Occupy the SEC Questions Unduly Generous Treatment of Disclosures by Corporate Beneficial Owners, aka Potential Tax Evaders

More than 10 years after Occupy Wall Street was crushed in a Federally-coordinated 17 city paramilitary crackdown, Occupy the SEC is still going strong. The group received extensive, laudatory press coverage after it published a 325 page comment letter on the so-called Volcker Rule. It has continued to weigh in on pending financial regulations via comment letters, as you can see from its site.

The latest Occupy the SEC comment letter, embedded at the end of this post, focuses on a proposed rule about who has access to a US registry of corporate beneficial owners and what information is in it. Many of you will go into MEGO (“My eyes glaze over”) mode. And that’s the point. Opacity and complexity enable misconduct.

Per Investopedia:

A beneficial owner is a person who enjoys the benefits of ownership even though the title to some form of property is in another name.

Many beneficial ownership relationships are benign. As Investopedia points out, if you own shares in a mutual fund or securities that are held by a custodian, you are the true owner even though, say, Fidelity holds the title. But there is no secrecy intent. The IRS will be informed of any taxable income from these assets.

By contrast, as fans of former Naked Capitalism writer Richard Smith will know, mechanisms that hide who company owners and directors regularly enable tax and investment frauds. Smith and his colleagues have pursued dodgy New Zealand corporate registries and Scottish limited partnerships as regularly-used mechanisms for chicanery. As MLROs wrote:

“Scottish Limited Partnerships are attractive to money launderers because they can provide anonymous ownership and control, while giving the impression of a respectable UK business” – Transparency International UK

For anyone seeking to conceal and launder the proceeds of crime, the role of an anonymous and untraceable legal entity is critical. These entities, typically found within offshore jurisdictions (such as the British Virgin Islands, Belize and Seychelles), provide little to no information on the individuals sitting behind them.

The role of such companies and their role within the world of financial crime was clearly demonstrated in the data leak of 2016, known within the media as the ‘Panama Papers’. This leak provided us with just a glimpse into the significant scale of the level of abuse of these anonymous companies.

Whilst many of these opaque companies are located in offshore jurisdictions across the globe, anonymous companies also exist right here within the UK.

This extract gives a sense why opaque corporate ownership is a license to steal, at least from the taxman. And before you assume the US is more buttoned down than the financial pirates of the UK, our Wild West offers the Wyoming Limited Liability Company, which can have anonymous owners.

Davis Polk explained what is at stake in the proposed rule. Note that the great unwashed public cannot get access to this registry information, only government officials and financial institutions. From Davis Polk:

The proposed rule is the second step in creating a national registry of beneficial ownership information and would govern access to and the protection of information in the registry.

On December 15, 2022, the Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking that, when finalized, will establish the standards for financial institutions and government entities to access beneficial ownership information (BOI) reported to FinCEN (the Access Rule or the Proposed Rule). The Access Rule is the second of three rulemakings implementing the Corporate Transparency Act (CTA), a statute intended to enhance transparency in the ownership of corporate entities in the United States through the creation of a national registry of BOI (the Registry). As described in our recent client update, on September 30, 2022, FinCEN published the final Beneficial Ownership Information Reporting Rule (the BOI Reporting Rule), which will require certain legal entities to submit to FinCEN a report containing information related to the beneficial owner and company applicant information of the reporting company. The Access Rule will govern access to and safeguarding of BOI submitted to FinCEN pursuant to the BOI Reporting Rule. The third and final rulemaking will make conforming amendments to the beneficial ownership requirements of FinCEN’s existing Customer Due Diligence (CDD) Rule.1

Under the Access Rule, FinCEN will only permit certain government entities and financial institutions to access BOI, which include (1) Federal, State, local and Tribal officials for national security, law enforcement, and intelligence activities, as well as certain foreign law enforcement, judicial, and government entities; (2) Federal functional regulators acting in a supervisory capacity; (3) and financial institutions subject to the CDD Rule’s beneficial ownership requirements. The Access Rule also provides a detailed framework for ensuring that BOI is subject to cyber security controls, confidentiality protections, and oversight measures. Finally, the Access Rule also proposes amendments to the BOI Reporting Rule regarding the use of FinCEN identifiers.

While the Access Rule provides insight as to how FinCEN intends to administer the Registry, important questions and issues remain. For example, it is not clear the extent to which banks and other financial institutions are expected or required to use the Registry or may (or must) continue to rely on current CDD procedures. Moreover, the Access Rule only authorizes “covered financial institutions” to access BOI, meaning cryptocurrency companies and other entities registered as money service businesses (MSBs) will not have access to BOI despite the anti-money laundering (AML) and other illicit finance risks they face. Finally, FinCEN has stated that it continues to face resource constraints in developing and deploying the Registry, and there are many areas that will need additional investment.

As you can see in the missive below, Occupy the SEC is bothered by the very premise that beneficial owners of companies are deemed to be entitled to much greater protection of their information than ordinary citizens are, although it concedes that that premise is enshrined in the Orwellianly-named Corporate Transparency Act. But given that sad situation, Occupy the SEC points out that the proposed rule goes even further than the law in limiting disclosures and access to information and recommends specific changes.

If this sort of finance and legal geekery is up your alley, please ping Occupy the SEC at info@occupythesec.org! They can alway use help.

00 OSEC BOI Access Letter.pdf
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  1. Ignacio

    The rules for commercial/business registry and transparency are unequal in different countries and I guess that with different rules different mechanisms have developed everywhere to hide stuff to the taxman and/or responsibilities. Public access to the registries is a feature, i believe, common in Europe and, for instance I believe that in the UK you only need internet connection to download all the data available in the registries. Then, the demon is on the kind and quality of data available in these, the rules for reporting and that thing we call “confidentiality”. Opening access to the general public is a good thing but only a minor step for transparency, IMO. In Spain, for instance you can have access to all data but you have to pay for it (for each individual company) and it is somehow cumbersome. That combination discourages the regular citizen and a business has flourished in the internet to provide access to data even more expensively than doing it for yourself.

    1. Revenant

      A recent ECJ ruling will roll back the public availability of registry data in the EU, sadly.

      US corporate registers are a joke. Our VC fund was a significant early investor in a Delaware company and we had to threaten to sue in Delaware chancery court to get any useful information about the latest funding round (and rather than spend $100k+, we ended up selling to an anonymous secondary buyer and – quite possibly a management or investor-related party – at what was likely a significant discount). And yet famous Silicon Valley law firms pretend this is reasonable behaviour and, worse, have undisclosed conflicting interests through partners’ investments in client firms which are whitewashed with blanket releases signed by investors in the investment agreements.

    2. Piotr Berman

      Is it possible for a corporate officer X to sell shares to corporation C in a tax haven that he owns? Subsequently, the public would not be informed about sales and purchases of C, while “insider transactions” are use by the public in the prediction of stock price trend. Is it a valid concern?

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