KYB in the United States: farewell to shell companies with the new Corporate Transparency Act

The Financial Action Task Force (FATF), a body founded in 1989 to combat money laundering and financing of terrorism, indicated in its 2016 report that there was an enormous lack of KYB (Know Your Business) transparency in the United States, as regards the individuals who were the real beneficiaries of new companies. The country’s flexible regulations for setting up companies, which lacked demanding identity requirements, gave shell companies and businesses with complex structures the go-ahead to appear, therefore making auditing difficult and favouring financial crime.

In a bid to tackle this situation, the United States Congress passed a new Corporate Transparency Act (CTA – page 2996 of the linked PDF) on 1st January of this year, which will come into force at the beginning of 2022. In accordance with these new KYB regulations, U.S. companies must notify the authorities of all information available regarding the identity of their real beneficiaries. In other words, information on the identity of any individual who have significant control over the companies, or who own at least 25% of the aforementioned. In short, regarding the natural person on behalf of whom any transaction is made. These companies must process all this information via FinCEN- Financial Crimes Enforcement Network, which is a bureau of the U.S. Department of the Treasury.

Tougher KYB measures: the end of the “American Dream”

Now with the new act, when any U.S. company or any company which does business on U.S. soil is set up, it must provide information which proves its real ownership. These companies must also implement efficient and trustworthy identity verification methods and confirmation methods for the information submitted to FinCEN. All of this information may only be managed by competent authorities and financial institutions. The ultimate aim is to combat money laundering and tax evasion, driven by shell companies. Likewise, this information will only be processed once consent has been given by the parties concerned.

KYB information provided by each company must be updated on a yearly basis. The following personal details must be notified and verified:

1 | Full name
2 | Date of birth
3 | Usual address or updated business address
4 | Government-issued identification number which is associated with a legal document (valid official identity card, passport or driving licence)

Particular attention must be paid to this last point, as its format, the way in which it should be requested, the controlling party and the protective mechanisms to be implemented are yet to be defined. FinCEN must also state the necessary procedure in the event that it has to be changed.

The method and protocol for submitting all this KYB information are two of the most significant points of the act. The process calls for maximum transparency and for costs to be cut, where possible. However, FinCEN has put together a set of 48 questions designed to help companies report this information correctly. Furthermore, it will offer a reasonable deadline so that information is submitted on time, and businesses will receive support from companies which will verify the processes and with which they must reach agreements. This shall make the work easier for civil servants who are responsible for enforcing the law.

The data and identification verification systems of sources will prove to be as important as the information itself. Guaranteeing security and trust to this effect is the only way in which this new government KYB strategy will work, branded as “historic” by Transparency International. Gary Kalman, Director of the U.S. office of the organisation, stated that this was the first major legal change to be made in 20 years to combat money laundering in the United States.

A “historic” legal change

Bank Policy Institute, an organisation which represents dozens of banks in the United States and whose staff is made up of economists, researchers and lawyers, stresses the importance of implementing these KYB mechanisms in order to verify the information provided by reporting companies and therefore build sound trust in the FinCEN Network. It is also important to know if there will be a way, once the new Corporate Transparency Act is in force, of correcting mistakes in the event that the information is inaccurate, which fines and penalties will be imposed if false information is provided on purpose and what the protocols will be for submitting reports on a regular basis.

The new Corporate Transparency Act puts an end to an “American Dream” driven by a commercial freedom which lacks transparency and security. According to the Financial Secrecy Index 2020 of the Tax Justice Network, the United States is the second biggest enabler of financial secrecy, only behind the Cayman Islands. The success of the new KYB measure depends on both the commitment of authorities and companies, as well as how severely the notification and verification systems are implemented.

SOURCES

1. Full legal text of the new Corporate Transparency Act of the United States of America (page 2996 of the linked PDF file)

2. Historic Anti-Corruption Measures Become Law. Transparency International U.S. Office. 01/01/2021

3. Explained: the Corporate Transparency Act. Scott Greytak | Transparency International. 25/01/2021

4. US passes ‘historic’ anti-corruption law that effectively bans anonymous shell companies. Richard Hall | Independent. 02/01/2021

5. Corporate Transparency Act and its Impact on Your Business. Danielle Snyder Fadel & Robert L. Macklin | The National Law Review. 19/08/2021

6. Financial Secrecy Index 2020 reports progress on global transparency – but backsliding from US, Cayman and UK prompts call for sanctions. Press Office | Tax Justice Network. 18/02/2020

7. United States’ measures to combat money laundering and terrorist financing. FATF – GAFI. 01/12/2016

8. Comments Regarding Beneficial Ownership Information Reporting Requirements. Angelena Bradfield | Bank Policy Institute. 05/05/2021