Looking Through the Corporate Veil

Looking Through the Corporate Veil

Many of our clients have been complaining in recent years that banking has become more difficult.  Opening a business bank account used to be a simple process.  Now it is extremely difficult, and sometimes impossible.

The politicians have enhanced the LLC and Corporation Disclosure Requirements.  It is now necessary for banks and title companies to trace every business entity to a natural person.  All such natural persons must sign the bank forms.  Some banks, as a policy matter, require all such people to appear physically in the same bank branch on the same day.  This makes it particularly challenging for business entities owned by multiple parties who don’t live in the same place.

Historically, people used to get help from their attorney to protect their privacy.  One could use a business entity to minimize disclosure of one’s identity and financial activity.  Such days are long gone.  There is no longer any right to financial privacy.  The government can and will look behind every curtain.  Every business owner should assume that the government is looking through the corporate veil, and conduct themselves accordingly.

Your attorney cannot make the rules go away, or find a clever way for you to be exempt.

Protecting Us From Ourselves

While this may feel like a monstrous burden to small businesses that erects yet another barrier to competition and market entry, don’t worry.  This is required to “protect” us all from money laundering, tax evasion, and other criminal activities.  It is all about closing loop holes.

These elevated disclosure requirements are the built into two laws:

• The Corporate Transparency Act, passed by the House on October 22, 2019, and
• The National Defense Authorization Act (“NDAA”) passed on January 1, 2021 by the Senate overriding President Trump’s veto.  This law specifically ramped up the disclosure requirements under the Bank Secrecy Act of 1970, which was strengthened by the USA Patriot Act of 2001 in response to 9/11.

Just in case these are not enough, we can be confident more rules are in the making.

Prior to these more stringent disclosure laws, opening a bank account for a business entity was fairly simple.  All if required as proof that the entity existed at the state level, and an EIN.  It was sufficient to produce the governing documents of the entity such as Articles, By Laws or an Operating Agreement showing that the person opening the account had authority to do so.  People who remember this banking simplicity, miss it.

The trend puts such simplicity far behind us, never to return.  These laws are part of a long range plan to create a federal data base that tracks the ownership of basically every business on the planet.  The politicians assure us that, of course, they would never abuse such a data base to enhance their own power or political agendas.  No doubt, they will also protect the data from private corporations and foreign governments whose interests may not be aligned with those of our nation.

We can thank our politicians for protecting us from all those law breakers who abuse bank accounts.  The personal inconvenience we experience is a small price to pay for all the protection we are getting.  The wild eyed notion that such data could be abused is merely material for conspiracy theorists.  Nothing like that ever happens in reality.

Following the Rules

Compliance matters.  It is extremely important that all business owners carefully and completely follow all applicable laws.  That is our strong and consistent recommendation.  Follow the rules!

So where is the line between legitimate business activity and unlawful money laundering?  The answer depends in part on who you ask.  On the extremes, there are those who believe there is no such line.  One extreme sees all business transactions as inherently immoral, and the other extreme sees all interference with business as inherently overreaching.  For policy makers, the best solutions will avoid both extremes.  The middle ground of permitting commerce and preventing crime may be a tough goal, but it should be the only goal.

What to Do About It?

Among the many potential responses to these rules, scolding your attorney for setting up a business entity that must comply with applicable laws doesn’t do anything to change the rules.  It also does no good whatsoever to tell your banker how crazy they are for implementing such requirements.  They have no choice but to follow the law.

We encourage out clients to carefully follow the rules, and lawfully work with policy makers to implement solutions that both protect commerce and prevent abuse.