Shell-company bill drives wedge between banking, small business

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WASHINGTON — An effort to pass a bill cracking down on anonymous shell companies, which is now in its home stretch in Congress, has essentially become a proxy fight between the banking and small-business lobbies.

The bill already passed the House last week, but underwhelming GOP support leaves its Senate chances in question. Republicans are split on whether the bill gives banks needed regulatory relief or is overly burdensome to small businesses.

“When you’re in the full House or full Senate, you’re fine to provide regulatory relief when it is confined to the banking industry itself,” said Ed Mills, a policy analyst at Raymond James. “If it’s at the expense of the larger business community, that’s where you see members have pause.”

Yet backers of the legislation, which requires businesses to identify their true owners starting at incorporation, are hopeful that a Senate version can build broader support. Under the Senate bill, companies could report less often to the Financial Crimes Enforcement Network with their beneficial-ownership information.

“I think our bill even puts more small-business protections in place," Sen. Mark Warner, D-Va., said in an interview with American Banker. “For example, only requiring filing when a change of ownership takes place. … I think we have a possibility of building an even broader bipartisan coalition here in the Senate.”

The House bill, championed by Rep. Carolyn Maloney, D-N.Y., had the support of all Democrats on the House Financial Services Committee and more than a third of the Republicans on the panel. But when it hit the House floor, less than 15% of Republicans joined nearly all of the chamber's Democrats in passing the Corporate Transparency Act.

The banking industry has supported the bill because it removes financial institutions' burden of identifying the beneficial owners of their business clients. But many Republicans were turned off by new compliance burdens and privacy concerns for small businesses.

The four Democrats and four Republicans sponsoring the Senate version, the Illicit Cash Act, hope they can quell those concerns. While the House bill would impose an annual disclosure requirement on small businesses, the Senate version would only require businesses to report beneficial-ownership information when a change of ownership takes place.

Banking industry groups hope that that change will help build broader support in the Senate, where a 60-vote threshold is required to move legislation without a filibuster.

“One of the issues that was cited was around the annual updating of information,” said James Ballentine, executive vice president for political affairs and congressional relations at the American Bankers Association. “The Senate version of the bill is already introduced, so that would have to be addressed [only if ownership] changes are made.”

Fincen issued a final rule in 2016 requiring banks to identify and verify the identity of the beneficial owners of companies opening accounts, in order to crack down on anonymous shell companies.

The Customer Due Diligence rule came with strong opposition from Republicans and the banking industry, leading members of Congress to push measures to put the burden on small businesses, rather than the banks.

But even though law enforcement has argued that the information would be useful in fighting money laundering, there are still many people in the business community and Republicans who don’t support a new beneficial-owner requirement for small businesses.

The House and Senate bills both would create a new database of businesses’ beneficial-ownership information. Access to the database would be limited to protect business owners' privacy.

“There’s a prior question in my view, which is, do we really need to get this information at all?” Sen. Pat Toomey, R-Pa., said in an interview with American Banker. “Do we not already have sufficient information for most purposes? I don't think we should accept as a given that we need to necessarily create this new obligation on the part of business.”

Even if Congress enacts a beneficial-owner bill, banks would still have to comply with Fincen's CDD rule. But Ballentine said a beneficial-ownership database at Fincen would help banks subject to the regulation.

“When someone comes into an institution for a loan, the process both for a lender and for the borrowers should be fairly expedient,” Ballentine said.

Some House Republicans attempted to add a requirement for a court-issued subpoena to be obtained in order to access the new ownership database, but Ballentine said the ABA opposed the measure because it “would certainly slow that process.”

J.W. Verret, an associate law professor at George Mason University, said he thinks many Senate Republicans will see the legislation as simply an effort for banks to pass off a compliance burden on other companies.

“This is a bill being pushed by the banking industry to outsource compliance costs to small business,” Verret said.

He added that he doesn’t think there is any law enforcement benefit to a beneficial-ownership requirement since there is nothing to stop criminals from lying in the disclosures.

“I don’t think either [the House or Senate bill] are going to get the support of the business community, in part because the government gets nothing in exchange for the compliance burden,” Verret said.

The National Federation of Independent Business has helped lead opposition to a new beneficial-ownership reporting requirement. Brad Close, senior vice president for public policy at the federation, said the $10,000 fines or three years of jail time for failing to comply would be unfair for small businesses.

“The fact that small-business owners could get a 10,000 fine and 3 years in jail … it just makes small-business owners’ blood boil,” Close said. “We’ve seen no indication that anyone in the Senate is interested in addressing the small-business concerns.”

But banking industry advocates say the House passage of Maloney’s bill negates the small-business argument.

“First of all, despite very prominent opposition from the small business groups, they lost on the House vote which still had 25 Republicans,” said Paul Merski, group executive vice president for congressional relations and strategy at the Independent Community Bankers of America. “Overall, that strong House vote really neutered these small-business groups’ arguments.”

Beneficial-ownership efforts have gotten a boost from the Trump administration, which said it will continue to work with Congress to improve the legislation.

“We think it’s helpful because they are taking into consideration the views of Treasury and Fincen,” Ballentine said. “They see the value of having this information. We want to keep this process moving forward and that’s exactly what happened.”

Yet Senate Banking Committee Chairman Mike Crapo, R-Idaho, has not indicated whether a committee vote will be scheduled on the Illicit Cash Act.

Sen. John Kennedy, R-La., another co-sponsor of the Illicit Cash Act, said he thinks members can address small-business concerns while removing an unnecessary burden on the banks.

“You can address" small-business burdens "by exempting very, very small businesses, but have some sort of monetary value or revenue that triggers the requirement," Kennedy told American Banker last week.

He said banks currently face substantial challenges under the Fincen rule trying to extract beneficial-ownership information from their customers.

“What are [banks] supposed to do? Hire private investigators to track down the true identity of a corporation?” Kennedy said. “I think the burden needs to be placed on the person who registers to the corporation. And if they’re found later to have lied, then they should be punished so that they won’t do it again and so that others will see that they have been punished and go ‘Oh, we better not lie.’ "

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AML KYC Regulatory relief Mark Warner Pat Toomey House Financial Services Committee Senate Banking Committee FinCEN