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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

Amendment Focuses on Professional “Gatekeepers” – Lawyers, Accountants, Payment Processors, and Those Providing Corporate Formation and Trust Services

On July 13, 2022, the House of Representatives (the “House”) adopted an amendment to the 2023 National Defense Authorization Act (“NDAA”) offered by Maxine Waters (D. CA), inserting into the NDAA a version of the “Establishing New Authorities for Business Laundering and Enabling Risks to Security Act,” otherwise more commonly known as the ENABLERS Act. If ultimately passed into statute, even a scaled-back version of this amendment could significantly alter the Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) regulatory framework in the United States.  Of course, the sweeping AML Act of 2020 was passed because it also was tucked into the massive defense spending authorization bill for that year—so backers of BSA/AML expansion appear to be reverting to tactics which previously bore fruit.

Arguably, this amendment is even more sweeping than the AML Act. As we will discuss, it applies the BSA to persons providing corporate formation, trust, third-party payment, or similar legal or accounting services.  Although much digital ink will be spilled regarding the amendment’s application to lawyers—and we certainly emphasize here that potential sea change in AML regulation—the amendment’s application to third-party payment processors, depending upon how that term ultimately gets defined if the amendment becomes law, also could be a very significant development affecting many businesses and financial technology companies (“fintechs”).  Currently, and depending on the facts, the BSA often does not apply to payment processors, who often fit into an exemption under the BSA’s definition of a “money services business,” or MSBs, subject to AML requirements.  However, the amendment is “scaled back” from the original version of the ENABLERS Act, introduced last year, which had included investment advisors, art and antiquities dealers, and public relations firms.  Finally, the ambitious agenda of the amendment does not appear to acknowledge the current reality of actual government resources: the fact remains that the Financial Crimes Enforcement Network (“FinCEN”), which implements the BSA, has been struggling to implement the huge array of tasks and deadlines already foisted upon it by Congress through the AML Act and the recently-passed Corporate Transparency Act (“CTA”)—and FinCEN has been stating repeatedly that it needs increased funding.…

Continue Reading  Closing the Gate:  House Adopts ENABLERS Act Amendment to 2023 NDAA

Enforcement Trends, Crypto, the AML Act — and More

We are very pleased to be moderating, once again, the Practising Law Institute’s 2022 Anti-Money Laundering Conference on May 17, 2022, starting at 9 a.m. This year’s conference will be both live and virtual — and it will be as informative, interesting and timely as always. …

As we recently blogged (here and here), the Financial Crimes Enforcement Network (“FinCEN”) recently issued a Notice of Proposed Rulemaking (“NPRM”) regarding the beneficial ownership reporting requirements of the Corporate Transparency Act (“CTA”).  The NPRM is the first in a series of three rulemakings that FinCEN will issue to implement the CTA.  It sets forth FinCEN’s proposed reporting requirements, i.e., who must file a report on beneficial ownership information (“BOI”), what information must be reported, and when reports will be due.

In response, FinCEN received over 230 comments (see FinCEN’s press release here).   We focus here on comments from two key players: the American Bankers Association (“ABA”) and the Bank Policy Institute (“BPI”), which highlight the industry perspective of banking institutions (These groups also commented previously  on FinCEN’s Advance NPRM regarding the CTA’s implementation, which we blogged about here and here).

The CTA, passed as part of the Anti-Money Laundering Act of 2020 (“AML Act”), requires certain legal entities to report their beneficial owners (“BOs”) 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”) compliance obligations, particularly FinCEN’s existing Customer Due Diligence Rule (“CDD Rule”) for legal entity customers implemented in 2018.

Under the existing CDD Rule, covered financial institutions must collect and verify BOI from certain entity customers and maintain records of such information.  But until now, entities did not have to report directly such information to the government.  The CTA makes companies (like LLCs and corporations) subject to BOI reporting requirements.  The CTA also requires FinCEN to revise the existing CDD Rule to try to make it consistent with the CTA and remove any unnecessary or duplicative burdens.

