If, with one law, you could strike a blow against slumlords, human traffickers, fentanyl importers, tax cheats, terrorists, political corruption, kleptocrats and Russian oligarchs, would you pass that law? That’s the question New York faces in whether to pass a bill I have introduced with Sen. Brad Hoylman.
The LLC Transparency Act (A9415 / S8439) would require the disclosure of the beneficial owners of limited liability companies operating in New York. Beneficial owners are the individuals who profit from or control a corporation, asset, or legal entity, as distinct from the legal owners, which can include registered agents, nominees, or intermediaries such as trusts or other corporations. The use of complicated indirect ownership structures and shell companies like LLCs, which can be organized with less personal information than it takes to get a library card, allow a beneficial owner to profit or exercise control while remaining anonymous, a feature that has been exploited by criminals worldwide.
In 2003, the Financial Action Task Force, the international body tasked with promulgating anti-money-laundering standards, began recommending that nations adopt beneficial ownership transparency laws in order to crack down on terrorist financing and money laundering facilitated by opaque matrices of anonymous trusts and shell corporations. In 2012, the G8 nations committed to beneficial ownership transparency, which was followed by a G20 commitment in 2014.
By 2016, the United Kingdom became the first nation to adopt the gold-standard policy for beneficial ownership transparency: a publicly searchable registry of beneficial owners of corporations. The EU followed suit in 2018. As of this year, 105 countries worldwide have committed to public registries of beneficial ownership. The U.S. has not.
These policies have been prompted by the proliferation of shell corporations like LLCs. As the United States has fallen behind, it has become the second-most secretive financial jurisdiction in the world, after the Cayman Islands. The consequences of this inaction were laid bare by the release of the Pandora Papers last year, which showed the extent to which the United States had become the go-to destination for money laundering and tax evasion. Ironically, while the federal government has insisted on sanctions against kleptocrats abroad, policymakers have allowed our own borders to become the safest place to evade those sanctions. As Secretary of the Treasury Janet Yellen remarked in December, “The best place to hide and launder ill-gotten gains is actually the United States.”
The risks created by anonymous shell companies are not abstract. This lax disclosure regime has resulted in the federal government accidentally funding the Taliban through shell companies posing as Afghan contractors; sanctioned oligarchs sheltering their assets in New York while the federal government seeks to penalize them abroad; the Iranian government owning a skyscraper in downtown Manhattan; the sale of fentanyl and opioids in the United States through anonymous shell companies; the operation of 2,100 shell companies in the United States by the Chinese XPCC paramilitary organization, under sanction for human rights abuses committed against the Chinese Uyghur minority; New York-based money launderer Da Ying Sze laundering $653 million in drug money through shell companies with bank accounts in New York, New Jersey, and Pennsylvania and remitting that money to China and Hong Kong; and human traffickers hiding their identities behind shell companies organized in the United States.
In the housing market sociologist Adam Travis has documented an “LLC effect”: a statistically significant correlation between code violations and the prevalence of LLC landlords, a phenomenon documented by a 2019 Senate investigation focusing on the Hudson Valley. Anonymous LLCs also continue to facilitate campaign finance violations.
Beneficial ownership transparency is necessary for the world we live in, which is why I have introduced A9415. LLCs were invented in Wyoming in 1977 to exploit a loophole in American tax law and brought to New York in 1994. They weren’t handed to Moses on a stone tablet. They have many legitimate business uses, but none of these depend on the anonymity of their owners. Limited liability is a legal privilege conferred upon an individual by the state, and it’s eminently reasonable to ask for the disclosure of one’s identity in exchange for such a privilege.
We cannot stand idly by while oligarchs under sanctions abroad use LLCs in New York to hide their wealth or criminals traffic people and narcotics using LLCs to escape accountability. Besides helping combat corruption and crime, beneficial ownership transparency significantly eases the investigative and regulatory burdens on law enforcement, title companies and financial institutions already tasked with identifying beneficial owners as part of routine work but who hit dead-ends whenever confronted by anonymous LLCs.
The importance of corporate transparency is evidenced by the wide support corporate transparency proposals have received in Congress. The need for transparency measures is self-evident in many areas where they have already been adopted, such as with lobbying disclosures, but LLC transparency has largely escaped scrutiny.
Passing the LLC Transparency Act will illustrate that New York is willing to lead on this issue and will not tolerate being complicit in these crimes.
Assemblywoman Emily Gallagher, D-Brooklyn, represents the 50th Assembly district.