The battle over corporate transparency in the USA

We are supportive of a recent decision by the U.S. Court of Appeals for the Fifth Circuit to block enforcement of the Corporate Transparency Act (CTA).

The Act, which came into force on 1st January last year (2024), required business owners to file corporate transparency reports with beneficial ownership information.

For many reasons, this new decision is a landmark moment in the ongoing tension between regulatory oversight and constitutional rights; we have long argued that the push for total transparency would have a negative effect on the regulated sector, including on law firms like ours specialising in asset recovery litigation.

Our belief is that if faced with greater demands for “transparency”, crooks (being crooks) will simply use frontmen and nominees to hide their involvement in the ownership and running of a company. 

Notably, a fraudster is unlikely to connect themselves with a corporate vehicle designed for wrongdoing, if their identity is likely to be published or disclosed.

Our concern, therefore, is over the tension between unlimited forms of transparency and the effective use of UBO [ultimate beneficial owner] identification material to fight financial crime or to deliver economic justice to victims of fraud.

Added to the mix is the negative impact which transparency can have on an individual or a company’s right to privacy. 

These concerns are shared by many of our professional colleagues. Yet they are often criticised by transparency crusaders, who seem to view transparency as a panacea for stopping all fraud, money laundering and terrorist financing. 

Here we reiterate: why would a terrorist provide know-your-customer and due diligence information to an offshore service provider, if their intention was to use a company as a vehicle to hide funds intended for acts of terror?

The US’s Corporate Transparency Act (CTA) is thus a double-edged sword. Originally enacted in 2020, its aim was to combat money laundering and financial crimes by requiring businesses to disclose their “beneficial owners” – individuals who owned 25% or more of a company or exercised significant control over it. 

Supporters of the CTA argue that transparency is a critical tool for curbing illicit activities, as anonymous ownership structures have been exploited by criminals and terrorists to conceal assets. We believe that this is naive.

Those, like us, who have raised objections to the CTA, contend that it infringes upon fundamental rights, including the First Amendment: mandatory disclosure infringes on the right to free association by exposing personal and business relationships to government scrutiny.

Secondly, critics have argued that the CTA impinges on an individual’s Fourth Amendment Rights, in that the law violates privacy protections by compelling individuals to share sensitive information without probable cause or a showing of suspected criminality.

Thirdly, it violates state sovereignty, as it can be seen as overriding states’ rights to regulate businesses within their own jurisdictions.

The decision by the U.S. Court of Appeals for the Fifth Circuit to halt enforcement appears to add credence to detractors’ concerns.

The CTA impacts 32.6 million corporate entities in the US. The sweeping and mandatory disclosure of ownership information imposed by the CTA has been an unprecedented intrusion into the private affairs of those running these entities.

Corporate confidentiality is a thing: transparency demands will, to my mind, negatively erode competitive advantage. Exposing sensitive relationships will negatively erode competitive advantage. Such delicate business relationships exist for many reasons. Just because they are sensitive does not make them nefarious.

For the regulated sector, these concerns highlight the fine line between fostering transparency and respecting the legitimate need for discretion in personal and corporate dealings. The current CTA reversal is an opportunity for the regulators to reflect on the broader implications of transparency.

Whenever a judge considers an application for disclosure of confidential material, one of the central elements is proportionality. The court must balance the need for information against the potential costs to privacy and freedom.

Meanwhile, by pioneering what is effectively a call for total transparency, campaigners risk alienating stakeholders and creating resistance to compliance. 

If we are to go down this route to total transparency, robust mechanisms must be in place to ensure that information collected under transparency laws is protected against misuse and breaches.