Skip to content

Beneficial Owners: It’s Good to be the King

August 18, 2011

A recent Reuters article reported that Senator Levin (D-MI) has reintroduced in the U.S. Senate his Incorporation Transparency and Law Enforcement Assistance Act.   The article focused on the idea that this would successfully help law enforcement combat the supposed evils of shell companies.

The act, introduced as s.1483, would require all states to collect the names, addresses and unique identifying number (i.e., passport or driver’s license) from every beneficial owner of a corporation or LLC when it is created.  Beneficial owners are defined as persons who 1) exercise substantial control over a company, or 2)
have a substantial interest in or receive substantial economic benefits from the assets of a company.   Interestingly, nominees are excluded from the definition).  A penalty of $10,000 or 3 years in prison, or both, would be imposed on those who knowingly provide false information, fail to update the information when it changes or disclose the existence of a subpoena for the information.

This act is rife with bad assumptions and the potential for unintended consequences.

In U.S. law, a beneficial owner is one who is entitled to the benefits of the property, while another person holds the legal title to it.  The obvious example is a trust, where the trustee holds the legal title to property for the benefit of the beneficiaries.  This act’s definition broadens that.  Now the CEO who instructs a subordinate to create a LLC for a specific purpose becomes a beneficial owner, even if he is never made a member of the LLC.  The manager of the LLC (basically, the CEO) would now be a beneficial owner, because he exercises substantial control.  And the employee with a huge salary, even though not an ‘owner’ in the traditional sense, might be considered a beneficial owner.  While law enforcement certainly needs a way to discover the controllers or owners of a suspect company, requiring states to collect such a broad base of information would bring over-regulation of corporations and LLCs to ridiculous levels.

Nor does this proposed law address the methods that might be used by real criminals.  How does an incorporator or state find out when someone instructs someone else to create and operate a company?  We’re back to the example of the mafia don who tells his girlfriend to set up a company through which he can launder money.  Clearly, he would be the beneficial owner.  But what are the odds that the girlfriend will report that?  Committing a crime by not doing so is probably the least of her sins at that point.  Using a false passport or driver’s license for the beneficial owner falls into the same category.  Setting up the business in violation of the law is probably small potatoes compared to what the business is being used for.

It is like panning for gold.  While looking for the occasional criminal, the net will catch up many small  businesses in over-regulation, destroying privacy and holding small business owners to an impossibly high standard of accountability.  Currently, a lot of business corporation law is a sort of ‘no harm, no foul’ type system.  Many people don’t keep adequate business records, many may unintentionally commingle funds or make other missteps.  These aren’t criminals; they are just small business people who understand their product better than the myriad laws that already govern businesses.  Should we fine them, or throw them in jail, just because their actions are coincidentally similar to the methods criminals use?  This proposed act causes more harm than good, even if its intentions are noble.

Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )


Connecting to %s

%d bloggers like this: