In late September, the U.S. Treasury finalized a rule that will require millions of small companies to disclose more information about their owners. This is Treasury’s first move to implement the Corporate Transparency Act (CTA), enacted by Congress over President Trump’s veto in 2021. Designed to combat illicit finance, the new database catches the United States up with the United Kingdom and other global allies that already maintain registers of corporate owners.
The 2016 Panama Papers and other massive leaks revealed corruption by political and business elites worldwide — often using “shell companies” to shield the identity of owners. But governments worldwide have been slow to change laws that allow companies to operate with anonymity. So how did proponents of disclosure finally succeed in the United States? My research shows that “strange coalitions” of industry groups such as the Bank Policy Institute and advocacy groups like the FACT Coalition are central in securing greater corporate transparency in the United States and beyond.
The new law targets “anonymous shell companies”
When someone sets up a company in the United States, they don’t need to identify the person who actually owns it or who is in charge of its day-to-day operations. In fact, in some cases obtaining a library card might require divulging more information than setting up a U.S. company. Anonymous companies operate that way for a large number of reasons — but the main concern is that U.S.-registered companies have been used to hide illegally obtained assets from corruption, human and drug trafficking, terrorist financing and many other illicit activities.
Those looking to evade detection will often layer companies on top of one another to make it harder to identify the true owner. Such “anonymous shell companies” do no real business other than allowing “illicit actors” to conceal their true identity. According to Treasury, the CTA will “pierce the corporate veil” and require reporting the real person who owns a company, not just the shell company that claims ownership.
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Scandals don’t always increase transparency
Political science researchers as well as journalists point to information leaks such as the Panama Papers and ensuing scandals as the major push toward greater corporate transparency. The “John Doe” whistleblower behind the Panama Papers recently noted they were proud of the major policy changes resulting from this data leak. And BuzzFeed has repeatedly claimed credit for ensuring passage of the CTA after reporting on global banking misconduct in the 2020 FinCen Files.
Yet long before these scandals, lawmakers knew that anonymous shell companies posed a number of challenges. A version of the CTA was first proposed by Sens. Barack Obama (D-Ill.), Carl Levin (D-Mich.) and Norm Coleman (R-Minn.) in May 2008. The measure was introduced in every session of Congress until it passed both houses in December 2020.
A “strange coalition” backed the CTA
Enacting the CTA took more than the global outrage over these financial scandals. First, a small group of advocates prioritized ownership transparency as one of their core issues. The Financial Accountability and Corporate Transparency (FACT) Coalition, founded in 2011, spent nearly a decade producing investigative reports, lobbying legislators and building a coalition with interest groups such as Friends of the Earth and Polaris. FACT’s strategy was to highlight how anonymous companies enable and perpetuate the harms these groups care about, such as environmental degradation and human trafficking. FACT’s advocacy kept ownership transparency on Congress’s agenda and contributed to building bipartisan consensus around change.
Second, several key business interest groups became supportive of increasing ownership transparency. U.S. anti-money laundering (AML) laws after 9/11 only required some industries, like banks and credit unions, to collect limited customer information to reduce the risk of illicit financial dealings. Other industries, like hedge funds and private equity firms, successfully lobbied to remain exempt.
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Further changes in May 2016 required AML-regulated industries to start collecting ownership information. To reduce their compliance costs, banking and some real estate industry groups started to support greater ownership transparency. They recognized that having the U.S. Treasury collect and share ownership information would cut compliance costs considerably. What’s more, some service providers such as Corporation Service Company also sought to ensure the rules apply to all professions that set up companies, to level the playing field across industries.
This increased lobbying for ownership transparency among some industry groups also led the FACT Coalition to ally with groups like the Bank Policy Institute to push Congress to adopt the CTA. Together, this “strange coalition” prevented Congress from passing an AML reform bill in 2018 that did not include increasing ownership transparency. Then, in 2021, the coalition managed to insert the CTA into the “must-pass” 2021 National Defense Authorization Act.
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Will the registry work?
Transparency advocates and the U.S. Treasury hope the ownership register will lessen the impacts of illicit finance in the United States. But it’s too early to tell.
Recent research by Matt Collin, Florian Hollenbach and David Szakonyi examined whether increasing ownership transparency around real estate purchases changed the financial behavior of those looking to park corrupt and criminal assets via real estate transactions. They found that requiring full disclosure of purchasers who buy homes with all cash in some parts of the United States did not change the incidence of all-cash purchases.
Stronger oversight and enforcement mechanisms may help. Collin, Hollenbach and Szakonyi argue a lack of overt enforcement of ownership reporting requirements is likely why they observed no behavioral change. Their argument mirrors other recent research by Daniel Honig, Ranjit Lall and Bradley Parks, who find that transparency improves development aid project outcomes when enforcement mechanisms are in place — such as an appeals process for denied information access requests.
With its new rules in place, the U.S. Treasury has some new tools. Treasury can fine noncompliers up to $10,000 and threaten those who violate the law with up to two years in prison. But requiring disclosure of company owners is just the first step. How well Treasury enforces these new rules — and what level of resources the U.S. government directs toward compliance and enforcement — will be the all-important next steps.
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Elizabeth (Bit) Meehan is a PhD candidate at the George Washington University and a National Science Foundation Graduate Research Fellow. This article draws from her dissertation research on the Political Origins of Corporate Transparency. Follow her on Twitter @bitmeehan.