I came across a piece of legislation today that gave me a double-take. Introduced back in May (by Sen. Obama and two others, no less), this proposed Senate Bill would require incorporators to disclose all of the owners of each entity formed.
The bill has been tied to the Homeland Security Department. In order for states to receive funding through the department (to provide, maintain and improve security), states would have to enact legislation, beginning in 2011, that required incorporators to:
- Provide to the state with a list of names and addresses of all beneficial owners of the corporation or limited liability company on formation. If the owner was an entity itself, incorporators would be required to dig into the entity and provide its beneficial owners.
- Update the list yearly, as part of the annual report filing requirement, or, in states with no annual report filing requirement, update the list each time a beneficial owner changed.
States would be required to maintain that information for as long as the entity stayed active, and for a 5-year period after entities were dissolved or revoked, and would be required to turn the information over upon receipt of a civil or criminal subpoena or summons from a State or Federal agency, a Congressional committee or subcommittee, or to foreign interests, where the request is made through a State or Federal agency.
Incorporators would have to go further for foreign owners, and provide a declaration that the name, address and identity of each foreign owner had been verified by the incorporator, provide a copy of each owner’s photo page of his or her passport, and hang onto all of that information for the same period of time described above (5 years beyond revocation/dissolution).
Failure to follow the proposed rules could result in the incorporator being hit with a $10,000 fine or up to 3 years in jail (or both).
I’ve got a problem with this on so many levels I hardly don’t know where to begin. The biggest issue is privacy. Even though there are no privacy rights explicitly guaranteed in the Constitution, we do have federal legislation in place, along with laws at the state level. This legislation, on the face of it, appears to try and slide around all of those, under the guise of Homeland Security. The idea that security funding would be tied to this legislation hardly makes it voluntary.
I see an impact on foreign investment, in much the same way that the Patriot Act hit the banking industry. After that law came into force I had several clients lose bank accounts that had been opened for years (in some cases) because they were non-U.S. residents. Given the onus is put on the incorporator to provide proof of identity, I can’t see a lot of incorporators be willing to take that risk.
I also wonder how attorney-client privilege would factor in. If it trumped this potential legislation, the incorporation business would change overnight, as non-attorneys would face a significant disadvantage.
And I can’t see states like Nevada, Delaware and Wyoming, which all have considerable stakes in the incorporation industry, being happy with this type of privacy invasion. Nevada prides itself on being one of the only states that doesn’t have an information-sharing agreement in place with the IRS. Nevada doesn’t collect shareholder information so it doesn’t have anything to give up.
Finally, given that any state agency can subpoena information, I can see both the IRS and state tax departments getting involved.
After some research, I was relieved to see that absolutely nothing had happened with this bill (Senate Bill 2956 I.S.) since its introduction back on May 1st. I’m hoping it languishes, lost and forgotten, in some corner of Capital Hill. However, considering one of the sponsors, it could come back to haunt us next year. I’ll be watching, that’s for sure.