Regulating Lawyers as Formation Agents in the United States: A Bone of Contention

The United States has long been criticized for enabling corporate secrecy and money laundering, despite urging offshore tax havens to crack down on these activities. Nearly two million shell companies are formed in the US every year, and many states in the country do not require limited liability companies (LLCs) to report their beneficial owners. This stands in contrast to European countries and tax havens like the Cayman Islands, which have robust beneficial ownership requirements.

To address this issue, the Financial Crimes Enforcement Network (FinCEN) implemented a Final Rule last year requiring financial institutions regulated under the Banking Secrecy Act (BSA) to obtain beneficial ownership information of their business customers. While several bills have been introduced to strengthen beneficial ownership requirements at the time of incorporation, including proposals to bring "formation agents" such as lawyers under the purview of the BSA, these attempts have been met with resistance from the legal profession.

The Corporate Transparency Act (2017) proposed by Representatives Carolyn Maloney and Peter King aimed to require LLCs and corporations to disclose their beneficial owners at the time of formation or incorporation. The Act recognized the lack of uniformity in beneficial ownership requirements across different states in the US and suggested a list of minimum standards, including the collection of beneficial ownership information by licensed formation agents. However, the Act's definition of formation agents was considered too broad and raised concerns over the attorney-client privilege and undue burdens on attorneys.

The True Incorporation Transparency for Law Enforcement (TITLE) Act introduced by Senator Sheldon Whitehouse also aimed to firm up beneficial ownership requirements at the state level and mandated that formation agents conduct due diligence on their clients in the same way that financial institutions conduct customer due diligence (CDD). However, the American Bar Association (ABA) argued that the changes proposed by these Acts endangered attorney-client privilege and imposed unrealistic levels of resource and time allocation.

While the issue of regulating formation agents like lawyers is still mired in uncertainty, the latest incarnation of the Corporate Transparency Act (2019) has steered clear of any references to formation agents. Nonetheless, the discourse is likely to continue in the future, given the push-and-pull of US politics.