In the first week of May, 2016, the U.S. Department of the Treasury announced several actions to strengthen financial transparency and combat the misuse of companies to engage in illicit activities. Treasury announced a Customer Due Diligence (CDD) Final Rule, proposed Beneficial Ownership legislation, and proposed regulations related to foreign-owned, single-member limited liability companies (LLCs). Together, these efforts target key points of access to the international financial system – when companies open accounts at financial institutions, when companies are formed or when company ownership is transferred, and when foreign-owned U.S. companies seek to evade their taxes.
These efforts are very timely as the shocking disclosures in the Panama Papers have been in the news in 2016. The scandal originated from a data leak from Panamanian law firm Mossack Fonseca, which specialized in creating offshore shell companies. The scandal exposed significant, world-wide tax cheating and corruption by celebrities, politicians and the wealthiest Americans who hide possible criminal activities thru anonymous shell companies. Reverberations from the leak continued with the resignation of a minister in Spain and five European countries agreeing to share beneficial-ownership data in a bid to curb tax evasion.
The U.S. Government has been targeting offshore tax evasion and money laundering in the last ten years. The attack is against these “shell companies” that facilitate tax evasion and money laundering by hiding behind nominee owners, officers, directors, trustees, powers of attorney and a cottage industry of lawyers. This long-awaited CDD rule requires banks and other financial institutions to obtain ownership information for shell companies when they open accounts. Anyone who owns at least 25 percent of the company, or controls it, must be identified under the new beneficial ownership rule.
Current federal anti-money laundering laws already require financial institutions to collect personal information from customers before opening an account, encouraging a risk-based approach where certain clients receive more scrutiny than others in determining the level of knowledge needed on a client. But the present rules don’t require financial institutions to actually learn the identity of a corporate entity’s true ownership, which according to many encourages corrupt officials across the globe to create shell companies to hide assets in the U.S. financial system.
The rule contains three core requirements: (1) identifying and verifying the identity of the beneficial owners of companies opening accounts; (2) understanding the nature and purpose of customer relationships to develop customer risk profiles; and (3) conducting ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information.
Also, the Treasury Department announced it is sending beneficial ownership legislation to Congress. The Administration is committed to working with Congress to pass meaningful legislation that would require companies to know and report adequate and accurate beneficial ownership information at the time of a company’s creation, so that the information can be made available to law enforcement.
As part of the legislation, companies formed within the U.S. would be required to file beneficial ownership information with the Treasury Department, subject to penalties for noncompliance. The Treasury Department also announced proposed regulations which, if passed, would require foreign-owned “disregarded entities,” including foreign-owned single-member limited liability companies (LLCs), to obtain an IRS-issued employer identification number (EIN).
If you live in the New York or the Tri-State area and have any questions about the new Treasury Department rules requiring the disclosure of shell companies, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation call 212-490-0704. 
