Once the Corporate Transparency Act (CTA) comes into effect, U.S. companies will have to report their Ultimate Beneficial Owner (UBO) information to the Financial Crimes Enforcement Network (FinCEN). In 2022, any new incorporation or significant UBO change will need to be reported and any company formed before the effective date of the Act will have two years to report to FinCEN.
The use of anonymous shell companies, complex ownership structures that often make it difficult to identify true company ownership, has long been one of the critical weaknesses of Anti-Money Laundering efforts in the U.S. In its 2016 Mutual Evaluation Report (MER) of the U.S. government’s AML/CFT program, the Financial Action Task Force (FATF) noted that the “lack of timely access to accurate beneficial ownership information remains one of the most fundamental gaps in the U.S. context.”
Many states have no requirements for collecting beneficial ownership information. For example, incorporating in Delaware allows companies to form quickly, inexpensively and with no identity requirements. As a result, numerous shell companies were formed there, further resulting in many financial crime investigations. The federal Corporate Transparency Act will overlay all state-based UBO reporting obligations.
While regulated entities in the U.S. have had to identify and verify the identity of the beneficial owners of business customers at the time a new account is opened, as per the Financial Crimes Enforcement Network (FinCEN) Final Rule, it is now the responsibility of the entity itself to provide the beneficial ownership information.
U.S. UBO reporting requirements
When considering the FATF’s Best Practices on Beneficial Ownership for Legal Persons, the Corporate Transparency Act is best categorized as a registry approach. Each reporting company will need to provide FinCEN with four pieces of information:
(i) A beneficial owner’s full legal name
(ii) A beneficial owner’s date of birth
(iii) A beneficial owner’s current residential or business street address
(iv) A government-issued identifying number assigned to that beneficial owner from an acceptable identification document (such as passport, driver’s license or other U.S. state-issued identification document).
It’s important to note that the registry will not be publicly available, but the information will be available to law enforcement or financial institutions (with customer consent).
According to a National Law Review article, “Customer Due Diligence requirements for financial institutions will be updated to conform to the requirements of the Act and to take into account access by financial institutions to the information compiled under the Act.” The fact that this UBO information is available to financial institutions implies that the checking and confirmation of UBO registry information will become a necessity for reporting companies. But not all companies will be required to report their UBO information to FinCEN. Exemptions include:
- Companies with more than 20 employees and gross receipts or sales of more than $5 million and a physical presence in the U.S.
- Reporting companies like banks, credit unions and registered brokers or dealers
- Dormant companies
- Unregistered foreign entities (companies that aren’t registered with a state)
The specific definition of a beneficial owner in the Act is:
“A natural person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise:
(i) Exercises substantial control over a corporation or limited liability company;
(ii) Owns 25% or more of the equity interests of a corporation or limited liability company; or
(iii) Receives substantial economic benefits from the assets of a corporation or limited liability company.”
Providing false or fraudulent UBO information carries penalties of up to $10,000 and two years in jail.
Improving AML practices
Many compliance experts are cheering this development as anonymous shell companies have historically been connected with enabling money laundering, corruption, fraud and tax evasion. According to the Bank Policy Institute (BPI), a nonpartisan public policy, research and advocacy group, the collection of UBO information has a direct connection on reducing crime. BPI points to a study that finds “after anonymity is no longer freely available to domestic and foreign investors, all-cash purchases by corporations fall by approximately 70%, indicating the share of anonymity-seeking investors using LLCs as ‘shell corporations.’”
The FATF best practices document, “A well-resourced and proactive company registry holding beneficial ownership information can be an effective mechanism because it provides a useful basis for competent authorities to access to such information.” But the FATF also notes that it is up to the registry to actively verify and monitor the UBO information for this approach to be successful. There is also the consideration of how the regulations that result from the Act will deal with trusts, estates and other complex financial structures.
Reporting UBO information to FinCEN
While passing the law is an essential first step, the details of the regulations to come and how FinCEN operates the registry will tell how successful the Corporate Transparency Act is. FinCEN issued an advance notice of proposed rulemaking to gather feedback before giving final rules.
The proposed rule comes with 48 questions to help determine procedures and standards for reporting companies to submit information to FinCEN. It’s important to note, “while only the regulations implementing the reporting requirements must be promulgated by January 1, 2022, with an effective date to be determined.” FinCEN will provide “a reasonable timeframe” for reporting companies to become compliant with the new requirements.
Some of the questions are potential game-changers. For example, the definition of beneficial ownership; should it be the same as has been used previously under Customer Due Diligence requirements? Does the definition of “own” and “control” need to be precisely defined? And should “substantial control” be limited to one beneficial owner?
In this era of complex ownership structures, what specific information needs reporting about a company’s corporate affiliates, parents, and subsidiaries? How will all this information be sent in and how can costs be minimized while still providing helpful information to regulators and law enforcement officials?
What are ongoing reporting requirements? What happens if a company discovers that inaccurate information has been filed? Is there a safe harbor to make changes without penalty? Is there a need to certify the accuracy of submitted information?
The proposed rule also brings up the concept of a FinCEN identifier, a unique identifier for each individual or entity that may be used for subsequent reporting to FinCEN. This voluntary identifier will qualify as (iv) A government-issued identifying number mentioned above. What format this identifier takes, how to apply for it, how it is secured, who controls it, and what happens if changes are needed must be determined.
Feedback from the industry
The Bank Policy Institute responded to the FinCEN proposed rules. They point out it’s vital that:
“FinCEN implement mechanisms to verify, to the extent feasible, the identity of beneficial owners reported by reporting companies and included in the FinCEN Database. Unless verification efforts are undertaken, users of the FinCEN Database will have little reason to trust or rely on information from the database.”
They also point out that “FinCEN should expressly permit, but not require, financial institutions to rely on the information in the FinCEN database.” While due diligence by the reporting company on any information gathered from the database is still necessary, the information should be of value and should be reasonably reliable. After all, the CTA states the database should be “highly useful to national security, intelligence, and law enforcement agencies, as well as federal functional regulators.” If the data is good enough for government use, it should be good enough for companies’ use.
While the specific FinCEN reporting requirements of the Corporate Transparency Act are not complete, reporting companies in the U.S. would be wise to consider what new procedures to enact. The law designed to curtail financial crimes by limiting anonymous shell companies is significant in the fight against money laundering. The results are sure to be closely monitored by AML experts around the world.