The ABA (which represents large banks) and the BPI (which represents universal, regional, and major foreign banks) each submitted lengthy comment letters, showcasing their strong interest in how these reporting requirements shake out.  As the ABA observes, it will be difficult to determine how these reporting requirements will fit in with bank responsibilities until FinCEN issues its other rulemakings.  Still, both groups recommend making several modifications to the proposed reporting requirements now—mainly aligning the NPRM with the existing CDD Rule—to minimize future burdens on banks and their customers.  Both groups propose similar modifications, but there are some differences.  We summarize the most salient points in this post.

Overall, these comments make clear that the ABA and the BPI continue to support creation of the FinCEN registry as a way to drive down the cost of regulatory compliance for banks.  Both groups suggest, however, that such a benefit could be outweighed if the final reporting requirements stray too far from the existing CDD Rule.  As both groups observe, any significant change from the current CDD Rule will require banks to divert significant resources to comply with the new requirements, at the expense of other AML efforts.
Continue Reading  American Bankers Association and the Bank Policy Institute Weigh in on FinCEN’s Proposed Rules for Corporate Transparency Act

But AML Concerns Linger As To “High End” Art and NFTs

On February 4, 2022, the U.S. Department of the Treasury published a study (the “Study”) on the facilitation of money laundering (“ML”) and terrorist financing (“TF”) through the trade in works of art.  The study was commissioned as a result of Section 6110(c) of the Anti-Money Laundering Act of 2020 (the “Act”), which required Treasury to examine art market participants and sectors of the art market that may present ML/TF risks to the U.S. financial system, and examine what steps regulators might take to mitigate these risks.

According to the press release accompanying the Study, “[s]everal qualities inherent to high-value art – the way it is bought and sold and certain market participants – may make the high-value art market attractive for money laundering by criminals. These include the high dollar value of transactions, transportability of goods, a longstanding culture of privacy and use of intermediaries (e.g., shell companies and art advisors), and the increasing use of high-value art as an investment class.”  As we will discuss, the Study proposes four scenarios—two regulatory and two nonregulatory—to mitigate money laundering risks in the art industry. Ultimately, however, the Study concludes that, “[w]eighed against other sectors that pose ML/TF risks, . . . the art market should not be an immediate focus for the imposition of comprehensive AML/CFT requirements.” (emphasis added).  Accordingly, any ML/TF regulation of the art trade will not happen soon.

Ironically, dealers in antiquities – an industry dwarfed by the size of the global art market – are not so lucky, because Congress already has subjected them to anti-money laundering (“AML”) duties.  As we blogged, the Act amended the Bank Secrecy Act’s (“BSA”) definition of “financial institution” to include those “engaged in the trade of antiquities, including an advisor, consultant, or any other person who engages as a business in the solicitation or the sale of antiquities, subject to regulations prescribed by the [Treasury] Secretary.”  The Financial Crimes Enforcement Network (“FinCEN”) still must issue implementing regulations for antiquities dealers.
Continue Reading  Treasury Report:  No Immediate Need for BSA Regulations for the Art Industry

We are pleased to offer the latest episode in Ballard Spahr’s Consumer Financial Monitor Podcast series — a weekly podcast focusing on the consumer finance issues that matter most, from new product development and emerging technologies to regulatory compliance and enforcement and the ramifications of private litigation.

In this episode, we discuss the historic changes…

On January 13, 2022, Himamauli “Him” Das, the Acting Director of FinCEN, virtually addressed the Financial Crimes Enforcement Conference hosted by the American Bankers Association and the American Bar Association.  In his speech, Mr. Das highlighted the transformation and modernization of the anti-money laundering/counter-terrorist financing (“AML/CFT”) regulatory framework from a tool updated in the wake of September 11, 2001 to combat money flows to terrorist organizations, to an instrument designed to address the more complex current and future challenges presented by digital assets and strategic corruption.

