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.
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.
BackgroundThe 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:
The CTA RequirementsThe 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:
FinCEN Issues ANPRM on the CTAOn 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 CTAFinCEN’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.
FinCEN’s rule proposal includes additional details that further define the information in Section 6403 CTA provision as follows:
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. 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 ApplicantsA. The CTA defined a beneficial owner to include any individual who:
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).|
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”:
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:
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.
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.|
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.
FinCEN plans to implement three sets of rulemakings to comply with the requirements in Section 6403 of the AMLA:
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:
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:
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.