Slowly but surely, one by one, traditional secrecy jurisdictions like Panama, Cayman Islands, and British Virgin Islands have succumbed to international criticism regarding the anonymity that the laws of these countries provide to citizens all over the world. Many destinations once known for providing privacy to individuals forming offshore companies have caved in the face of pressure stemming from negative media coverage, taking away some of the rights they once protected.
While others have acquiesced, under the infallible justification of countering terrorist financing and money laundering, many look to the US as a stronghold of privacy. Most states in the US have no ultimate beneficial ownership requirements, making it one of the most attractive places to form corporations like Limited Liability Companies and US trusts. Nearly two million business entities are formed in the US each year for individuals all over the world who are seeking refuge from corrupt regimes, security for their families, and the universal right of privacy.
But if you’ve been watching closely, as we have, soon the US will follow suit and change its own laws, depriving Americans, as well as foreigners who want to incorporate in the US, of these rights. You need not look abroad to see the signs that the US has been cracking under pressure for more transparency. American politicians themselves are crusading against privacy rights in the US, within an ingenious theme of combating the ills of society: money laundering, terrorist financing, and drug, arms and human trafficking. It’s not a tough sell to both sides of the American government, with Democrats and Republicans alike condemning these horrific criminal practices. The product of these good intentions, however, has been a series of well-timed regulatory changes that should be a warning bell to anyone who is thinking of putting their own assets in the US. Take a look at this timeline if you’re not convinced yet that the US is changing its stance on privacy.
2010: Enter the Foreign Account Tax Compliance Act. This federal law enacted in 2010 and implemented in 2014 was a strong move by the US against the privacy of its own citizens by forging intergovernmental agreements (IGAs) with 128 countries and even more financial institutions, forcing governments and banks to comply under threat of a 30% withholding tax. Under FATCA, all non-US foreign financial institutions file yearly reports on US persons, including those living abroad with information on their financial accounts. While the US itself has not provided reciprocity to the reporting countries of FATCA, pressure from IGA signatories, the G20, and the OECD will soon force the US into the same regulatory burden it imposed on the rest of the world.
2015: Identification of natural persons in certain geographic areas, which only keeps expanding. The Financial Crimes Enforcement Network (FinCEN), part of the US Department of the Treasury, rolled out “Geographic Targeting Orders” on six major metropolitan areas since 2015, which require US title insurers to identify the natural persons behind shell companies that are used to pay all cash for high-end real estate. This increased scrutiny on shell companies has only heightened with recent coverage of luxury real estate being utilized for money laundering. The GTO program is likely to continue.
2016: In order to tax, jurisdictions must first identify what assets you have and where they are. The US has no doubt relished being the secrecy haven that international clients seek, with billions of dollars flowing inbound as clients enjoyed privacy benefits unavailable to them elsewhere. But foreign persons who operate in the US shouldn’t be so comfortable.
In 2016, the IRS published new rules that treat foreign-owned US disregarded entities as domestic corporations for the purposes of filing Form 5472. This form requires reporting of fund flows between the foreign owner and the reporting corporation. For the first time in history, LLCs that are owned by foreign persons will be required to file Form 5472 in order to obtain a tax identification number,which requires the disclosure of a related party. If they don’t file the 5472 or pay a penalty of $10,000. So if these foreign owned entities are not taxable, why collect information? The pattern governments use in their tributary systems usually goes like this: report, collect, and tax…We’re in the collect phase.
2017: If you’re still not worried about the US as a jurisdiction for your financial holdings, this news may push you over the edge. The True Incorporation Transparency for Law Enforcement (TITLE) Act (S. 1454), accompanied by its sister bill in the House called the Corporate Transparency Act (HR 3089), are bipartisan pieces of legislation that will be the final fissure in the US framework for privacy. The TITLE act is stronger than any other piece of legislation drafted for the purposes of unveiling ultimate beneficial owners, and has widespread support from both Republicans and Democrats, as well as financial institutions and law enforcement in the US. The act would require states to identify beneficial owners of companies, including maintaining, updating and sharing information on ownership with federal agencies, financial institutions, and under any civil, criminal or administrative subpoena. Anyone who violates this requirement will be liable to the US government for civil and criminal penalties up to $1 million and imprisonment for up to three years.
The TITLE act shows that the winds of change could knock over the US pillar of privacy once and for all. With ultimate beneficial ownership reporting requirements, forming corporations in the US will serve no purpose other than telling another government, one that has its own issues with corruption and conflict of interest, where your money is.
2018 and beyond: And if all the internal pressure from within the US doesn’t do the trick to crack privacy wide open, then the nuclear option still remains on the table. The OECD could put the US on the blacklist, forcing US financial institutions to share the information of foreign clients with 110 countries that are signatories to the OECD’s Common Reporting Standards (CRS), or be subject to a 30% withholding tax. The irony is that the same tool of coercion used by the US government to force foreign financial institutions into submission aka FATCA, will be the same tool that foreign governments use to force US financial institutions into submission.