FinCEN Issues the First NPRM on the Corporate Transparency Act

On December 7, 2021, the Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM) 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 NPRM seeks comments from the public regarding its proposed beneficial ownership regulations on the beneficial ownership information (BOI) reporting provisions. The NPRM provides insight into who must file a BOI report, what information must be reported, and when a report is due, with other separate NPRMs being released in the future for the BOI database access protocol and revisions to the existing Customer Due Diligence (CDD) Rule.

Summary

The use of shell companies and concealing the true beneficial owners of assets has been a significant loophole in the US’s anti-money laundering (AML) regime.

Background

The CTA is part of the AMLA, which was signed into law on January 1, 2021. The CTA is intended to facilitate critical national security, intelligence, and law enforcement efforts with the goal of countering money laundering, the financing of terrorism, and other illicit activity by using the following measures:
  • Increasing transparency into shell companies and smaller entities
  • Creating a non-public central registry of BOI on reporting entities
  • Imposing criminal and civil penalties in connection to reporting failures and unauthorized disclosure of the information.

The CTA Requirements

The AMLA’s CTA established requirements for reporting companies to report certain beneficial ownership information, as well as provide exceptions to the definition of reporting companies, and put in place safeguards to protect beneficial ownership information. The CTA specified:
  • Who must report
  • What must be reported 
  • When it must be reported by
  • Who is able to access the BOI
  • When it must be reported by
  • Who is able to access the BOI

FinCEN Issues ANPRM on the CTA

On April 1, 2021, FinCEN issued an Advance Notice of Proposed Rulemaking (ANPRM) soliciting public comment on the implementation of the CTA on procedures and standards for reporting companies to submit beneficial ownership information to FinCEN. It also requested initial public input on FinCEN's implementation of the related provisions of the CTA that govern FinCEN's maintenance and disclosure of BOI, subject to appropriate protocols.

FinCEN Issues NPRM on the CTA

FinCEN’s NPRM is a continuation of its April 2021 ANPRM. The NPRM proposes rules and seeks comments on how best to implement the reporting requirements of the CTA regarding who must report, what must be reported, and when the report must be submitted. Similar to the ANPRM, within the NPRM, FinCEN also requests comments on rule understandability and effective date, reporting requirements and violations, definitions of key terms, timing of report submission and updates, and the administrative costs associated with complying with the CTA.
Key Elements of the NPRM

FinCEN’s rule proposal includes additional details that further define the information in Section 6403 CTA provision as follows: 

Reporting Companies

A. The CTA defined a “reporting company” as a “corporation, limited liability company, or other similar entity” that is either “created by the filing of a document with a secretary of state or a similar office under the law of the State or Indian Tribe”; or “formed under the law of a foreign country and registered to do business in the US by filing of a document with the secretary of state or a similar office under the laws of a State or Indian Tribe.”  

B. To facilitate, the NPRM separates the applicable reporting companies into “domestic” and “foreign” reporting companies. Under the NPRM: 

  • A domestic reporting company would be any entity created by the filing of a document with a secretary of state or similar office under the law of a state or Indian tribe. 
  • A foreign reporting company would be any entity formed under the law of a foreign country and that is registered to do business in any state or tribal jurisdiction.
  • FinCEN expects that the definition of a reporting company would include limited liability partnerships, limited liability limited partnerships, business trusts, and most limited partnerships, in addition to corporations and limited liability companies, due to these entities appearing to be typically created by a filing with a secretary of state or similar office.
  • Other types of legal entities, including certain trusts, appear to be excluded, to the extent that they are not created by the filing of a document with a secretary of state or similar office. The NPRM seeks public comment on state and Indian Tribe law practices regarding trust formation to better understand and define the scope of the rule.
  • FinCEN’s proposed rule is consistent with the CTA and exempts the following seven types of entities from the definition of “reporting company”:

a. Entities supervised by federal agencies, such as the Commodity Exchange Act and the US Securities and Exchange Commission 
b. Companies with more than $5 million revenue and 20 employees with offices in the US
c. Federal and state credit unions, bank holding companies, savings and loan holding companies
d. Non-banking financial institutions, such as money transmitting businesses
e. Public accounting firms
f. Insurance companies, charities, and dormant companies
g. Public utilities, financial market utilities, and certain kinds of trusts

Beneficial Owners and Company Applicants

A. The CTA defined a beneficial owner to include any individual who:
  • Exercises substantial control over a reporting company.
  • Owns or controls at least 25% of the ownership interests of a reporting company. 

B. In the NPRM, FinCEN’s proposed regulation defines the terms “substantial control” and “ownership interest” to set forth standards for determining whether an individual qualifies for either of those criteria. FinCEN’s approach on its definition of “substantial control” is designed to close loopholes that would allow corporate structuring that obscures owners or decision-makers.    
The table below provides FinCEN’s proposed definition and control types that apply to “substantial control” and “ownership or controlling interest”.

