Geographic Targeting Orders Take Aim at Entity Secrecy, 0517 COBJ, Vol. 46 No. 5 Pg. 29

AuthorHerrick K. Lidstone, Jr. J.

46 Colo.Law. 29

Geographic Targeting Orders Take Aim at Entity Secrecy

Vol. 46, No. 5 [Page 29]

The Colorado Lawyer

May, 2017

Business Law

Herrick K. Lidstone, Jr. J.

Geographic Targeting Orders Take Aim at Entity Secrecy

This article examines government attempts to obtain information about beneficial owners of entities as a means to target money laundering and other illegal activities, with a specific focus on “Geographic Targeting Orders.”

Over the last decade, state and federal legislators have proposed a variety of beneficial ownership laws to target money laundering and other illegal activities. Recently, that effort has expanded into the real estate transaction market through “Geographic Targeting Orders” (GTOs). This term may sound ominous, especially when coupled with the federal agency in charge of issuing GTOs: the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN). What is the government doing now, and who is it targeting?

Who Are The Targeted Owners?

Business entities, such as corporations and limited liability companies, can be formed easily in a large number of states, usually at nominal cost. In Colorado, Delaware, Nevada, and even Wyoming, the organizers of an entity are not required to disclose or even keep a record of the beneficial owners of the entity. As a result, many believe that these entities are easy tools for laundering money and conducting other illegal activities. As discussed below, these issues have been raised nationally and internationally since at least the early 2000s.[1] Locally, on November 13, 2007, Denver Channel 7 television reporter John Ferrugia covered a story about the employment of undocumented immigrants and other illegal activities conducted through opaque entities, and stated that given the Colorado Secretary of State’s open entity recording system, “any person could form a corporation or limited liability company in Colorado and remain anonymous.”[2]

What are GTOs?

The Treasury Department created GTOs to address the lack of legislation in this area and enhance its enforcement efforts. GTOs are a vehicle for obtaining information about beneficial owners participating in all-cash residential real estate purchases in targeted jurisdictions.

Federal Actions Requiring Beneficial Ownership Disclosure

There have been a number of attempts in recent years to requre disclosure of beneficial ownership in various situations through legislation and by efforts of a federal task force and the Treasury Department.

Legislative Efforts to Curb Abuses

Senator Carl Levin (D-MI, 1979-2015) introduced several bills requiring disclosure of the beneficial ownership of entities, starting with S. 569 (introduced on March 11, 2009), following hearings that he and Senator Norm Coleman (R-MN, 2003-09) chaired from 2006 to 2007 on the subject. The hearings focused on the laundering of drug money through shell companies and the complete lack of disclosure of the owners of these private entities. The National Association of Secretaries of State[3] (NASS) was the target of Senator Levin’s ire in 2007 and remained so until Senator Levin’s retirement.

Beneficial ownership legislation continues to percolate in 2017. In February 2016 Representatives Carolyn Maloney (D-NY) and Peter King (R-NY) and Senators Sheldon Whitehouse (D-RI) and Diane Feinstein (D-CA) introduced H.R 4450 and S. 2489, known collectively as the Incorporation Transparency and Law Enforcement Assistance Act (ITLEAA).[4] On May 5, 2016, Treasury Secretary Jacob Lew sent a letter to Speaker of the House Paul Ryan proposing beneficial ownership legislation to Congress and supporting the pending ITLEAA legislation “to increase financial transparency in the United States and protect the integrity of the U.S. and global financial systems.”5 No similar bill has yet been introduced in the current (115th) Congress.

Also in February 2016, NASS issued a white paper, “Calling on Congress to Support Existing Federal Approaches to the Collection of Beneficial Ownership Information at No Additional Cost to Taxpayers.”6 The white paper was in opposition to ITLEAA and highlighted several existing federal approaches:

. IRS Form SS-4, which requires ownership disclosures when applying for an employer identification number;

. the required reporting of Foreign Bank and Financial Accounts; and

. U.S. Treasury Customer Due Diligence (CDD) requirements imposed on financial institutions (which were significantly amended in May 2016, as described below).

An August 2016 Reuters article explains that beneficial ownership secrecy is big business for states seeking incorporation or organization of entities, especially in Delaware.[7] The article notes that in “2009, the Department of Justice, U.S. Immigration and Customs Enforcement and the Manhattan District Attorney’s office each testified to a Senate committee that corporate secrecy was a growing problem and impeding law enforcement.” By May 2009, however, Delaware Secretary of State Jeffrey Bullock “had hired Washington lobbying firm Peck Madigan Jones to sway lawmakers and administration officials against Levin’s bill.” The article points out the importance of entity incorporation/organization in Delaware:

Delaware, meanwhile, is doing much better. Since Bullock started his job, the number of companies registered in Delaware has jumped 34 percent, to 1,181,000 as of last year. Revenue from the state’s corporations unit surpassed the $1 billion mark for the first time in 2015. In 2010, the state budget deficit was $800 million; as of this July [2016], it was zero. Rising fee income from registrations, which surged during Bullock’s tenure, helped plug the gap.

International Financial Action Task Force

While ITLEAA has yet to emerge from the House Committee on Financial Services, the Financial Action Task Force (FATF) has declared the United States noncompliant in beneficial ownership disclosure obligations, which are obligations that the FATF believes are essential “to prevent the misuse of corporate vehicles for the purpose of money laundering, terrorist financing and other illicit purposes.”8 Currently, the FATF comprises about 35 member countries and an international, inter-governmental body established in 1989 “to set standards and promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and other related threats.”

The August 2016 Reuters article referenced above states that Delaware Secretary of State Bullock co-wrote a September 16, 2011 letter to the FATF on behalf of...

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