The Corporate Transparency Act Gets Tough on Shell Companies

Over the last tumultuous year, a slew of new legislation has been passed, primarily in response to the pandemic and the resulting challenges faced by individuals, families and businesses.

With the onslaught of economic, health and political news sweeping headlines every day, you may have missed a new and critical piece of legislation, which some are calling the most notable anti-corruption reform passed in years: the Corporate Transparency Act, which is part of the broader National Defense Authorization Act.[1]

So, what’s included in the legislation, and why does it matter to you and your business? Here’s what you need to know.

What is the National Defense Authorization Act?

It all starts with the National Defense Authorization Act of 2021, H.R. 6395, that became law on January 1, 2021, with strong bipartisan support.[2] The bill primarily concentrates on two major federal activities: it creates the 2021 budget and policies for the United States Department of Defense’s annual activities, and it communicates personnel appropriations for active duty and reserve military forces. The bill also focuses on other federal activities, such as national security and artificial intelligence programs.[3]

There was also an important piece of anti-corruption legislation included in the National Defense Authorization Act that law-abiding businesses should be aware of that may create compliance challenges.

What is the Corporate Transparency Act, and how does it affect shell companies’ activities?

This year’s National Defense Authorization Act included a piece of legislation known as the Corporate Transparency Act (CTA), which specifically targets anonymous shell companies, a favorite vehicle used in fraud and other illegal activities.

Fun fact: before the CTA was made into law, more information was required to get a library card than to form a secret company in the U.S.

The CTA now requires the true, human owners of any company formed in the U.S. to disclose their identities upon the formation of their company and upon any change thereafter.[4]

In simple terms, shell companies are corporations without active business operations or significant assets. Although most people associate shell companies with illegal activities, not all of them are used for nefarious purposes; in fact, shell companies can be used as holding companies to preserve future business rights or opportunities, as a vehicle to raise funds or as a tool to acquire different types of business financing.

However, those who do use shell companies for fraudulent purposes do so to conceal information regarding their company. According to the Association of Certified Fraud Examiners (ACFE), this can include the concealment of the “…nature, origin, or destination of misappropriated funds and/or the concealment of the true owners and decision-makers of a criminal act or conspiracy.”[5]

The ACFE also states that organizations conducting any type of transaction should be cognizant of the fact that shell companies are the financial and deception vehicle of choice for most corrupt individuals and entities. Organizations should familiarize themselves with the red flags of potential fraud-related activities and transactions that disingenuous shell companies use for illicit practices.

What’s the impact of the CTA?

Often during investigations involving some type of financial fraud — whether it be tax evasion, money laundering or corruption — an investigation can hit a wall when it comes across a shell company due to insufficient beneficiary information. With the CTA, financial institutions and law enforcement are hopeful investigations will lead to additional information, the increased ability to “follow the money trail” and the decreased abuse of the U.S. financial system for illicit activity.

There are many examples of shell companies using our financial system for illegal gains, including the 2008 case of an Iranian-owned building in Manhattan. The U.S. government filed a complaint regarding the ownership of the building in question; it came to light that the true ownership was hidden through the use of anonymous companies formed in the U.S. and abroad.[6]^,[7] In this case, the building was partially owned by a company incorporated in New York, which was wholly owned by a corporation in an offshore jurisdiction known to uphold secrecy regarding beneficial ownership. After a lengthy and costly investigation, law enforcement uncovered that the beneficial owners of the building were Iranian citizens with ties to Bank Melli, which is on the U.S. Office of Foreign Asset Control Specifically Designated Nationals and Blocked Person’s list (SDN list) as linked to the Islamic Revolutionary Guard Corps.[8]^,[9]

Moving forward, the CTA hopefully will allow for more transparency into the ownership of companies incorporated in the U.S. The law is supported by a wide variety of entities, including law enforcement, local and federal prosecutors, anti-human trafficking groups, financial institutions, insurance companies and more.[10]

Since the CTA affects companies incorporated in the U.S., these firms will have to report their ownership information. The Financial Crimes Enforcement Network (FinCEN) has been tasked with issuing the regulations to implement these reporting requirements by December 31, 2021.[11] However, not all companies will be required to comply; the CTA considers that some regulated companies (including publicly traded companies and larger, private companies) already file beneficial ownership reports with other agencies and therefore will not be required to file under the CTA.[12]

The bottom line

All U.S. companies must comply with the CTA once the reporting requirements and guidelines have been implemented. Not only is this new regulatory development essential from a compliance perspective, but it also has major implications for fraud investigations. With greater transparency, we anticipate that investigations into fraudulent shell companies will be more effective.

At Aprio, we’re committed to keeping you abreast of the regulatory changes that can have a major impact on your business and will help you comply with the new requirements under the CTA once they have been put in place. In addition, our Litigation Support and Forensic Accounting team regularly conducts fraud investigations on behalf of clients and can help you start an investigation should you suspect you are a victim of a fraudulent scheme.

If you want to learn more about how we can help you and your business, contact us today.

[1] Morris Pearl, “Congress just passed the most important anti-corruption reform in decades, but hardly anyone knows about it,” FORTUNE, December 26, 2021, https://fortune.com/2020/12/26/ndaa-2021-shell-companies-corporate-transparency-act/.

[2] The National Defense Authorization Act for Fiscal Year 2021, H.R. 6395, 116^th Congress, 01/01/2021 – Became Public Law No: 116-283, https://www.congress.gov/bill/116th-congress/house-bill/6395/all-info.

[3] Ibid, 1.

[4] Morris Pearl, “Congress just passed the most important anti-corruption reform in decades, but hardly anyone knows about it,” FORTUNE, December 26, 2021, https://fortune.com/2020/12/26/ndaa-2021-shell-companies-corporate-transparency-act/.

[5] Ryan C. Hubbs, “Shell games: Investigating shell companies and understanding their roles in international fraud,” Association of Certified Fraud Examiners (ACFE), July/August 2014, https://www.acfe.com/article.aspx?id=4294983054.

[6] Vivian Wang, “Manhattan Skyscraper Linked to Iran Can Be Seized by U.S., Jury Finds,” The New York Times, June 29, 2017, https://www.nytimes.com/2017/06/29/nyregion/650-fifth-avenue-iran-terrorism.html.

[7] “FACT Sheet: Anonymous U.S. ‘Shell’ Corporations: A National Security Code Red,” The FACT Coalition, April 10, 2014, https://thefactcoalition.org/fact-sheet-anonymous-u-s-shell-corporations-national-security-code-red/.

[8] Office of Foreign Assets Control (OFAC), Specially Designated Nationals And Blocked Persons List (SDN), https://sanctionssearch.ofac.treas.gov/Details.aspx?id=25578 (searched 1/28/2021).

[9] Ibid, 6.

[10] “FACT Sheet: A Brief Summary of The Corporate Transparency Act (Title LXIV of the NDAA, H.R. 6395),” The FACT Coalition, December 17, 2020, https://thefactcoalition.org/fact-sheet-a-brief-summary-of-the-corporate-transparency-act-of-2019-title-lxiv-of-the-ndaa-h-r-6395/.

[11] Akin Gump Strauss Hauer & Feld LLP, “Corporate Transparency Act Establishes New Beneficial Ownership Reporting Requirements for U.S. and U.S.-Registered Foreign Companies,” JDSUPRA®, January 6, 2021, https://www.jdsupra.com/legalnews/corporate-transparency-act-establishes-6759633/#:~:text=Enacted%20as%20part%20of%20the,%2C%20by%20December%2031%2C%202021.

[12] Ibid, 8.