Seventh Post in an Extended Series on Legislative Changes to BSA/AML Regulatory Regime
On April 5, 2021, the Financial Crimes Enforcement Network (“FinCEN”) issued an advance notice of proposed rulemaking (“ANPRM”) to solicit public comment on questions pertaining to the implementation of the Corporate Transparency Act (“CTA”), passed as part of the Anti-Money Laundering Act of 2020 (“AMLA”). The CTA requires certain legal entities to report their beneficial owners at the time of their creation to a database accessible by U.S. and foreign law enforcement and regulators, and to U.S. financial institutions seeking to comply with their own Anti-Money Laundering (“AML”) and Customer Due Diligence (“CDD”) compliance obligations.
According to the ANPRM, the ability to operate through legal entities without requiring the identification of beneficial owners is a key risk for the U.S. financial system. The CTA seeks to mitigate the risk by reducing an individual’s ability to use corporate structures to conceal illicit activity such as money laundering, financing of terrorism, proliferation financing, serious tax fraud and human and drug trafficking. The CTA seeks to set a clear federal standard for incorporation practices, protect vital U.S. national security interests, protect interstate and foreign commerce, better enable various law enforcement agencies to counter illicit activities and bring the U.S. into compliance with international standards. With the goals of the CTA in mind, the ANPRM seeks public input on procedures and standards for reporting companies to submit information to FinCEN about their beneficial owners, and input on the implementation and maintenance of a database safeguarding disclosed information subject to appropriate protocols.
Written comments on the ANPRM are due soon – by May 5, 2021. The CTA is a critical development in AML regulation, and FinCEN can expect a considerable response to this important ANPRM, both from the businesses that are covered and the financial institutions that would have access to the beneficial ownership database. Although the ANPRM is detailed and poses many questions, the ultimate, real-world implementation of the CTA will involve even more questions.
Under the CTA, corporations, limited liability companies and any “other similar entity” will be required to provide the full legal name, date of birth, residential or business address and an identification number of a beneficial owner. A “beneficial owner” is defined as the individual who exercises “substantial control” over an entity, or who “owns or controls” more than 25% of the ownership interest of an entity. FinCEN has asked commentators several questions related to the proposed definitions, including, but not limited to:
- Is the definition clear and comprehensive enough to identify beneficial owners?
- Should the definition of beneficial owner align with existing regulations such as the CDD Rule’s definition for banks or the standards adopted under the Securities and Exchange Act of 1934?
- Should FinCEN define “own” and/or “control” with respect to the ownership interest of an entity?
- Should “substantial control” be defined to mean there is only one beneficial owner, or can there be more than one?
- Should the definition of an “applicant,” an individual who files an application to form or register an entity under applicable state or tribal law, be more expansive?
Furthermore, the CTA’s definition of “reporting company” contains numerous exemption, such as entities that are created without the filing of a document with the State or Indian Tribe government. Thus, FinCEN asks for comments as to whether these exemptions should be clarified, and if other categories of entities (trusts or special purpose vehicles) should be subject to the exemption from the definition of “reporting company.” If so, how should eligibility be determined, and should there be a verification process? And, should exempt companies be required to file periodic reports to confirm continued applicability? The ANPRM also asks whether there are other terms used in the CTA that would benefit from additional clarity.
Reporting of Beneficial Ownership Information
Because beneficial ownership information will be kept in a confidential database, not available to the public but available only to certain users such as law enforcement and financial institutions, FinCEN seeks to ensure that the database is useful. Specifically, FinCEN highlights companies with complex ownership structures that involve affiliates and parents and subsidiaries, and questions whether this information should disclosed “as a matter of course, or only when the information has a bearing on the reporting company’s ultimate beneficial owner(s).” FinCEN also requests commentary on the following:
- How should beneficial ownership be reported, and whether to allow electronic filing?
- Should the filing mechanism differ depending on the type of filer?
- Is there a need for previously exempt entities to file in a different manner?
FinCEN also asks for commentary regarding the burdens imposed on reporting companies, such as compliance costs for small businesses, and the burdens of updating beneficial ownership information. For instance, FinCEN seeks commentary on what should be considered a “timely manner” for companies to update beneficial ownership information upon triggering events like: (1) a transfer of “substantial control,” (2) change in legal name or address, (3) death of a beneficial owner or (4) the expiration of a previously acceptable identification number. And, FinCEN questions whether companies should have an obligation to confirm continued accuracy on a periodic basis.
