Can The UK Teach The US How To Manage Beneficial Ownership Registers?

The US Corporate Transparency Act (CTA) came into force on 1 January 2024, introducing corporate ownership reporting requirements into the US for the first time. In the UK, a similar regulatory regime came into force in 2016, building on the existing corporate ownership register, Companies House, which had been in existence (in one form or another) since 1844.

Both regimes exist to combat money laundering, tax fraud, and related misconduct. What can the UK experience tell us about the likely impact of the US CTA?

The UK People With Significant Control (PSC) Register

In 2016, the UK introduced a register of beneficial owners of UK companies – the people of significant control register (PSC Register).^[i] The PSC Register is publicly accessible. Stakeholders who use the PSC Register include financial institutions, corporate entities, civil society, and law enforcement.

Although the PSC Register applies only to beneficial owners of UK companies, subsequent legislation now extends certain registration obligations to overseas entities. The Economic Crime (Transparency and Enforcement) Act 2022 (ECA), which came into force in March 2022, requires any overseas entity that invests in UK property to file details of beneficial ownership on a register of overseas entities.^[ii]

The purpose of the PSC Register was to “facilitate economic growth and help tackle misuse of companies”.^[iii] Its effectiveness has been limited. Stakeholders tend to identify three key deficiencies.

First, accuracy. Companies House, the government agency that maintains the PSC Register, has been notorious for the extent by which inaccurate data is permitted to be deployed on the Register.^[iv] Companies House relies on self-reporting, and until recently, it has not tended to independently verify submitted information. Helpfully, new verification measures and further funding have come into force under the Economic Crime and Corporate Transparency Act 2023, passing into effect on 4 March 2024. However, it remains to be seen if this development will have a material positive impact on the accuracy of the UBO data collected on to the PSC Register.^[v]

Second, ambiguities. The definitions of control and significant influence that determine the scope of registration requirements under the PSC Register are relatively nuanced and subjective.

Third, searchability. The PSC Register user interface and search parameters are not well-suited to searching complex ownership structures. This substantially increases the cost and competence thresholds for making effective use of the resource.

The US Corporate Transparency Act

In January 2021, US Congress enacted the Corporate Transparency Act (CTA).^[vi] Effective as of January 2024, the CTA now requires corporations, limited liability companies, and similar business entities, to file beneficial ownership information (BOI) reports with the Financial Crimes Enforcement Network (FinCEN).

BOI reporting requirements apply domestically and to foreign companies registered to do business in the United States. Each reporting company will need to file information on the reporting company and information on all beneficial owners.

The purpose of the CTA BOI registry is to combat economic crime, particularly money laundering, terrorist financing, corruption, and tax fraud. Even at this early stage there are some clear challenges to its effectiveness.

First, access. Unlike the UK PSC, the US BOI database will not be accessible to the public. Access is limited to permitted parties, including law enforcement, federal regulators, and financial institutions, for certain permitted purposes. This excludes certain key stakeholders, like private civil victims of fraud seeking to recover misappropriated assets.

As the author has argued elsewhere, this is a mistake.^[vii] The CTA regulatory regime should provide a discovery right to plaintiffs in civil cases, with the judge acting as the gatekeeper. One important advantage is commercial certainty. All transactions involve risk of misconduct. To manage this risk, entities rely on overlapping legal frameworks: criminal sanctions and civil sanctions.

While law enforcement typically has a monopoly on criminal sanctions, commercial entities can manage risk of misconduct by bringing civil suits. If the US BOI database was accessible to victims of fraud and related misconduct, business entities would have greater certainty in engaging in commercial transactions.

Second, exemptions. There are 23 categories of exemptions that permit reporting companies not to report beneficial ownership information. One category – the Large Operating Company exemption – is particularly broad. It covers entities that employ more than 20 full-time employees in the US, have a physical US-based operating presence, and have more than $5 million in gross receipts or sales. In consequence, the US BOI database will be substantially less comprehensive than that of the UK’s PSC register.

Third, ambiguity. There are several points of ambiguity in the CTA BOI reporting requirements that will likely be exploited. One important example is the BOI reporting exemption for entities whose ownership interests are “controlled or wholly owned” by other exempt entities. The term “control” is not explicitly defined.

This will likely lead to the relatively expansive use of complex corporate structures that broadly qualify entities for the subsidiary exemption. The UK PSC disclosure model applies blanket rules with much more limited exemptions, and consequently less ambiguity. Again, it is likely that the scope of the data to be held by the US BOI database will be less comprehensive than that of the UK PSC Register.

Fourth, accuracy. Like the UK PSC Register, the effectiveness of the US BOI database will be dependent on the accuracy of the information it contains. FinCEN has reported that it is actively working on solutions for verifying reported information.^[viii] It appears that FinCEN is unable to commit resources to manually verify reported information. Instead, it is looking to develop or onboard an automated solution.

