The Corporate Transparency Act in the Crosshairs (Dekleptocracy Report #35, 7 February 2025)

THE DEKLEPTOCRACY REPORT

Issue #35 February 7, 2024

BOTTOM LINE UP FRONT:

In this issue, we look at recent concerted attempts to dismantle the Corporate Transparency Act (CTA) and the odyssey of transparency campaigners to put in place a single registry of the beneficial owners of American companies. Will it, currently blocked by the courts, be eliminated before it ever sees the light of day? As operatives from Elon Musk’s Department of Government Efficiency rove across Washington – provoking hair-raising questions (Who are they? Do they have security clearances? Are they feeding the financial and healthcare information about 330 million Americans into cloud-based AI?) – it feels like there are fires everywhere. However, we argue that it is precisely now that we should not fall prey to the imperatives of a crisis and allow decades of work to make America’s financial markets fairer and more transparent to be undone.

THE CORPORATE TRANSPARENCY ACT IN THE CROSSHAIRS

It’s just over two weeks into the second Trump presidency, and the administration’s agents have pursued their agenda with an iconoclastic fervor, a mix of ideological score settling and the Silicon Valley move-fast-and-break things ethos. The first target was America’s aid workers: a few nights ago, after Musk lined up his sights on  the United States Agency for International Development (USAID), the website of the 64-year-old hallmark of JFK-era optimism was reduced to a single message announcing that staff would be placed on administrative leave. As of writing, operatives (“cocksure young engineers” in the words of the Guardian) from the Department of Government Efficiency (DOGE) are inside the Treasury’s payment system for Social Security checks and federal salaries and appear bent on rearranging things. Then there are reports that DOGE operatives have accessed Medicaid and Medicare data. With all this, the latest moves in Congress to kill the Corporate Transparency Act (CTA) and the long-awaited project of launching a federal registry of the beneficial owners of American companies might seem like the least of our worries, assuming you are one of its defenders. But we argue that Americans should not sit still amid the torpedoing of the CTA, precisely because it is part of a concerted attempt to diminish America’s role as the policeman of global financial markets – a brazen attempt to undo decades of transparency efforts under the guise of protecting small businesses that risks making the vast sea of our markets a haven for dirty money from home and abroad.

For Musk’s supporters, what is happening today is the liberation of business from regulation and the bracing downsizing of Treasury bureaucrats. Along with DOGE’s efforts to overhaul the very electronic infrastructure of the government, there is the parallel if more conventional implementation of Project 2025 policies across the 15 executive departments. This is also radical, but may charitably be seen as reflecting an abiding and genuine belief among conservatives that federal oversight imperils the sovereignty of the individual and the personhood of the corporation. Among their objectives, the authors of Plan 2025 – the Heritage Foundation, which trains the current administration’s political officers – envisage transforming the Treasury Department by curtailing most of its enforcement functions, which it sees as both wasteful and intrusive. It seeks to reverse a decades-long trend towards greater oversight of banking, equity and debt markets.

This culture of oversight is exemplified by legislation like the Sarbanes Oxley Act (SOX) and the CTA. Congress drafted SOX in 2001 and passed it in 2002 following a series of accounting scandals – most memorably at Enron – that increased legal responsibility for executives and toughened the requirements for auditors. For those old enough to remember, Congress passed SOX amid cries of government overreach and burdens on smaller firms. It had significant repercussions on US markets. A University of Florida study found that the number of foreign companies going public in the US through initial public offerings – using instruments known as American Depositary Receipts (ADRs) as proxies for foreign shares – plunged from 82 in 2000 to nine in 2001 and five in 2002, not recovering previous levels until 2021. Anecdotally, at least, SOX played a significant role in this as executives from Chinese and Russian companies, for example, were leery of possible US criminal liability for signing off their accounts. Many chose London and its lighter regulatory touch instead. More broadly,  the US took several steps over the last 25 years to make its capital markets and banking sector far less welcome to foreign money of uncertain provenance. At the same time, agencies have toughened scrutiny of US citizens’ financial activity abroad, through heightened enforcement of long-standing requirements requiring disclosure of foreign bank accounts and securities portfolios. It has made hedge fund partners grumble but most observers agree that according to most metrics, US financial markets have seen greater transparency and investor confidence than at any time in the past and grown to new heights.

Creating a beneficial register

Enter the CTA. While it would be a mistake to see the last 25 years of market regulation as one of a steady journey to the sunny uplands – a loophole introduced under George W. Bush, for example, allows US banks to sell “unsponsored ADRs” of foreign companies virtually without any reporting requirements whatsoever –  the US has been a global leader on many of these issues. It has also pushed other jurisdictions like the UK and EU countries to improve securities regulations and tackle thorny issues like crypto-assets. One area where the US has conspicuously lagged – and has felt international pressure from bodies like the Financial Action Task Force to improve – has been disclosure of the beneficial ownership of limited liability and other private companies, allowing shell companies to thrive in areas like finance and real estate. Legislative proposals to address this emerged on the federal level in the 2000s, eventually coalescing into the CTA, as well as in several states, including New York, the country’s banking hub.

