Corporate Transparency Act To Bring Crippling Costs to Banks, Law Enforcement

The long-awaited Corporate Transparency Act (CTA) is officially in effect as of January 1^st, requiring beneficial ownership reporting for both American and foreign companies. The very goal of the CTA is in its name: transparency. Given the increasing prevalence of financial crime seen domestically and abroad, the United States is seeking to expose criminal and terror organizations, those with ties to illicit trades (i.e. drug and human trafficking), as well as foreign diplomats and politically-exposed persons (PEPs) hiding behind shell companies and beneath oft-complex webs of beneficial ownership to conceal their identities while laundering ill-gotten funds. All told, the measure is seen as a major boon to ongoing international financial crime and anti-terror initiatives given the stark improvement in oversight it could provide over various industries – though with these new requirements come heavy burdens on these reporting entities. 

The CTA defines a “reporting company” as a domestic entity created by filing a document with the Secretary of State, and expands to foreign entities that register to conduct business in the United States. Those meeting this criteria will officially be required to file a beneficial ownership report (BOI report) with the new Beneficial Ownership Secure System (BOSS). This new database will be used by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) to house and process proprietorial information on beneficial owners – i.e. the individual, “natural persons” who ultimately own or control the companies being dealt with – as reported to them by covered domestic and international entities.

Previously, only companies directly related to the financial industry were required to report beneficial ownership information about their clients. Now this responsibility has also fallen upon small businesses, family investment companies, and real estate holding companies. As such, the handling of what is expected to be a major influx of reports from these various entities ultimately led to the creation of the new database out of necessity. Given these major changes – many of which are likely to alter the very foundation and bottom-line of smaller financial institutions and covered businesses – many had speculated as to the true efficacy of the program when taking into account cost-effectiveness of implementing the necessary procedures and bolstering personnel to manage these novel requirements from the perspective of a covered financial institution. FinCEN – itself a relatively small government bureau – is also slated to see a significant increase in resources allocated to managing the database, while also being tasked with maintaining strict protocols to ensure that all reported beneficial ownership information is maintained confidential and secure through this non-public register. Altogether the identified parties will be tasked with attempting to close what remains the single largest loophole with respect to U.S. anti-money laundering protections over the past decade.

While the database is expected to allow for unprecedented information sharing capabilities between financial entities, the federal government, and various law enforcement bodies granted access to the ledger for purposes of better combatting fraud and money laundering activity, any potential benefits may come at a high price (literally). The Wall Street Journal, citing a notice filed by FinCEN last Monday, writes that financial institutions would need about 6.5 million hours of work in the first year to establish procedures and implement safeguards to meet the security and confidentiality requirements to access the database, equating to a nearly $700 million dollar figure for this associated work.² This, per FinCEN, would effectively cover the development and implementation of administrative, physical and technical safeguards, the ability to obtain and document customer consent, submit certification on requests and provide appropriate training to staff.² The high expense will become a non-negotiable cost of business in order to implement particular security and confidentiality procedures that will have to be put in place to protect the highly-sensitive information that will be stored in the database. A breach in security with a registry of this scope would be disastrous, which is why FinCEN is being particularly strict on their requirements for access.

Reports have indicated that banks and law-enforcement officials will be granted access to the database according to necessity, which is supposed to aid in the identification of patterns of money laundering, fraud, or general suspicious activities. All told, there are six specific categories of recipients authorized for BOI access under certain circumstances. These include: 

(1) U.S. Federal agencies engaged in national security, intelligence, or law enforcement activity; (2) U.S. State, local, and Tribal law enforcement agencies; (3) foreign law enforcement agencies, judges, prosecutors, central authorities, and competent authorities (foreign requesters); (4) financial institutions using BOI to facilitate compliance with customer due diligence (CDD) requirements under applicable law; (5) Federal functional regulators and other appropriate regulatory agencies acting in a supervisory capacity assessing financial institutions for compliance with CDD requirements under applicable law; and (6) Treasury officers and employees.¹

Each of the above recipients will also be subject to specific requirements for confidentiality and security in line with the CTA. Access to the database is expected to be granted in phases beginning in February, but will come with associated costs in their own right.  FinCEN estimated that first-year costs for state, local and tribal agencies would be about $182 million in total.²  

The agency does offer some optimism with respect to these new expenses for financial institutions, as they estimate a significant reduction in costs and man-hours required for compliance following the end of the first-year transition period as firms acclimate to the new standards. Of course, covered entities will face potential enforcement actions to ensure their compliance with the BOSS system’s access restrictions, as well as for upkeep with their reporting requirements, though these penalties have yet to be revealed. FinCEN is seeking comments from the public pertaining to the type of information they would like to see collected for the database with respect to beneficial ownership. The public has until April 1^st to submit their comments.

Citations

1. “Fact Sheet: Beneficial Ownership Information Access and Safeguards Final Rule.” Financial Crimes Enforcement Network, The U.S. Department of the Treasury, 21 Dec. 2023. 
2. Sun, Mengqi. “Banking Industry May Need to Spend Millions to Gain Access to Company  Ownership Database.” The Wall Street Journal, 30 Jan. 2024.