A Truly Historic Achievement
Transparency advocates begin 2021 in a jubilant mood, as Congress on New Year’s Day overrode President Trump’s veto to pass the annual defense spending authorization. Included as a part of that law was the Corporate Transparency Act, which bans the creation of anonymous companies and requires the reporting of company ownership information to the Treasury Department. Ownership information housed at Treasury—recording the identity of the “beneficial owner” of a company, that is the actual human being who owns shares or otherwise exercises control of the business—will be made available to law enforcement agencies and, in the limited scenario of verifying the ownership of a customer account, to banks. Due to privacy concerns and fear of regulatory overreach, ownership information will not be publicly available. Nonetheless, the FACT Coalition, which led the diverse coalition supporting the bill, called it “historic” and a “landmark.” Transparency International USA hailed the legislation as “the most significant update to U.S. anti-money laundering laws in a generation.”
Advocacy groups hope that the bipartisan support for this bill signals momentum behind the incoming Biden administration’s anti-corruption agenda. As the Alliance for Securing Democracy’s Josh Rudolph has written, the Treasury Department should help lead a whole-of-government anti-corruption push in 2021. Among its top priorities will be drafting regulations to set up the database of company ownership information that Congress has now mandated. Treasury will have to tackle several other important anti-corruption agenda items, including drafting a National Corruption Risk Assessment, finalizing anti-money laundering requirements for hedge funds and private equity, making the existing pilot program to collect real estate ownership information permanent and nationwide, and setting up a cross-border payments database.
Does this seemingly arcane beneficial ownership provision really make a difference in the struggle against corruption and illicit finance? Absolutely. As things stand, it is not generally possible to open a bank account in the United States in a completely anonymous fashion; banks are required to know who the owner is under the Financial Crime Enforcement Network’s Customer Due Diligence Rule. But law enforcement agencies currently need a subpoena or similar order to determine who owns Company X, which may then point them to Companies Y and Z. Months of investigative time are lost this way, even when the case is purely domestic. When an investigation crosses borders and involves many financial institutions, the process is even more cumbersome or simply impossible. The new beneficial ownership database will centralize all of this information in one place. And the law has teeth, as there are civil penalties for non-compliance and criminal penalties for willful violation.
Now, the campaign to create a transparent business environment inhospitable to illicit financial activity moves from Washington to the 50 states. State legislators and state secretaries of state are positioned to build on this Congressional foundation by crafting best-in-class transparency standards at the state level.
A Floor, Not a Ceiling
The monumental achievement of a federal register of company ownership should be seen as a floor, not a ceiling. Anti-corruption campaigners wisely compromised on a “good enough” company register that was politically attainable. Many transparency groups, such as the Tax Justice Network and Open Ownership, have pushed for much more. Above all, they have called for making ownership information public. Their argument is that only public, searchable registers will empower journalists, academics, and nongovernmental organizations to exploit ownership data to the fullest. The United Kingdom, Denmark, and Ukraine were the first three countries to make ownership information public. The European Union as a whole is moving in that direction too under the Fifth Anti-Money Laundering Directive, although implementation at the national level has been slow. Moreover, the Corporate Transparency Act’s ownership threshold of 25 percent has also been criticized as too high. For example, ownership of publicly traded stock is reported to the Securities and Exchange Commission at a 5 percent threshold (and made available via the EDGAR database). The Corporate Transparency Act also contained several carve-outs that were necessary to obtain a veto-proof majority, such as exemptions for pooled investment vehicles or companies with more than 20 employees or $5 million in revenue.
The law passed on New Year’s Day accomplished as much as was politically feasible. Just as important, it achieved what was needed at the federal level, specifically that which was only achievable at the federal level: the creation of a centralized database maintained by Treasury and available to law enforcement. Further transparency measures can and should be pursued in the 50 states in which companies are formed and file annual reports. It is state governments that are best suited to devise rules appropriate to the day-to-day business of companies operating locally and regionally. Even better, the political dynamic at the state level is distinct from Congress, in which small states heavily dependent on company formation and related services—such as, Delaware, Nevada, and Wyoming—have disproportionate influence. At the state level, the states with the largest populations and economies set the rules of the road nationwide. That is because companies must file with state governments to operate in each state, whether forming a distinct legal entity or simply registering a “foreign” branch formed out of state.
From Washington to the 50 States
States do not need to pursue public ownership registers to build on the Corporate Transparency Act, although some might choose to. Rather, they must simply enhance their existing registration and annual filing processes with an eye toward greater transparency and the collection of basic, useful data. Some states already do so, but practices vary widely. Interestingly, such practices do not break down neatly along partisan or ideological lines. While California currently collects and publishes fairly extensive company data, so does Florida. Wyoming is a laggard, but so is New York.
Policymakers in all 50 states should pick up the mantle of transparency from Congress, since companies are formed and operate under the unique rules of each jurisdiction. But the key decisions will be made in the largest states: California, Florida, Illinois, New York, Pennsylvania, and Texas. Since companies must register with the governments of the states in which they operate, leaders of the large states have great influence and can foster a transparency “race to the top.” Therefore, even if Delaware continues to collect scant company information—Delaware currently publishes almost nothing useful about a company other than its name and date of formation—states with large economies will have leverage to obtain all relevant information short of beneficial ownership. Different states already collect and disseminate much of this information in different ways. The challenge is one of standardization.
Three Simple Standards
State governments should aim to meet basic standards of transparency to ensure an open and fair business environment, including:
- Collection and publication of substantive information about the company should be mandatory. “Substantive information” includes articles of incorporation and annual financial statements, names of officers and executives, a description of the business, and the physical location of operations.
- All such substantive information should be made available free of charge, without a paywall. It should also be searchable in bulk, for example by application programming interface, to aid researchers and information portals such as OpenCorporates.
- Officers or members of a company must be natural persons, that is actual human beings, and not another legal entity.
None of these standards require collecting beneficial ownership information. State governments should apply them universally to any company registered in or operating in their jurisdictions.
For Delaware, meeting these standards would be a sea change. For California and Florida, it would entail tweaks to existing forms, the addition of some new ones (such as annual financial accounts), and one significant legal change to prohibit the listing of entities as corporate officers. For New York and Texas, meeting these standards would require a lot of work to upgrade systems, but doing so would pay dividends in the form of a more transparent and equitable business environment.
What effect would these three simple standards have? Imagine, for a moment, that you are a beleaguered member of a bank’s compliance department tasked with smoking out suspicious doings by your customers. You know a lot about your customer, including the owner of the company, the nature of the business, and its historical behavior. On the other hand, you know very little about the companies they do business with.
The same is true if you are a journalist investigating a politician’s business dealings with local businesspeople, or a concerned citizen who wants to understand which companies have been winning public procurement contracts. Your state government is not tasked with collecting sensitive beneficial ownership information, which will be housed securely and centrally at the Treasury Department in Washington. Conversely, none of this basic information is to be collected at the federal level under the just-passed law. But under these common-sense state-level standards, you will know a great deal of meaningful information about the companies operating in your hometown. So too will law enforcement, journalists, regulators, and local governments. That benefits the public good.