public information.” Simply put, to the extent the TITLE Act and the Corporate Transparency Act have states collecting the personal information of direct and indirect beneficial owners as part of the entity formation processes they mandate, they are ensuring it is publicly available! Even to the extent these measures have beneficial ownership data collected by FINCEN or another entity, the information can be obtained by all manner of officials at every level of government. Disclosure of this information is not limited to law enforcement officials trying to track down suspected terrorists and narcotraffickers. What’s worse is that neither bill imposes any restrictions on what state and federal officials or members of Congress may do with this personally-identifiable information once it is in their hands.
While the bills’ sponsors focus on emotionally-triggering words to distract the American people—like the need to combat “terrorism”—the true motives of some of the sponsors of these bills have become all too clear. They see beneficial owner disclosure as a means to attack so-called “dark money” and the Citizens United decision and to challenge the free speech rights of those who disagree with them on policy issues. This is not supposition. Senator Whitehouse, a co-sponsor the TITLE Act made that point abundantly clear. In a June 14, 2017 speech on the Senate floor, discussing the merits of the TITLE Act he stated:
Since the Citizens United decision, we have seen unprecedented dark money flow into our elections from anonymous dark money organizations, groups that we allow to hide the identities of their big donors. We don’t know who is behind that dark money . . . .
Just over one month later, Senator Whitehouse made the connection between beneficial owner disclosure and donor disclosure explicit when he reintroduced the latest iteration of the perennial anti-free speech DISCLOSE Act (S. 1585). Speaking on the DISCLOSE Act, Whitehouse noted that “shell corporations and tax-exempt 501(c)(4) organizations make it possible for anonymous donors…to buy influence and threaten crushing spending against political foes.” To get at such spending and to ensure that “the public know who is behind” it, Whitehouse explained that the latest version of the DISCLOSE Act will require that beneficial owner information be disclosed to the Federal Election Commission (FEC) for any group that makes “campaign-related disbursements” or makes transfers to another entity that makes such disbursements. The DISCLOSE Act uses the same definition of beneficial owner that is in the bills pending before Congress. This anti-free speech legislation also requires FINCEN to “provide the [FEC] with such information as necessary to assist in administering” the public reporting of beneficial ownership of entities making campaign-related disbursements. This includes information FINCEN collects on beneficial owners through its existing Customer Due Diligence Rules or any future beneficial owner legislation Congress may enact.
Legislation like the TITLE Act and Corporate Transparency Act would materially facilitate the kind of targeting and intimidation tactics now-Senator Kamala Harris used when she was Attorney General of California. Nothing would prevent another overzealous state attorney general from seeking beneficial owner information to attack donors to public education campaigns, voter outreach efforts, or communications urging support or opposition to state ballot initiatives like those who supported efforts to combat Proposition 8 in California.
In the name of fighting terrorists and criminals these bills will expose millions of law abiding individuals to a massive government data collection that undermines their personal privacy and that of anyone even loosely connected to an entity they create. Like most things that happen in government, when our leaders tell us a law is needed for our own good—whether it is national security, money laundering, or healthcare—it usually means it is bad news for the individual. These beneficial ownership disclosure bills are no exception. The vague language in these bills will bury anyone who forms a legal entity in regulatory paperwork and further invite the government into our homes and finances, while making it easier to attack supporters of viewpoints that are not politically correct or popular with the mainstream media. Remember, transparency is for the government, privacy is for the people. As representatives of the people, Senators Whitehouse, Grassley, Wyden and Rubio and Representative Maloney and King should know better.