What’s Behind NYC’s Push for a Public Ownership Database?

The New York Assembly and Senate passed the LLC Transparency Act (Senate Bill S995B) on 20^th June 2023 for which the proposed bill, if signed into law, aims to create the first publicly accessible database of beneficial owners in the United States. Unlike the federal plan, which limits access to law enforcement and financial institutions, New York's version would make the personal details of corporate beneficial owners public. This move is intended to combat issues related to anonymous shell companies being used for various illicit activities such as money laundering, tax evasion, and supporting criminal organisations.

LLC Transparency Act vs Corporate Transparency Act

At the federal level, the Corporate Transparency Act (Senate Bill S8439B) already exists to prevent use of anonymous shell companies for illegal activities, however the LLC Transparency Act differs in that it is specific to the state of New York and only affects limited liability companies - whereas the Corporate Transparency Act covers nearly all types of business entities. Another key difference is that the LLC Transparency Act legislation would require a publicly-available database to be maintained by the New York secretary of state containing details about beneficial owners of LLCs formed in New York as well as foreign LLCs qualified to do business in New York. Both will come into effect on 1^st January 2024.

Implications of the LLC Transparency Act

The LLC Transparency Act would require the New York Department of State to collect information about individuals who own 25 percent or more of any limited liability company formed in New York or operating within the state. Entities formed before the effective date as well as out-of-state entities already conducting business in New York would have until 1^st January 2025 to provide their ownership details. The information would be published on an accessible database alongside the names of the entities.

Prevention of financial crime

The roots of this legislation can be traced back to efforts to reveal the identities of beneficial owners of companies doing business in New York increasing transparency and accountability whilst preventing money laundering, fraud, terrorism and other illegal practices.

A trend develops as California introduces a similar bill

A similar bill modeled after the federal Corporate Transparency Act has also emerged in California, which would require out-of-state LLCs to disclose ownership details to the Secretary of State when registering. This demonstrates a broader trend towards greater transparency in corporate ownership across different states.

Challenges

However, the Act is not without its controversies and potential challenges. Critics, particularly in the real estate industry, argue that it could create redundant databases susceptible to hacking and impose undue costs on New York businesses. Moreover, unlike the federal Corporate Transparency Act, the LLC Transparency Act lacks a comparable defense against legal challenges related to individual privacy rights.

Another concern is the Act's enforcement mechanism, which includes a $250 fine for LLCs that fail to disclose their beneficial owners within two years. Critics suggest that this fine might be seen as a minor cost by entities that choose to ignore the requirement.

Furthermore, the Act's applicability is limited to LLCs, whereas the federal plan covers a broader range of legal entities. Whilst there's potential to expand the Act's coverage, it primarily targets LLCs, which are often at the center of the issue of anonymous shell companies.

Takeaways

The passage of the LLC Transparency Act in New York and the emergence of similar legislation in California signify a growing effort to address the issues posed by anonymous shell companies and promote transparency in corporate ownership. However, the Act's potential impact on businesses, its susceptibility to legal challenges, and its effectiveness in curbing illicit financial activities remain subjects of debate and scrutiny.

How Delta Capita can help

Delta Capita has a Policy team which can provide reviews on clients' AML policies to ensure compliance with the latest regulations, provide process and procedure reviews to optimize the clients' operating models and develop the necessary documentation​. To find out more speak to one of our experts, contact us today.

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