Given the issues with accuracy of information evidenced in the UK PSC Register, this is the right policy priority. A better model is used in many offshore financial centres like the BVI, where the AML /KYC compliance conduct of company formation agents (styled ‘trust companies’) is regulated. No company formation agent is independently regulated in either the UK or the US.

Fifth, notice. Counterintuitively, greater transparency can lead to worse enforcement outcomes. Transparency maximalists often assume that unlimited corporate transparency maximises accountability for fraud and corruption. In fact, maximum transparency can have precisely the opposite effect. As the author has argued elsewhere, if bad actors are put on notice that a register will record beneficial ownership information, they are more likely to take evasive action with evidence or assets.^[ix] Often, this takes the form of using nominee beneficial owners or shifting to secrecy jurisdictions.

Compliance Burden And Privacy Concerns

Independent of the question of effectiveness, there is the question of cost, both in terms of the compliance burden and in respect of privacy. The introduction of the CTA has far-reaching implications for businesses across the spectrum. In particular, small businesses will face an additional compliance burden. The requirement to report detailed beneficial ownership information, and maintain an updated register of this information, places an administrative burden on these entities. The disproportionate impact on small businesses will be felt on the competitive landscape.

The UK PSC guidance is instructive on how to reduce compliance costs. The PSC Register submission process is straightforward and user-friendly. Submission is made directly to Companies House, the UK’s registrar of companies. The clarity and specificity of requirements for reporting have streamlined the compliance process. These measures have had the desired outcome. A government post-implementation review has concluded that survey data indicates that PSC Register compliance costs are remarkably low – under approximately $150 per company for the year assessed.^[x]

Separately, the privacy cost shouldn’t be understated. The CTA mandates the disclosure of personal information, such as names, addresses, and social security numbers, of the beneficial owners of registered entities. Small businesses are often closely held, meaning that information about ownership structure can be particularly intimate and private. There is justifiable apprehension about the security of this sensitive information and the potential for misuse or unauthorised access, despite assurances from FinCEN regarding data protection.

Learning The Lessons

The US BOI database and the UK PSC Register are similar solutions to similar problems. The rules governing the UK PSC Register, in force since 2016, offer useful lessons for the rules governing the US BOI database, in force since January 2024. Even at this early stage, it is possible to predict outcomes for the US BOI register.

It is likely that the US register will be a substantially less comprehensive source of information than its UK counterpart, given the broad exceptions, and ambiguity in the scope of reporting requirements. It is also likely that, given that the US register is not publicly available, it will only provide limited support to civil actions against fraud and related misconduct.

FinCEN’s commitment to exploring options for verification of reported information offers reason for optimism, and possibly a transferable framework for UK regulators. Regardless, as with the UK PSC, although the US BOI register will provide value-add in combatting economic misconduct, it remains a flawed resource for stakeholders.

^[i] https://www.legislation.gov.uk/ukpga/2015/26/contents/enacted

^[ii] https://www.legislation.gov.uk/ukpga/2022/10/contents/enacted

^[iii] https://assets.publishing.service.gov.uk/media/5d431904e5274a699238cf8b/review-implementation-psc-register.pdf  

^[iv] https://www.thebureauinvestigates.com/explainers/companies-house-what-is-it-and-how-is-it-failing-to-do-its-job/

^[v] https://www.gov.uk/government/news/first-changes-to-uk-company-law-expected-on-4-march

^[vi] https://www.congress.gov/bill/116th-congress/house-bill/2513/text

^[vii] https://www.thestar.com/opinion/contributors/calls-for-greater-corporate-transparency-in-the-u-s-are-well-intentioned-but-flawed/article_4f2d61c8-aede-5a2f-a43c-e1165c91da03.html

^[viii] https://www.thomsonreuters.com/en-us/posts/investigation-fraud-and-risk/beneficial-ownership-reporting-requirement/

^[ix] https://www.theglobeandmail.com/business/commentary/article-businesses-deserve-privacy-too-the-case-against-public-registers-for/

^[x] https://www.legislation.gov.uk/uksi/2017/694/pdfs/uksiod_20170694_en.pdf

Martin Kenney
Martin is Managing Partner of Martin Kenney & Co (MKS), a specialist investigative and asset recovery practice based in the BVI, focused on multi-jurisdictional fraud and grand corruption cases. In 2014 Martin was the recipient of the Association of Certified Fraud Examiners (ACFE) highest honour: the Cressey Award for life-time achievement in the detection and deterrence of fraud. Ranked by both Chambers and Partners and Legal500, for the past several years he has been chosen as a global elite “Thought Leader” of the legal profession by Who’s Who Legal. Website: martinkenney.com