Money Laundering, Shell Corporations and More: What Are LLCs and Why Are They Currently Under Fire?

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Limited liability companies, or LLCs, are no stranger to controversy, mainly because of how easily they can be used to hide owners and assets. Now they are being targeted by a New York watchdog group that supports a bill that would bring more transparency to LLCs to prevent them from becoming “shell companies” for money laundering.

The group, Reinvent Albany, recently issued a statement of support for the LLC Transparency Act under consideration by the New York legislature. According to the New York State Senate website, the bill “aims to modernize disclosure laws for limited liability companies by defining beneficial ownership and requiring the disclosure of beneficial owners.” The bill is currently in the Senate rules committee, according to the most recent update.

Reinvent Albany supports the bill for a few reasons. One is that LLCs make it difficult to trace owners, which eases the way for money laundering and other illicit activities. Another is that LLCs still donate “significant amounts” of money to political candidates.

“Because of weak enforcement by the Board of Elections, many LLCs making political contributions have not disclosed their owners as required by a change to the law in 2019,” Reinvent Albany said in its statement of support.

A recent article on the Spectrum News 1 website addressed this issue, noting that LLCs are “behind a significant amount of campaign cash in New York,” but their names and ownership are “often opaque.” This makes it difficult to determine who’s behind campaign donations.

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The 2019 change that Reinvent Albany referred to requires more disclosure for LLCs when used as political donation sources. However, many watchdog groups think it doesn’t go far enough.

“Opening up beneficial owners’ identity to the public will help government regulators and law enforcement bodies determine whether LLCs are being used to illegally move cash and dodge taxes,” Reinvent Albany stated.

LLCs are a common business structure, but regulations governing them vary significantly by state. Most states don’t restrict LLC ownership, according to the IRS, meaning that owners (called “members”) can be individuals, corporations, other LLCs and foreign entities.

There is no maximum number of members, and some states allow “single-member” LLCs with only one owner. Among the businesses that can’t be LLCs are banks and insurance companies. There are also special rules governing foreign LLCs.

Despite their popularity as a business structure — or maybe because of it — LLCs have come under fire in recent years. A 2019 investigation by The New York Times found that “the use of LLCs and shell corporations has been an issue for the United States for more than a decade.”

In 2015, the NYT reported that buyers of condominiums on Manhattan’s “billionaires row” used LLCs to hide the identity of the properties’ owners. A year later, CBS’s “60 Minutes” captured lawyers on hidden camera offering to help move funds with “questionable origins” through different shell companies. Legislative attempts to bring more transparency to LLCs have largely either fallen short or been watered down well beyond their original intent.

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A separate 2019 investigation from Roll Call found that the U.S. “is one of the largest havens for money laundering and tax evasion” in the world, and that’s partly because of how easy it is to set up an LLC. As Roll Call put it: In some states, “library cards require more information” than LLCs.

“In most states, it’s possible to form companies anonymously, using a lawyer or a registered agent service to file the forms,” Roll Call reported. “That company can purchase legitimate assets, like real estate, using surreptitiously transferred illegitimate funds, laundering them in the process. For added secrecy, the initial anonymous entity often itself incorporates a subsidiary, creating multiple layers of shells around the illicitly financed assets.”

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