Acting on the authority accorded FinCEN by the Anti-Money Laundering Act of 2020 (the “AML Act”), FinCEN has been in the process of reorganizing and upscaling several of its divisions in order to meet increased obligations. New divisions include the Global Investigations Division, the Strategic Operations Division and the Enforcement and Compliance Division, which together work to combine resources against bad actors, share information, and act to resolve investigations across the financial sector. Mr. Das focused on three additional areas that FinCEN would concentrate on moving forward: new threats, new innovations and new partnerships.
Continue Reading  Transformation of the AML/CFT Regulatory Regime Requires Innovation and Collaboration, According to FinCEN Acting Director

Proposed Reporting Rules Will Require Careful Parsing for Businesses and Revision of CDD Rule for Banks

As we initially blogged, the Financial Crimes Enforcement Network (“FinCEN”) issued on December 7 a Notice of Proposed Rulemaking (“NPRM”) regarding the beneficial ownership (“BO”) reporting requirements of the Corporate Transparency Act (“CTA”).  FinCEN’s press release is here; the NPRM is here; and a summary “fact sheet” regarding the NPRM is here.

The CTA requires defined entities – including most domestic corporations and foreign entities registered to do business in the U.S. – to report beneficial owner information (“BOI”) and company applicant information to a database created and run by FinCEN upon the entities’ creation or registration within the U.S.  This database will be 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.

Congress passed the CTA because the ability to operate through legal entities without requiring the identification of BOI is a key AML risk for the U.S. financial system.  The CTA seeks to mitigate this risk by reducing an individual’s ability to use corporate structures to conceal illicit activity such as money laundering, financing of terrorism, and other offenses.  We often have blogged on the CTA and these impending regulations (see here, here, here, here and here).

The NPRM describes who must file a BOI report, what information must be reported, and when a report is due.  Although this blog post is lengthy, it still only summarizes the NPRM, which is 55 pages long in the Federal Register.  The NPRM envisions broad and often complicated reporting requirements under the CTA, including an ongoing duty to update any changes in information.

Further, this NPRM addresses “only” BOI reporting.  FinCEN will engage in two additional rulemakings under the CTA to (1) establish rules for who may access BOI, for what purposes, and what safeguards will be required to protect such information; and (2) revise and conform FinCEN’s existing CDD rule for financial institutions.  As we will discuss, the NPRM undermines hopes that the CTA regulations would simplify the compliance obligations of financial institutions already covered by the CDD rule, which requires covered financial institutions to obtain BOI from certain entity customers.  To the contrary, the NPRM indicates that FinCEN will complicate and expand the definitions of the two groups of individuals qualifying as BOs – those exercising “substantial control” and those with a 25% “ownership interest” – and amend the existing CDD rule accordingly, so that the CTA regulations and the CDD rule supposedly align.

The potential application of these regulations is sweeping.  FinCEN estimates at least 25 million existing U.S. companies will have to make a report under the CTA when the proposed regulations become effective.  And approximately three million new entities created each year in the U.S. potentially will be subject to the regulations going forward.  The NPRM does not address the additional amount of foreign entities registered to do business in the U.S. covered by the CTA.
Continue Reading  Proposed Beneficial Ownership Reporting Regulations Under the CTA:  Broad and Complex

Strategy Reflects Coordinated Focus on Transparency and “Gatekeeper” Responsibilities

Last week, the Biden Administration unveiled a sweeping “whole-of-government approach” to combating corruption.  Identifying corruption as a “cancer within the body of societies—a disease that eats at the public trust and the ability of governments to deliver for their citizens”—the United States Strategy on Countering Corruption (the “Plan”) articulates a global vision for rooting out this national security threat.  The first-of-its-kind approach focuses on responding to corruption’s transnational dimensions, with a specific emphasis on reducing “the ability of corrupt actors to use the U.S. and international financial systems to hide assets and launder proceeds of corrupt acts.”  Although the Plan is grounded in “five-mutually reinforcing pillars,” pillars two and three merit a closer look from this blog’s readers.  They serve as an important recap of the various steps the Administration has taken to combat illicit finance and its strategy for increased enforcement using both the new and existing tools at its disposal.  Further, the Plan implicates many pressing Bank Secrecy Act/Anti-Money Laundering (“BSA/AML”) issues on which we repeatedly blog, as we will discuss.
Continue Reading  White House Releases Sweeping U.S. Strategy on Countering Corruption

Notice is First of Three Sets of Regulations for the CTA

Yesterday, the Financial Crimes Enforcement Network (“FinCEN”) issued a Notice of Proposed Rulemaking (“NPRM”) regarding the beneficial ownership reporting requirements of the Corporate Transparency Act (“CTA”), which requires defined entities – including foreign entities with a presence in the U.S. – to report their…