With Beneficial Ownership Rule In Tow, Questions Remain For U.S. Banks

With Beneficial Ownership Rule In Tow, Questions Remain For U.S. Banks

In January of 2021, Congress passed the U.S. Corporate Transparency Act (CTA), a breakthrough measure aimed at improving integrity across the financial sector, while also allowing national security and counter-intelligence agencies to improve their detection of illicit financial activity. The CTA also led to the creation of a national beneficial ownership registry, effectively amending the Bank Secrecy Act to require corporations, limited liability companies, and similar entities to report certain information about their beneficial owners (the individual, “natural persons” who ultimately own or control these companies), while requiring appropriate reporting of beneficial ownership with respect to both domestic and foreign entities upon their creation or incorporation. It also required FinCEN to maintain strict protocols to ensure that all reported beneficial ownership information is collected and stored in a confidential, secure, and non-public register. At the time of its passing, the CTA was viewed as arguably the most significant banking reform measure since the passage of the USA Patriot Act of 2001, as analysts believed the measure would provide a needed boon to federal authorities attempting to track the proceeds of illicit finance and subsequently prosecute bad actors behind nefarious activities at the domestic and international levels.

                Last week, the United States Department of the Treasury (DOT) issued long-awaited regulations regarding beneficial ownership reporting in wake of the CTA’s passing. A press release from the Treasury notes that the novel legislation will now officially require certain financial institutions and associated entities to identify their primary ownership by January of 2024, a motion that should effectively close one of the last major loopholes in American anti-money laundering and counter-terrorism safeguards. The rampant misuse of anonymous shell and front companies to launder funds derived from various forms of destabilizing crime is a practice that has grown exponentially across the globe over the past decade. This at least in part was due to a lack of true international oversight over the practice, as well as the limited success had by international financial authorities being able to follow obscure paper trails further shrouded by complex beneficial ownership structures most often utilized when making cross-border real estate purchases. Given this lack of legislation, few businesses have also gone out of their way to identify the corporate business structures of those they engage with. As a result, the greater goal of the new corporate ownership database is to reduce the negative impact that these activities can have on the integrity of both the United States economy and the international trade market. 

                While the Treasury as a whole brought the legislation forward, its implementation and follow-through ultimately falls on the Financial Crimes Enforcement Network (FinCEN) – the bureau of the U.S. Department of the Treasury specifically tasked with combatting money laundering and other pertinent financial crimes. In mid-2021, FinCEN issued a Notice of Proposed Rulemaking (NPRM) which laid out the requirements for beneficial ownership reporting under the CTA, and allowed for public comment on the regulations. The Wall Street Journal reports that the NPRM received upwards of 250 comment letters from covered financial institutions, some recommending that officials make extensive revisions to the proposal before moving towards its enactment.2 Reports have indicated that several key changes to the initial proposal have been made in wake of these comments, although speculation remains that the rule remains quite burdensome for smaller businesses/institutions.2 FinCEN’s rule defines a beneficial owner as an individual who directly or indirectly exercises “substantial control” or who controls at least 25% of the ownership interests of a corporate entity. The broad wording of the definition has contributed to more questions for FI’s as to who exactly qualifies for identification. Analysts have also questioned how FinCEN plans to verify that the information being submitted is in fact accurate (although the law requires the reporting firms to confirm that the information they are providing is accurate at risk of potential penalties).

                Thus far, 23 types of entities will reportedly be exempt from the new reporting requirements, including any SEC-registered investment adviser, venture capital adviser filing with the SEC as an exempt reporting adviser (“VC Advisers”) and any private fund managed by any such adviser that qualifies as a “pooled investment vehicle.”1 The largest exemptions however are for publicly listed and large operating companies, with Congress defining the latter as “any company with more than 20 full-time employees, $5 million in revenue and operations in the U.S.” – this given that ownership information for companies of this size would already be available to all of the necessary parties.2 All in all, approximately 32 million existing American companies will be required to report beneficial ownership information once January of 2024 rolls around.2 Clearly there remains a lot of work to be done on behalf of covered institutions and FinCEN before the legislation comes into effect, though the move is certainly a step in the right direction for the United States with respect to maintaining financial security for years to come.

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