Search results for: beneficial ownership rule

 

FinCEN Cites Low Risk of Money Laundering and High Regulatory Burden of Rule

On September 7, 2018, the Financial Crimes Enforcement Network (“FinCEN”) issued permanent exceptive relief (“Relief”) to the Beneficial Ownership rule (“BO Rule”) that further underscores the agency’s continued flexibility and risk-based approach to the BO Rule.

Very generally, the BO Rule — effective as of May 11, 2018, and about which we repeatedly have blogged (see here, here and here) — requires covered financial institutions to identify and verify the identities of the beneficial owners of legal entity customers at account opening. FinCEN previously stated in April 3, 2018 FAQs regarding the BO Rule that a “new account” is established – thereby triggering the BO Rule – “each time a loan is renewed or a certificate of deposit is rolled over.” As a result, even if covered financial institutions already have identified and verified beneficial ownership information for a customer at the initial account opening, the institutions still must identify and verify that beneficial ownership information again – and for the same customer – if the customer’s account has been renewed, modified, or extended.

However, the Relief now excepts application of the BO Rule when legal entity customers open “new accounts” through: (1) a rollover of a certificate of deposit (CD); (2) a renewal, modification, or extension of a loan, commercial line of credit, or credit card account that does not require underwriting review and approval; or (3) a renewal of a safe deposit box rental. The Relief does not apply to the initial opening of any of these accounts.

The Relief echoes the exceptive relief from the BO Rule granted by FinCEN on May 11, 2018 to premium finance lenders whose payments are remitted directly to the insurance provider or broker, even if the lending involves the potential for a cash refund. Once again, although the Relief is narrow, FinCEN’s explanation for why the excepted accounts present a low risk for money laundering is potentially instructive in other contexts. Continue Reading FinCEN Issues Exceptive Relief from Beneficial Ownership Rule to Certain Account Renewals

Incorporation Solidifies Customer Due Diligence as “Fifth Pillar” to BSA/AML Compliance Program

May 11, 2018 was the much anticipated effective date for the Customer Due Diligence (“CDD”) Requirements for Financial Institutions Rule (the “Beneficial Ownership Rule”) issued by the Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”). On the same day, the Federal Financial Institutions Examination Council (“FFIEC”) released two updates to the Bank Secretary Act/Anti-Money Laundering (“BSA/AML”) examination manual that incorporate and clarify the CDD Requirements and Beneficial Ownership Rule.  The FFIEC is an interagency body that is “empowered to prescribe uniform principles, standards, and report forms for the federal examination of financial institutions.”  The FFIEC examination manual drives the principles and obligations of covered financial instructions in creating BSA/AML compliance programs.  The new updates further clarify the FinCEN rules and solidify CDD as the fifth pillar of the BSA/AML compliance regime.

As we previously blogged here, when FinCEN announced its final rule on CDD requirements it established two important requirements for covered financial institutions.  First, the covered financial institutions were required to establish procedures to identify and verify the beneficial owners of all legal entity customers. Second, the rule required covered financial institutions to adopt ongoing risk-based CDD procedures as part of their AML compliance programs – including developing and updating customer risk profiles and conducting ongoing AML monitoring.  We previously provided practical guidance to aid covered financial institutions in preparing for implementation of these two requirements.  Now we will highlight the key considerations of FFIEC examination manual addressing these topics.  Of particular interest, the new FFIEC examination manual provisions state in part that regulatory examiners are not supposed to engage in second-guessing specific decisions; rather, during an examination “the bank should not be criticized for individual customer decisions unless it impacts the effectiveness of the overall CDD program, or is accompanied to evidence of bad faith or other aggravating factors.” Continue Reading FFIEC Manual Incorporates Beneficial Ownership Rule and CDD Requirements

Relief is Narrow, but FinCEN’s Explanation of Low Money Laundering Risk Posed by Lending Products is Instructive

On May 11, the Financial Crimes Enforcement Network (“FinCEN”) issued a ruling to provide exceptive relief from the application of the new Beneficial Ownership rule (the “BO Rule,” about which we repeatedly have blogged: see here, here and here) to premium finance lending products that allow for cash refunds.

