Lifting the Veil on US Shell Companies – Third Attempt to Force Beneficial Ownership Registers

Play it again (Uncle) Sam! Two US senators are trying yet again to enact a law mandating creation of a national database of beneficial owners of US businesses.  So far we have seen two unsuccessful attempts by lawmakers for mandatory beneficial ownership registers in the USA. The latest borrows heavily from the two bills that have failed before: the House’s “Corporate Transparency Act” (H.R. 2513) and the Senate’s “ILLICIT CASH Act” (S. 2563).  I blogged about the Corporate Transparency Act when it was first introduced last year.

The text of Section 5403, the latest newcomer, is being tacked on as an amendment (“Amendment”) to the 2021 National Defense Authorization Act (NDAA). This is a sneaky attempt at enactment by Senators Mike Crapo (R-Wyo.) and Sherrod Brown (D-Ohio) who have introduced this monster by adding it as an “amendment” to the NDAA.

“Must-Pass” Legislation

The NDAA is what is called “must-pass” legislation, meaning it is sure to pass Congress given its vital importance (e.g., defense funding).  As demonstrated here, must-pass legislation is often amended with policy provisos, or ‘riders’, that are completely unrelated to the principal purpose of the original proposal.  There is a good chance that such riders are ultimately enacted into law, but whether this particular amendment will remain intact is an open question. If it does, small businesses will be forced to comply with a very burdensome new regulatory regime.  Those intent on nefarious activities will simply lie to get around the disclosure rules. As a result, in all likelihood, if enacted the Amendment will end up being a toothless player in the war against criminal activity, terrorism and money-laundering.

If enacted, the Amendment would be successful in achieving other things. It would force many small businesses already drowning in regulatory requirements, to close their doors. It will also cause serious privacy and security concerns.  Just imagine the chaos when this national database is hacked – in my view, an almost inevitable event.  I can just imagine a breach of the treasure trove of information bringing ransom demands, extortion, and theft of the wealthy. Broad access to personal information is at stake.  In addition, the Amendment will also greatly expand the federal definition of a “beneficial owner” in ways that we have not seen before (more on this, below).

Overview of the Amendment

If passed, any applicant forming a US corporation, limited liability company or “other similar entity” must disclose the identity of their “beneficial owners” by providing their name, date of birth, unexpired passport or driver’s license number and current address.  The rules apply as well to an applicant seeking to register a foreign entity to do business in a US state.  The rules are riddled with complicated exceptions, the most notable being an exception for an entity that employs more than 20 employees on a full-time basis in the United States or that files income tax returns in the United States demonstrating more than $5,000,000 in gross receipts or sales.  Many smaller foreign businesses will not meet these thresholds and will think twice about entering the US market if the regulatory requirements outweigh possible benefits.

A significant problem with the Amendment lies in the definition of beneficial ownership.  The defined term is very broad and a beneficial owner can include anyone with an unspecified “understanding” “arrangement” or “relationship” who is deemed to “exercise substantial control” over the entity, or who owns 25% or more of its equity.   Of course, these terms are not defined and no one knows the parameters of “understanding,” “relationship,” or “substantial control”.  We may have to wait until years pass and guidance is provided in regulations or litigation and court rulings. Of course, Congress has often demonstrated a penchant for ambiguity in its legislation, leaving the finer details open and undefined.  What a mess.

Annual filing and updating of the information would be required. The information would be sent to Financial Crimes Enforcement Network, or FinCEN.  Many of my readers will know that FinCEN is the agency with primary power over the notorious FBAR. If passed, the agency will have another significant information gathering tool.

Let’s see how far this goes. The various States and the country as a whole, will not want to lose the strong financial support of untold numbers of foreigners who set up and rely on the anonymity of US corporations or LLCs. The US is viewed as a very enticing tax haven and the various States will not easily give up the cash cow of anonymous entity formations!

Posted July 30, 2020

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