The CTA, which mandates the creation of a national register of beneficial owners of American companies, as part of the Anti-Money Laundering Act of 2020 (AMLA), passed after multiple attempts as part of the much broader 2021 National Defense Authorization Act (NDAA in this alphabet soup), after Congress overrode President Trump’s veto of the overall NDAA. As the Director of Advocacy at Transparency International, Scott Greytak, told the Wall Street Journal at the time: “We have absolutely no reason to think that the Trump administration has changed its strong support of the CTA.” Of course, GOP support did not last, and groups like the Heritage Foundation soon began work on either repealing the CTA or neutering it in the courts, deriding it as onerous for business and conjuring the image of agents from the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN), the agency in charge of the registry, arresting small town business owners for making a mistake on the form.

Is it onerous? Under the CTA, many corporations, LLCs and similar entities are required to report personal identifying information – such as name, date of birth, address and a form of government-issued identification – for each person who directly or indirectly exercises “substantial control” over the entity or who owns or controls at least 25% of its equity. There are indeed penalties for non-compliance: Violations of the CTA may incur civil fines of up to US$500 for each day a violation continues and criminal penalties of up to US$10,000 or two years’ imprisonment for willfully providing false or incomplete information. Yet many would argue that the CTA doesn’t go far enough. Crucially, it is not public, unlike, say, UK Companies House. There are many exceptions – at least 23 organization types, many related to finance, are exempted. It is meant for the Treasury and other enforcement agencies. Financial institutions must get consent to use the information for due diligence. And like the British registry, it is overwhelmingly reliant on self-reporting.

Tommy Tuberville’s rebel stand

Whatever its shortcomings, most proponents, ranging across the political spectrum from law enforcement to the American Bar Association and transparency groups, see that the registry reduces the potential for anonymous shell companies to be used for money laundering, terrorist financing and other illicit activities. They also note that stronger beneficial ownership disclosure will help to align the US with international anti-money laundering standards. Reasonable critics, such as certain small business coalitions and privacy advocates, contend that the CTA imposes disproportionate reporting burdens on smaller entities and raises concerns about data security and confidentiality.

But between the passage of the NDAA and the company reporting deadline of the beginning of January 2025, conservatives decided as a group that the CTA and its registry must die. Legal challenges have been brought in federal court, claiming constitutional and practical concerns about requiring extensive reporting of personal data. Efforts to halt or limit enforcement at the Supreme Court level are also underway, although final outcomes remain uncertain. In December 2024, the editorial board of the Wall Street Journal called for the repeal of the CTA, rather than waiting on potential court action, calling a Texas federal court’s nationwide injunction “an opportunity” for Trump and the GOP “to remove this looming burden from millions of small businesses”. And such a repeal may be coming.  Senator Tommy Tuberville (R-Alabama) and Congressman Warren Davidson (R-Ohio) reintroduced legislation in January that they had initially submitted in the spring of 2024 seeking to repeal the CTA. Coverage has cited the large number of co-sponsors in this second attempt to pass the bills – as of 29 January, 25 senators and 86 house members, all Republicans.

Tuberville claims the “big brother” CTA is “crushing” small business. In the meantime, DOGE is rampaging through the US government and giving operatives with uncertain employment status access to Americans’ most private health and financial data, as well as social security numbers and, potentially, classified national security secrets. Taking a step back, it will likely take months, if not years, to understand exactly what took place in Washington during the first months of the second Trump presidency and the 119th Congress. Notably, several commentators in recent days have cited parallels with what is happening now the dismantling of post-socialist, democratic institutions in Viktor Orbán’s Hungary after he became prime minister in 2010. The truth is probably a far stranger American goulash. We argue that the repeal of the CTA should not be overlooked in the din of outrage about Elon Musk’s campaign to proverbially declare Year Zero and send government workers to the rice paddies. Doing so would send a devastating message to the world that we are surrendering the decades-long slogging battle to make America’s banks, financial markets and real estate markets – which already attract more corrupt money than the rest of the world put together because of their size, sophistication and opacity – a level playing field for everyone. We also fear that more radical ‘liberalization’ might follow, including going after SOX or even the Foreign Corrupt Practices Act, enforcement of which Trump’s new Attorney General, Pam Bondi, apparently intends to curtail. It is precisely the small businesses of America who will lose over the long run because our institutions and transparency are what protects them from actors who don’t play by the rules.

The Dekleptocracy Project (DKP) is a 501(c)(3) following the authoritarian money from Virginia. We're on a mission to show how existing levers of accountability can protect democracy and prevent authoritarians, their networks, and enablers from exploiting or circumventing the US system. As always, please sign up and forward this newsletter.