In terms of the CTA’s safe harbor provision, which allows individuals to correct previously submitted inaccurate information, FinCEN queries whether to define the scope of the provision, and whether the nature of the inaccuracy is relevant. FinCEN proposes a requirement that reporting companies certify the accuracy of the information they submit. Alternatively, FinCEN questions if it should take steps, such as with other Bank Secrecy Act (“BSA”) reports, and implement e-filing protocols that prohibit filings with blank fields.
The CTA’s beneficial ownership criteria require a company to provide a unique identifying number from an acceptable identification document. In lieu of that unique number, beneficial owners can request a “FinCEN identifier,” a new identifier issued by FinCEN and exclusive to a particular individual or entity. FinCEN, however, questions what situations would encourage the request of a FinCEN identifier. For FinCEN, protecting private information is of paramount importance. Thus, FinCEN has asked for commentary on the form of its identifier—its length; alphanumeric composition; whether it should contain embedded information; should it be generated independently for each individual or entity; should it be derived from another identifier provided by another authority; and should it resemble the document number of other reports filed under BSA or whether identifiers for individuals and legal entities should be different.
FinCEN also seeks commentary on methods of ensuring a one-to-one relationship between individuals and entities and their identifiers, and ways to protect identifiers from being used without authorization, which may entail regulatory requirements or prohibitions regarding use.
FinCEN claims that reducing the burden to financial institutions using the database, particularly when reporting companies with complex ownership structures seek to open an account, is paramount. FinCEN asks whether it would be beneficial for an applicant or beneficial owner to obtain a FinCEN identifier prior to entity formation, and whether FinCEN should verify identity before providing a FinCEN identifier.
Security and Use of Beneficial Ownership and Applicant Information
The CTA restricts access to the beneficial ownership database to users: (1) who are engaged in an applicable authorized investigation, (2) whose duties or responsibilities require such access, (3) who have undergone appropriate training, (4) who use appropriate identity verification mechanisms and (5) who are authorized by agreement with the Secretary of the Treasury to access such information.
However, FinCEN is concerned with security and privacy measures that may be necessary to protect information and limit its use for authorized purposes. FinCEN has asked whether these precautions should align with financial institutions’ compliance with AML, Counter Terrorism Financing and CDD requirements. FinCEN also questions whether it should be authenticating a request for beneficial ownership information pursuant to authorization from a court of competent jurisdiction. Misuse of the database is subject to existing penalties for violations of the BSA and FinCEN regulations, but FinCEN queries if this is sufficient as a deterrent.
The availability of beneficial owner information to financial institutions with CDD obligations should be practical and useful. For instance, financial institutions could use beneficial owner information for other customer identifications purposes, and reporting companies could pre-authorize specific financial institutions that should have access to their information. FinCEN seeks commentary on these suggestions, and guidance on a reasonable timeframe to respond to financial institution inquiries. Additionally, FinCEN asks how to handle updated reporting for changes in beneficial ownership when financial institutions, regulators or law enforcement previously requested beneficial ownership information, and if and how automatic notices should be provided to previous requestors.
FinCEN also posits whether applicant information should be accessible on the same terms as beneficial owner information, and whether the terms should align with a financial institution’s terms.
Cost, Process, Outreach and Partnership
Finally, FinCEN asks commentators how to reduce the compliance cost on small businesses. Suggestions for an alternative to a single reporting requirement that would create a less costly alternative for small businesses are encouraged. Also, as a way to ensure the efficiency and effectiveness of the filing process for entities subject to the requirements of the CTA, outreach to members of the small business community is proposed. Similarly, FinCEN questions how to reach financial institutions to ensure the efficiency and effectiveness of the process.
The CTA requirements also impose burdens of time, money and human resources on state, local and tribal governments. FinCEN asks if these burdens vary according to the size of the jurisdictions, specifically, whether smaller jurisdictions find it easier or harder to handle the costs associated with the CTA requirements. To minimize these burdens while still achieving the purpose of the CTA, FinCEN asks for comments on how to partner with state, local and tribal governments, and questions the practicality of collecting identity information through existing federal, state, local and tribal processes and procedures.