Proposed legislation at the federal and state levels would greatly expand the information required to be disclosed by the owners of certain privately-held corporations and limited liability companies. At the federal level, U.S. Senator Carl Levin recently re-introduced the Incorporation Transparency and Law Enforcement Assistance Act. The purpose of the proposed legislation is “to protect the United States from corporate entities being misused to commit terrorism, money laundering, tax evasion, or other misconduct” and is intended to promote transparency of the beneficial ownership of privately held companies to aid law enforcement in locating the owners of companies that are being misused for criminal purposes.
The legislation states that “criminals have exploited the weaknesses in State formation procedures to conceal their identities when forming corporations or limited liability companies in the United States, and then have used the newly created entities to commit crimes...” The legislation would require the states to obtain the names of the beneficial owners of privately held corporations and limited liability companies incorporated or formed in the state at the time the entity is formed. Each state would determine whether this information would be publicly available or would be maintained in a non-public database to be provided upon subpoena from a governmental body. The owners of the entity would be required to update the beneficial ownership information annually or, if there is no annual filing requirement in the state, upon any change in the beneficial ownership. The proposed legislation would not apply to public companies or the subsidiaries formed by those companies.
Although it is unclear whether the legislation proposed by Senator Levin will pass in its current form, the legislation represents a significant departure from the existing disclosure requirements of most states and would represent a significant new administrative burden on corporations and limited liability companies that fall within the legislation’s scope.
In response to this action at the federal level, the National Conference of Commissioners on Uniform State Laws and the American Bar Association are drafting a model law titled the Uniform Law Enforcement Access to Entity Information Act (the Model Act) to address the transparency concerns targeted by the federal legislation. The Model Act provides that, upon its formation, an entity would be required to designate in a public filing with the Secretary of State an individual known as a “records contact.” Entities would be required to provide information about the record owners, voting rights and managers of the entity to the records contact. Upon an appropriate request, such as a subpoena, the records contact would be required to produce this information to an authorized agent of the government. Unlike the proposed federal legislation, the Model Act does not call for the names of the beneficial owners to be filed directly with the state. Under the Model Act, only companies with no more than 50 owners would be required to furnish this information. There are other exceptions, such as for companies in “regulated” industries, as well. The approach taken by the Model Act is less intrusive than that taken by the legislation proposed by Senator Levin, and we believe represents a more measured approach to the transparency concerns targeted by the federal legislation.
Although the above proposals are a departure from most states’ current laws, they are consistent with a trend toward increased disclosure. Many European countries require the disclosure of company ownership information, and private entities such as banks have required disclosure of ownership under “know your customer” rules for some time. Accordingly, we expect that the Model Act or the proposed federal legislation will be passed in some form in the near future.