I sometimes run across the question, “What is a shell company?” You hear the term shell company, or sometimes shell corporation, used all the time on police TV shows.
The police captain walks into the squad room. “What’s the latest on the murder investigation?” he asks. The nerdy-looking policeman at a computer screen says, “We tracked them to a building on the 100 block of Pulaski Street, but we can’t tell who owns the place because it’s owned by a shell company.”
But despite its ubiquity on TV squad rooms everywhere, few people actually know what a shell company is.
Definition of “Shell Company”
You might be surprised to learn that “shell company” is not a real legal term and has no standard legal definition. In common usage, a shell company, or shell corporation, is any legal entity whose ownership is not apparent from the face of public documents about the company.
You might also be surprised to learn that most of the 30 million companies subject to the Corporate Transparency Act are themselves shell companies, because U.S. corporate practice (until now) has allowed most owners of private companies and limited liability companies to remain completely anonymous.
U.S. Companies Are Anonymous
Creating a corporation or limited liability company in most states is easy and does not require that the founders or initial owners identify themselves publicly.
In most states, you can form a corporation or LLC by filing articles of incorporation (for a corporation) or articles of organization (for an LLC) with the secretary of state. The articles will identify the entity’s legal name and a few other legal details and will be signed by an individual (usually called the “incorporator” or the “organizer”). The incorporator or organizer is usually a lawyer or paralegal who is signing and filing the document on behalf of the client.
Many states require corporations and LLCs to identify their directors (or managers, for an LLC) in a subsequent annual report. While this information is technically mandatory, the secretary of state almost never inquires and it is possible to list only one person’s name (or to make up a fake name if you like). Doing so isusually illegal under state law, but almost never prosecuted.
As a result, if you want to own property through a corporation or LLC that leaves your name out of it you can often get away with it without too much effort.
Shell Companies Are Often Abused for Illegal Purposes
Congress cracked down on shell companies through the Corporate Transparency Act because of the ways that shell companies have been used for illegal purposes.
Crime television sometimes glosses over the importance of money laundering, but this illegal practice has been called the “lifeblood of organized crime.” America’s most famous gangster, Al Capone, was not sent to prison for murder or racketeering, but rather because he failed to pay his taxes. If you are engaged in illegal activity and have piles of money and significant assets but no legitimate means with which to explain your wealth, law enforcement can use your wealth against you, arguing that it is evidence of your illegal actions.
Following Al Capone’s example, organized crime for decades has sought to hide its illicit proceeds by “laundering” money through apparently legitimate businesses. (Fans of the TV program “Breaking Bad” will remember how the protagonist bought a car wash for the purpose of money laundering. He deposited the proceeds of his illegal drug sales into the business, paid taxes on those funds, and then had seemingly legitimate post-tax income he could spend.)
One of the chief methods of money laundering is a technique known as “daisy chaining.” In a daisy chain, a money launderer creates several shell companies, opening multiple bank accounts and transferring cash from one anonymous shell company’s bank account to another. When the transfers are completed, organized crime can dissolve the shell companies, leaving little evidence behind as to their true owners.
Money Laundering is a Big Program and Shell Companies Are Part of It
Some investigative reporters have written that the U.S. is the global leader in money laundering, largely as a consequence of shell companies made possible by corporate anonymity.
Some have estimated that money laundering on a global basis accounts for 2-5% of the global gross domestic product, or roughly $800 billion per year.
Money laundering is not only a facet of the illegal drug trade. Money laundering also plays a role in facilitating other illegal activity, including human trafficking, illegal weapons sales, and terrorism.
Most European states passed anti money laundering regulations and banned the practice of anonymous shell companies more than a decade ago, but it was not until 2020 that the U.S. legislature caught up.
Shell Companies Also Impede Sanctions Enforcement
The Russian invasion of Ukraine in 2022 also shone a new light on the problem of shell companies.
After the Russian invasion, the U.S. government tried to impose sanctions on Russian oligarchs who supported Putin’s regime. High-ranking Kremlin officials and wealthy Russians who supported Putin were put on sanctions lists and the U.S. government tried to block or seize wealth transfers by sanctioned individuals.
Sanctioned individuals who were able to hide their wealth through shell companies, however, were able to evade sanctions and undermined U.S. efforts to isolate supporters of the Russian war effort.
The Corporate Transparency Act Ends Corporate Anonymity
The Corporate Transparency Act is changing this long-standing rule of U.S. corporate practice. Congress passed the Corporate Transparency Act in December 2020 specifically to end the practice of corporate anonymity.
When the CTA is implemented on January 1, 2024, nearly every U.S. corporation and LLC will need to file a beneficial ownership report that discloses the identity of its owners.
FinCEN—the Financial Crimes Enforcement Network of the U.S. Treasury—adopted a final rule on beneficial ownership reporting on September 30, 2022 that establishes January 1, 2024 as the implementation date for this new law.
The final rule names 23 categories of companies that are exempt from CTA reporting.
Non-exempt companies that are required to file a report with FinCEN will need to report the following five pieces of information for each beneficial owner:
- Full legal name
- Date of birth
- Current residential street address
- A unique identifying number (such as an unexpired passport or driver’s license)
- An image of the document from which the unique identifying number was obtained
Because these five types of information are personal, and are ordinarily kept confidential, reporting companies may have difficulty requiring their beneficial owners to provide this information.
The CTA Compliance Hub Helps Business Owners Keep Their CTA Data Safe
The FinCEN Report Company’s CTA Compliance Hub(™) system can help. Through the CTA Compliance Hub system, each individual can create their own secure data locker that will contain their personal data in encrypted format. The CTA Compliance Hub system allows the administrator of the company account to secure permission from each beneficial owner to include their data in the company’s beneficial ownership report. If the previously-reported data from any beneficial owner changes, the CTA Compliance Hub will alert the administrator of the company account to file an amendment with FinCEN to report that change, as the CTA requires.
The Corporate Transparency Act does not require companies to utilize the filing services provided by The FinCEN Report Company’s patent-pending CTA Compliance Hub solution, but it is hard to imagine how a company’s senior officers will keep confidential the information provided by the company’s beneficial owners, without implementing a solution like this one.
Conclusion: The Coming End of Shell Companies
After the CTA is implemented on January 1, 2024, companies will need to file a first beneficial ownership report with FinCEN within 30 days after they are formed.
As a result, the police drama of the future will look and sound a little different.
Instead of throwing up their hands when the “bad guys” have holed-up in a building that is owned by a shell company, the nerdy-looking policeman in the squad room will be able to tell his captain that he has cracked the case, because he can identify the beneficial owners of the building by looking up their CTA beneficial ownership reports through FinCEN.