Very generally, the BO Rule — effective as of May 11, 2018 — requires covered financial institutions to identify and verify the identity of the beneficial owner of legal entity customers at account opening. One exemption provided by the BO Rule from its requirements is when a legal entity customer opens a new account for the purpose of financing insurance premiums and the payments are remitted directly by the financial institution to the insurance provider or broker.  However, this exemption does not apply when there is a possibility of cash refunds.

In its May 11th ruling, FinCEN granted exceptive relief from the BO Rule to premium finance lenders whose payments are remitted directly to the insurance provider or broker, even if the lending involves the potential for a cash refund.  Although this exception is narrow when compared to the many other financial institutions covered by the broad BO Rule, FinCEN’s explanation for why the excepted entities present a low risk for money laundering is potentially instructive in other contexts, such as risk assessments undertaken by financial institutions for the purposes of their anti-money laundering (“AML”) compliance programs. Continue Reading FinCEN Provides Exceptive Relief from New Beneficial Ownership Rule

May 11, 2018 Implementation Deadline Looms

Last year, we posted FinCEN’s Beneficial Ownership Rule: A Practical Guide to Being Prepared for Implementation regarding the Customer Due Diligence Requirements for Financial Institutions Rule (the “Beneficial Ownership Rule” or “Rule”) issued by the Financial Crime Enforcement Center (“FinCEN”). With the Rule’s May 11 implementation date only a few weeks away, and with FinCEN recently having published its new and long-awaited FAQs regarding the Rule (FAQs), we thought that the time was right for more practical tips and answers to questions surrounding the Rule. Continue Reading FinCEN’s Beneficial Ownership Rule: More Practical Tips and Answers to Frequently Asked Questions

In May 2016, Treasury’s Financial Crimes Enforcement Network (FinCEN) issued its final rule on Customer Due Diligence (CDD) Requirements for Financial Institutions. The Final Rule can be found here; our prior discussion of the Final Rule can be found here.

The new rule requires covered financial institutions to identify and verify the identity of the beneficial owners of all legal entity customers. It also adds CDD as a fifth pillar to the traditional four pillars of an effective anti-money laundering (AML) program.  The implementation date of May 11, 2018 is less than a year away.  How can you ensure that you’ll be ready? Continue Reading FinCEN’s Beneficial Ownership Rule: A Practical Guide to Being Prepared for Implementation

On February 14, 2023, both the American Bankers Association (“ABA”) and the Bank Policy Institute (“BPI”) submitted comments to the Financial Crimes Enforcement Network (“FinCEN”) on FinCEN’s notice of proposed rulemaking (“NPRM”) relating to access to beneficial ownership information (“BOI”) reported to FinCEN under the Corporate Transparency Act (“CTA”). While both organizations had similar comments, mainly being that the proposed limits on FIs’ ability to use BOI retrieved from the database contradicts the CTA’s objective, the ABA recommended that FinCEN entirely withdraw the NPRM. Below, we break down each organization’s comments and strong critiques regarding the NPRM.

Continue Reading Bank Industry Groups Heavily Criticize FinCEN’s Proposed Rule on Access to Beneficial Ownership Information

Second Post in a Two-Post Series on the CTA Implementing Regulations

As we just blogged, the Financial Crimes Enforcement Network (“FinCEN”) has issued a final rule (“Final Rule”) regarding the beneficial ownership information (“BOI”) reporting requirements pursuant to the Corporate Transparency Act (“CTA”).  The Final Rule will require tens of millions of corporations and limited liability companies registered to do business in the United States to report their BOI to FinCEN.  FinCEN views this development as a “historic step in support of U.S. government efforts to crack down on illicit finance and enhance transparency.”

The Final Rule defines a “beneficial owner” whose information must be reported as “any individual who, directly or indirectly, either exercises substantial control over such reporting company or owns or controls at least 25 percent of the ownership interests of such reporting company.”  In this post, we focus on the “substantial control” prong of the beneficial ownership definition: “any individual who, directly or indirectly, . . . exercises substantial control over such reporting company.” (emphasis added). The Final Rule generally adopts the language of the proposed rule issued by FinCEN in December 2021, with some minor adjustments.

