On April 5, 2021, the Financial Crimes Enforcement Network (FinCEN) issued an advance notice of proposed rulemaking (ANPRM) to solicit comment on the implementation of the Corporate Transparency Act (CTA), as part of the Anti-Money Laundering Act of 2020 (AMLA). Specifically, the ANPRM seeks comment on how reporting companies should submit beneficial ownership information to FinCEN, and how FinCEN should implement protocols for maintaining and disclosing beneficial ownership information. The ANPRM provides insight into what reporting companies, law enforcement, and financial institutions should expect in the implementing regulations.
How We Got Here
US government reports and 2016 Financial Action Task Force Mutual Evaluation Report have identified the ability to form legal entities in the US without disclosing beneficial ownership as a key vulnerability to the US financial system. Criminals can form legal entities, engage in activity, and obtain financial services in the name of the legal entity, without disclosing the natural persons who own or control the entity, effectively concealing their interests. According to the ANPRM, previous measures implemented to address these concerns have been “only a partial solution,” citing the due diligence requirements for financial institutions under Section 312 and the Customer Due Diligence (CDD) Rule:
“US legal entities could make payments through foreign accounts to acquire US-based assets and then use those assets to engage in illicit activity without ever undergoing CDD. Further, US legal entities without any US-based accounts could be engaged in illicit activity outside the United States without having ever been subjected to CDD.”
The ANPRM makes the case that more transparent beneficial ownership reporting was a necessary component to maintain the integrity of the US financial system.
The CTA requires reporting companies to submit to FinCEN, for each beneficial owner and applicant, the full legal name; date of birth; current residential or business street address; and a unique identifying number from an acceptable identification document or the individual’s FinCEN identifier. This information closely resembles the Customer Identification Program (CIP) information required to open accounts with US financial institutions.
The CTA defines a reporting company as a corporation, limited liability company, or other similar entity that is:
Created by the filing of a document with a secretary of state or a similar office under the law of a state or Indian Tribe; or
Formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a state or Indian Tribe.
Importantly, the CTA exempts several types of entities from reporting beneficial ownership information to FinCEN, including:
Entities supervised by federal agencies, such as the Commodities Exchange Act and the US Securities and Exchange Commission (SEC).
Companies with revenues >$5 million and 20 employees with offices in the US.
Federal/state credit unions, bank holding companies/savings and loan holding companies.
Nonbanking financial institutions, such as money transmitting businesses.
Public accounting firms.
Insurance companies, charities, and dormant companies.
Public utilities, financial market utilities, and certain kinds of trusts.
Areas for Comment
As we have noted, the beneficial ownership registry provisions in the CTA have created more questions than answers. FinCEN is seeking industry help in answering those questions and has requested comment on the following areas:
FinCEN seeks to clarify certain terms and categories of customers who are subject to beneficial ownership reporting requirements. For example, FinCEN seeks to clarify the term “other similar entity” in the definition of a reporting entity and whether it should align the definition of beneficial owner to existing regulations, such as the CDD rule.
Reporting of beneficial ownership information
FinCEN asks what, when, and how reporting companies should submit information to FinCEN. For example, FinCEN asks questions about what information reporting companies should submit to make it more useful for law enforcement, such as submitting information about parent companies and affiliates to help understand complex corporate structures. FinCEN requests feedback about the burdens of reporting requirements and the methods in which reporting companies should submit information (i.e., electronic or another method). FinCEN also contemplates the frequency and manner in which reporting companies should confirm the accuracy of previously submitted information. FinCEN also seeks suggestions as to how it can ensure the accuracy of the information, including required steps for the reporting entity to certify the information and FinCEN to verify it.
FinCEN asks about the use, makeup, and how to obtain the FinCEN identifier. Specifically, FinCEN requests feedback on the various situations in which an individual or entity may wish to use an identifier, how long it should be, the structure, and how to ensure a single entity or individual does not have multiple FinCEN identifiers. FinCEN also asks about the necessary safeguards to prevent unauthorized use.
Security and Use of Beneficial Ownership and Applicant Information
FinCEN asks how to limit the use of beneficial ownership information for authorized purposes; how to make the information available to financial institutions; and how to address updated reporting for changes in beneficial ownership information when previously requested by the government or a financial institution. FinCEN also asks how to interpret the term “appropriate regulatory agency” and whether applicant information should be accessible in the same manner as beneficial owner.
Cost, Process, Outreach, and Partnership
FinCEN inquires about the burdens, including costs, for small businesses, and state, local, and tribal government, and how to minimize such burdens to ensure filing is efficient and effective. FinCEN also asks about methods to solicit information from financial institutions about how financial institutions could potentially access beneficial ownership information effectively and efficiently. In addition, FinCEN asks whether it can collect beneficial ownership information through existing processes, and how best to reach out to civil society stakeholders who are not directly affected but concerned about these reporting requirements.
What Can You Do Right Now?
In the ANPRM, FinCEN covers several areas, including how to interpret and define certain terms, how to make the process efficient and effective, and how to limit use to authorized persons. Based on the questions posed, there is a wide range of expertise required to implement this beneficial ownership registry, including technology, operations, legal, compliance, government, and law enforcement. Financial institutions should ensure that the implementing regulations provide real benefit to their due diligence obligations. Parties with relevant experience should provide comments to FinCEN to help the beneficial ownership reporting process be efficient and effective, while limiting unnecessary burdens and facilitating access to authorized parties.
Comments are due to FinCEN by May 5, 2021.
Special thanks to Gene Bolton for co-authoring this alert.