New York Set To Write US History With Public Beneficial Ownership Register

August 29, 2023
While US federal efforts are stuttering, New York is moving fast ahead with its own beneficial ownership register proposal that goes far beyond its federal counterpart.

  • New York bill modelled after federal law but with key differences
  • Bill set to create first register but other states are catching up too

While US federal efforts are stuttering, New York is moving fast ahead with its own beneficial ownership register proposal that goes far beyond its federal counterpart.

New York is set to pass a bill that requires a limited liability company (LLC) to disclose its beneficial owners upon formation or qualification to do business in New York.

The legislation defines beneficial owners as those who substantially control a company or have at least a 25 percent stake in it. Those companies that fail to report during a two-year period will be declared delinquent and will have to pay a $250 penalty.

The bill, dubbed the LLC Transparency Act, passed the state Assembly and Senate in June.

According to ICIJ, the investigative journalists behind the Pandora Papers and strong advocates of corporate transparency efforts, New York Governor Kathy Hochul is “on the cusp of signing off” on the bill.

When legislators voted in favour of the proposal, Representative Emily Gallagher, prime sponsor of the bill, called it a “history”.

At the end of 2021, the Pandora Papers revealed that the US had become a hotspot for money laundering and tax evasion and is the second-most secretive financial jurisdiction in the world, after the Cayman Islands.

“Ironically, while the federal government has insisted on sanctions against kleptocrats abroad, policymakers have allowed our own borders to become the safest place to evade those sanctions,” Gallagher wrote in an op-ed last year.

According to the legislator, “complicated indirect ownership structures and shell companies like LLCs …can be organized with less personal information than it takes to get a library card”.

Under current laws, to set up an LLC, the entity only has to provide an official business name, the county where the business will operate and a post office box.

“Passing the LLC Transparency Act will illustrate that New York is willing to lead on this issue and will not tolerate being complicit in these crimes,” she added.

Similar, but with two key differences

The LLC Transparency Act was modelled on the federal Corporate Transparency Act (CTA) which Congress passed in the wake of the Pandora Papers revelations at the tail end of 2020.

As one of its key provisions, the CTA mandated the Financial Crimes Enforcement Network (FinCEN) to implement and maintain a federal beneficial ownership register for US companies seeking to use the US financial system.

FinCEN was required to do so by adopting rules defining which data has to be shared, who can access the register and revising existing financial institution customer due diligence requirements in light of the new direct reporting of beneficial ownership information.

Last September, FinCEN adopted the first rule on the reporting requirements and, in December, it published a draft rule for data access.

However, the work has faced several delays amid resource struggles and heavy lobbying by banks against the proposals.

In its February submission to the consultation, the American Bankers Association (ABA) called the access rule “fatally flawed”, which has “limited, if any,” value to banks because it narrows down access to the register too much.

For instance, banks would not be able to run open-ended queries and money service businesses would be barred from accessing the database.

This stands in stark contrast with the New York bill, which would make the database publicly searchable.

However, the LLC Transparency Act would be more limited than the federal requirement in terms of the scope of reporting entities.

It would require only New York-registered LLCs to report their beneficial owners, while the federal obligation applies to domestic and foreign corporations, LLCs and any entities that are registered to do business in any state by filing a document with a secretary of state.

First beneficial ownership register in the US

The LLC Transparency Act would come into effect within one year of the governor signing it into law.

This timeline indicates that New York’s database will likely be the first of its kind in the US, which means “New York is setting a new standard for transparency in the United States”, according to Gallagher.

Meanwhile, state legislators in California have also filed two similar bills this year which suggests other states might follow suit.

One of the bills would require foreign corporations registered in the state to disclose the name, address and email address of their beneficial owners. Beneficial owners are defined as those that directly or indirectly own 50 percent or more stake in a company.

The other bill, called the LLC Owner Transparency Act, would require LLCs and similar corporate entities to register the name of each person with substantial control over the entity, both upon creation and upon making required biennial filings.

Although the Financial Action Task Force began recommending that nations adopt beneficial ownership transparency laws in 2003, it took more than a decade for countries to implement such registers.

In 2016, the UK became the first country to create a publicly searchable register of beneficial owners of corporations, followed by the EU in 2018, although the latter has now had to row back.

Together with the US, there are now more than 120 countries around the world that have committed to disclosing beneficial ownership and more than 40 have already established registers, according to the Open Ownership advocacy group.

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