FinCEN expects reporting companies to always identify at least one beneficial owner under the “substantial control” prong, even if all other individuals are subject to an exclusion or fail to satisfy the “ownership interests” prong.  As we will discuss, the Final Rule contemplates that a covered reporting company may need to report multiple individuals under the “substantial control” prong.  Further, and although FinCEN still needs to issue proposed regulations regarding the following, the Final Rule’s broad definition of the “substantial control” prong under the CTA presumably will lead to FinCEN expanding the definition of “beneficial owner” under the existing Customer Due Diligence (“CDD”) rule applicable to banks and other financial institutions (“FIs”).

Continue Reading FinCEN Final Rule for Beneficial Ownership Reporting: The “Substantial Control” Prong

First Post in a Two-Post Series on the CTA Implementing Regulations

On September 30, 2022, the Financial Crimes Enforcement Network (“FinCEN”) issued its final rule, Beneficial Ownership Information Reporting Requirements (“Final Rule”), implementing the beneficial ownership reporting requirements of the Corporate Transparency Act (“CTA”). 

FinCEN’s September 29, 2022 press release is here; the Final Rule is here; and a summary “fact sheet” regarding the rule is here.  The Final Rule largely tracks the December 8, 2021 Notice of Proposed Rulemaking (the “Proposed Rule”), on which we blogged here and here. 

The Final Rule requires many corporations, limited liability companies, and other entities created in or registered to do business in the United States to report information (“BOI”) about their beneficial owners — the persons who ultimately own and control the company — to FinCEN.  This information will be housed within the forthcoming Beneficial Ownership Secure System (“BOSS”), a non-public database under development by FinCEN. 

The Final Rule takes effect on January 1, 2024.  In a nutshell, (1) companies subject to the BOI reporting rules (“reporting companies”) created or registered before the effective date will have one year, until January 1, 2025, to file their initial reports of BOI and (2) reporting companies created or registered after the effective date will have 30 days after creation or registration to file their initial reports.  In addition to the initial filing obligation, reporting companies will have to file updates within 30 days of a relevant change in their BOI.  And, as we discuss, covered companies also will have to report their “company applicants,” which could include lawyers, accountants or other third-party professionals.

The Final Rule will have broad effect.  FinCEN estimates that over 32 million initial BOI reports will be filed in the first year of the Final Rule taking effect, and that approximately 5 million initial BOI reports and over 14 million updated reports will be filed in each subsequent year.  We summarize here the key provisions of the Final Rule.  In our next blog post, we will discuss the Final Rule’s broad definition of the “control” prong regarding who represents a “beneficial owner,” which will result in an expansion of the definition of “beneficial owner” under the existing Customer Due Diligence (“CDD”) rule applicable to banks and other financial institutions (“FIs”).

Continue Reading FinCEN Issues Final Rule on Beneficial Ownership Reporting Requirements

We blogged last year about the Final Rule issued by the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) extending Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) requirements to certain investment advisers.  The Final Rule, which was set to become effective as of January 1 of next year, was the result of years of effort to bring investment advisers within the scope of the Bank Secrecy Act.  The Final Rule required certain investment advisers to: (1) develop and maintain an AML/CFT compliance program; (2) file Suspicious Activity Reports (SARs) and Currency Transaction Reports (CTRs); (3) comply with the Recordkeeping and Travel Rules; (4) respond to Section 314(a) requests; and (5) implement special due diligence measures for correspondent and private banking accounts.

But this week, in yet another significant regulatory scale-back in the anti-money laundering space, the Treasury Department announced that FinCEN will postpone the effective date of the Final Rule two years, to January 1, 2028 – and, more portentously, that it intends to “revisit the scope” of the Rule “at a future date.”  The stated basis for this institutional about-face is “recogni[tion]…that the rule must be effectively tailored to the diverse business models and risk profiles of the investment adviser sector.”  The Department’s press release further stated that postponing the effective date “may help ease potential compliance costs for industry and reduce regulatory uncertainty while FinCEN undertakes a broader review” of the Rule.  (While the cost point is undoubtedly accurate, as firms will now be able to put off outlays for implementation of AML/CFT compliance programs, it is unclear how going back to the drawing board on the Rule will reduce regulatory uncertainty.)

