On August 2, 2011 Senators Carl Levin and Chuck Grassley introduced bi-partisan legislation requiring companies to disclose the names of beneficial owners of corporations and limited liability companies. The legislation is intended “to ensure that persons who form corporations in the United States disclose the benficial owners of those corporations, in order to prevent wrongdoers from exploiting United States corporations in ways that threaten homeland security, to assist law enforcement in detecting, preventing, and punishing terrorism, money laundering, and other misconduct.”

According to anti-money laundering proponents, law enforcement groups, and financial transparency organizations, the legislation is a crucial step toward strengthening law enforcement and keeping criminal and tax evading money out of the U.S. As reported by the Center for International Policy’s Global Financial Integrity, “Criminals, kleptocrats, and tax evaders from around the world are taking advantage of . . . U.S. law to hide and launder illicit money . . . [because] financial opacity puts law enforcement at a major disadvantage. Too often cases are dropped, or investigations are closed, due to a lack of evidence connecting the illicit funds held in accounts owned by anonymous corporations to the criminal owners of those corporations.”

The problem identified by this piece of legislation is two-fold: First, that it is too easy to gain access to financial services in the U.S. through anonymous U.S. corporations; and second, that it is too difficult for law enforcement groups to figure out the real owners behind anonymous corporations. Therefore, this legislation imposes both civil and criminal penalties on anyone who (1) knowingly provides, or attempts to provide, false or fraudulent beneficial ownership information; (2) willfully fails to provide complete or updated beneficial ownership information; and (3) knowingly discloses the existence of a subpoena, summons or other request for beneficial ownership information.

However, the true crux of this legislation is that it prohibits States or corporate formation agents from knowingly failing to obtain or maintain credible, legible, and updated beneficial ownership information, including any required identifying photographs. The federal government will be able to require this from any state receiving funds from the Department of Homeland Security even though corporate formation has traditionally been a matter of state law.

States must be in full compliance with the requirements of this law no later than 2014. They must implement an incorporation system that follows specific guidelines “to protect the security of the United States from corporations and limited liability companies with hidden owners.”

In addition to any civil or criminal penalties that may be imposed by a State, any person who violates the requirements of this legislation can be fined up to $10,000 by the United States and imprisoned for up to 3 years. Thus the federal government continues to impose upon U.S. persons more regulations and criminal statutes by leveraging the U.S. economy in the name of national security and transparency. Now, when forming corporations or LLCs U.S. persons must be wary of significant federal requirements (with the risk of imprisonment) in an area of law that has traditionally been left to the states.

The author of this blog is Erich Ferrari, an attorney specializing in Federal Criminal Defense matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrari-legal.com.

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