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U.S. Treasury Department and FinCEN fight against global corruption: New rule effective February 7, 2022

Many different types of companies are created each year in the United States and play an important and legitimate role in the U.S. and global economy. However, they can also be used to facilitate illegal activities, according to a statement by the Treasury Department.

Effective in early 2022, shell companies will be required to report beneficial ownership information (BOI) details (www.federalregister.gov) on who controls the company to the Treasury Department regulators. This report will be required to detect any individual using a shell company to conceal illicit funds or activities. Furthermore, both new and existing shell companies (LLC, Corporation, LLP) operating in a state in the U.S. will be required to register their real owners and investors who own or control a minimum of 25% of the entity or perform “substantial control” over the enterprise effective February 7, 2022, according to the Financial Crimes Enforcement Network (FinCEN) www.fincen.gov.

The Department of Treasury wants these transparent rules to discourage malicious individuals from setting up “shell” inactive companies to illegally launder money and evade taxable income. The establishment of clear and precise rules and procedures will provide regulators, courts and banks the ability to monitor the movement of illegal funds.

Shell companies are businesses that exist only on paper and have no office or employees but exist to hold funds and manage another entity’s transactions. These types of companies can be used unlawfully by camouflaging ownership from the public and regulators. Furthermore, shell companies can help owners achieve financial goals such as lower tax bills, hiding assets, and hiding their owner’s identity in a transaction such as in real estate.

Businesses that are operating legitimately and already disclose their controlling owners are completely exempt from the new reporting. However, the new rule requirements will help decipher those businesses that operate illegitimately. FinCEN is requiring companies to provide the company owners’ names, birthdates, addresses and other identification documents. Companies have 14 days to file the pertinent documents to FinCEN if formed after February 7, 2022, and companies created prior to the rule have one year to file the reports.

The interim FinCEN Director, Himamauli Das, stated that FinCEN is actively targeting individuals who use anonymous fake companies and other loopholes to launder the proceeds of crimes such as corruption, drug and arms trafficking, or terrorist financing.

Shell companies registered in the United States in the last few years have been exposed to reveal how corrupt politicians, terrorist groups, and drug cartels hide and launder money. Investigation reports such as the Panama Papers, Paradise Papers, and Pandora Papers detail the major leaks of data on a network of global law firms and bankers on global money laundering.

How the money laundering schemes operate:

According to the current U.S. disclosure law, international drug traffickers can virtually open a bank account in any country and pay someone to register a shell company for them in a U.S. state. The account in the country can send $10 million as an "investment" to a shell company without anyone knowing who is behind the money.

In turn, the shell company can buy a luxurious condominium for cash using $10 million. Once the shell company sells the condominium, the proceeds from the sale transaction will not appear as illegal funds to regulators or banks. The transaction now looks legitimate and can be deposited in a U.S. bank. However, under the new law, the individual submitting the document must provide FinCEN with the name and passport record of the person who actually managed the LLC in order to register the shell company. The requirement to abide by the new rule makes the possibility of money laundering using U.S. shell companies less attractive to international drug traffickers. In addition, the Treasury announced this week that it not only requires shell companies to report substantive owner information, but also plans to increase the reporting requirements for all cash real estate transactions.

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