This is the latest move by the Treasury Department to pause or delay enforcement of financial regulations.  We blogged in March about the Department’s announcement that it would not enforce penalties or fines associated with the Corporate Transparency Act’s beneficial ownership information reporting requirements, and that it would issue a proposed rulemaking to narrow the scope of the rule to only apply to foreign reporting companies.  At that time, the Department similarly spoke of “ensuring that the rule is appropriately tailored to advance the public interest.”  We’ve also blogged on Administration efforts to broadly limit regulation of digital assets. 

It remains to be seen whether FinCEN’s “broader review” of the Rule will indeed lead to “effective[] tailor[ing]” to the unique aspects of the investment adviser sector, or whether the AML/CFT requirements for the sector will simply die on the vine over the next few years.  We will continue to monitor developments on this front.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.

Does it matter if a law is valid if the Government refuses to enforce it?  For months, we have watched (and blogged on) courts grappling with the constitutionality and enforceability of the Corporate Transparency Act (“CTA”).  While, as we have blogged most recently here, courts have produced mixed returns on the validity of the CTA, the Department of the Treasury (“Treasury”) has now significantly mooted those questions.  On March 2, Treasury announced in a Press Release that it will not enforce significant provisions of the the CTA.  

Hold on Current Enforcement

The Press Release is short and states, in pertinent part, that the Treasury Department “will it not enforce any penalties or fines associated with the beneficial ownership information reporting rule under the existing regulatory deadlines.” The Department’s decision does not remove the CTA from the laws of the United States. It still means that reporting companies have to comply with their BOI filing obligations, as put forth in the regulations; but there will be no penalties or fines should a report be filed late, not updated on time, etc. The tumultuous litigation developments leave entities subject to the CTA in constant flux: one week, the CTA is stayed nation-wide, another week the deadlines are back in force but extended. In the absence of a fine or penalty for non-compliance with the CTA, reporting companies will undoubtedly ask their advisors as to whether or not to file BOI reports as they become due.  Operationally, is it better to file the BOI report and be “on the safe side” (but having to expend resources) or are the risks tolerable if the entity foregoes to expend the efforts and does not submit the appropriate BOI report in a timely manner?  Of course, the CTA is still good law.  So, the question is, effectively, is it more efficient to just break the law if there will be no penalties – for now. 

Future Enforcement and Rule Change

The Press Release also signals how the new administration would like to reshape the CTA.  According to the Press Release, the Department of the Treasury “will further not enforce any penalties or fines against U.S. citizens or domestic reporting companies or their beneficial owners after the forthcoming rule changes take effect either” and “will further be issuing a proposed rulemaking that will narrow the scope of the rule to foreign reporting companies only.”

A potentially narrower application scope begs the question how the executive department can follow the Congressional goal of the CTA:  increasing accountability in entities operating within or organized in the United States to combat money laundering, fraud, corruption, tax crimes, and other civil and criminal violations, nationally and internationally. In its final rule on the BOI reporting regime, FinCEN estimated about 71,000 foreign entities “operating in the United States that may be subject to BOI reporting requirements” in 2024, with about 10,900 new foreign entities subject to reporting per year after 2024. Limiting “the scope of the rule to foreign reporting companies only” would unquestionably result in the non-availability of a massive amount of BOI to law enforcement and agencies.

The government’s reasoning for these next steps is that they are, “in the interest of supporting hard-working American taxpayers and small businesses and ensuring that the rule is appropriately tailored to advance the public interest.” The CTA has been criticized as being too burdensome on small entities and that FinCEN has considerably underestimated the amount of time required to accurately complete a BOI report. It remains to be seen how the new proposed rule alleviates and address concerns on small businesses – and whether it imposes an obligation on smaller entities at all. 

Perhaps the promised rule changes will address these questions.  You will hear here if they do.

If you would like to remain updated on these issues, please click here to subscribe to Money Laundering Watch. Please click here to find out about Ballard Spahr’s Anti-Money Laundering Team.