  Substantial Control Ownership or Controlling Interest
Definition A single party that exercises substantial control over a reporting company. A single party with 25% or more ownership interest of a reporting company
Direct Control Service as a senior officer or a reporting company. Both Equity and other types of interest are included (e.g. warrants or rights; capital or profit interest or convertible instruments; other options or privileges to acquire equity, capital, or other interest).
 Indirect Control Direction, determination, or decision of, or substantial influence over, important matters of a reporting company.

The regulation also includes a catch-all provision to make clear that substantial control can take additional forms not specifically listed above.
Debt instruments are included if they enable the holder to exercise the same rights as one of the specific equity or other interests, including the ability to convert the instrument into one of the specified equity or other interests.

C. FinCEN’s proposed rule is consistent with the CTA and exempts five types of individuals from the definition of “beneficial owner”:

  1. Minor children
  2. Nominees
  3. Employees
  4. Inheritances 
  5. Creditors

Beneficial Ownership Information Reports

A. The CTA required a reporting company to identify itself and report four pieces of information about each of its beneficial owners and company applicants: 

  1. Full legal name
  2. Date of birth 
  3. Current residential or business street address 
  4. A unique identifying number from an acceptable identification document

In the NPRM, FinCEN proposes a reporting company also provide a scanned image of the unique identifying number.

B. The CTA also allowed individuals that submit their BOI to FinCEN to obtain a “FinCEN identifier,” which can then be provided to FinCEN in lieu of other required information about the individual.
In the NPRM, FinCEN further proposes a voluntary mechanism whereby a reporting company may report, with proper consent, the Taxpayer Identification Number  for a beneficial owner or company applicant.

Timing

FinCEN’s NPRM revises the CTA’s original timeline for reporting companies to submit BOI. The table below compares the CTA’s original timeline to FinCEN’s proposed timeline for reporting companies to provide initial and updated BOI, based on the effective date of the regulation.

   CTA Timeline FinCEN's Proposed Timeline
Created Before the Effective Date Within two years of the effective date. Within one year of the effective date
Created or Registered After the Effective Date At a time of formation or registration. Within 14 calendar days of creation or registration.
Updated Previously Reported BOI Within one year of the date of change. Within 30 calendar days of the date of change.
Updating Inaccurately Reported BOI Within 90 days of the original submission. Within 14 calendar days of the date the reporting company knew, or should have known, that the information was inaccurate.

Practical Impact to Financial Institutions

The CTA is expected to primarily affect the reporting companies. The database of the BOI is expected to be made available to financial institutions (FIs) for potential investigative and due diligence purposes, along with the revisions to the CDD Rule to complement the CTA.  However, until further information is released by FinCEN on the BOI data access and the acceptable uses of the data, the true impact on the FIs’ operations and compliance programs is unknown.

What you Should Start Doing

Next Steps

FinCEN plans to implement three sets of rulemakings to comply with the requirements in Section 6403 of the AMLA:

  • Implement the BOI reporting requirements
  • Implement the statute's protocols for access to and disclosure of beneficial ownership information
  • Revise the existing CDD Rule, consistent with the requirements of Section 6403(d) of the CTA.

The December 7, 2021, NPRM addresses the first rulemaking, related to the BOI reporting requirements. FIs should take advantage of FinCEN’s request for public comments on the NPRM by February 7, 2022. FinCEN also indicated that it is developing the infrastructure, such as the beneficial ownership technology system, required to implement the specific provisions as identified in Section 6403 of the CTA, within the AMLA. 

Questions for Comment

The beneficial ownership registry provisions in the CTA have created more questions than answers. The NPRM presents FinCEN’s analysis and assessment of the practicality and execution of the reporting requirements, including time to report, total burden, and cost.
FinCEN is seeking industry help in answering those questions and has requested comment on the following areas:

  • Understanding the rule and effective date
  • Detailing reporting requirements and violations
  • Defining key terms
  • Proposing timeframes for reports and updates
  • Estimating costs: capital, start-up, operation, and maintenance 
  • Enhancing the utility of BOI 
  • Minimizing the burden to collect information 

Call to Action

Guidehouse can help FIs assess their compliance programs in light of the proposed regulatory changes, including determining changed obligations under the proposed rules and developing and implementing updates to operations, policies, procedures, controls, and technology. Its areas of relevant expertise include the following:

  • Anti-money laundering
  • Customer due diligence
  • Sanctions
  • Strategic planning
  • Risk management
  • Vendor sourcing and governance
  • Executive training

Guidehouse can quickly review and assess your financial crime program to determine whether it is sound, identify gaps or weaknesses, or conduct training on AML, CDD, and sanctions compliance, including blockchain tracing and analytics. Guidehouse is well-equipped to make an individualized assessment of your unique circumstances and offer innovative advice and solutions for responding to heightened regulatory requirements.

 
 
 
 
 

Special thanks to Ji Kang for co-authoring this article.

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