The US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) has published an Advance Notice of Proposed Rulemaking (the Proposed Rule)¹ seeking input from the public on the implementation of a reporting system intended to curtail the flow of illicit funds through shell companies by requiring companies to disclose “beneficial ownership information.” This Proposed Rule is the first in a series of regulatory actions that FinCEN will undertake to implement the Anti-Money Laundering Act of 2020 (AML Act), which Congress enacted on January 1, 2021.²

The Corporate Transparency Act (CTA), which is part of the AML Act, establishes a new framework for the reporting, maintenance, and disclosure of companies’ beneficial ownership information. Section 6403 of the CTA amends the Bank Secrecy Act (BSA) by adding a new section (31 USC § 5336) that requires the reporting of beneficial ownership information by “reporting companies.” The CTA broadly defines “reporting company” to include a corporation, limited liability company, or “other similar entity” that is created by the filing of a document with a secretary of state or a similar office under the law of a US state or Indian tribe, or formed under the law of a foreign country and registered to do business in the United States by the filing of a document with a secretary of state or a similar office under the laws of a US state or Indian tribe. However, because the CTA is directed at smaller businesses and shell companies, there are a number of exceptions to the definition. Those exceptions detail the types of companies that are exempt from the reporting requirement, such as registered issuers, federal and state credit unions, broker dealers, and qualifying larger companies. FinCEN will maintain the reported beneficial ownership information in a confidential, non-public database that only authorized persons, such as federal law enforcement, will be able to access for limited uses. FinCEN will be able to disclose the information to financial institutions when it deems necessary and with the reporting company’s consent.

Through this Proposed Rule, FinCEN seeks to determine how best to implement the reporting requirements of the CTA, as well as the CTA’s provisions regarding FinCEN’s maintenance and disclosure of reported information, from regulated parties; the governments of the states, US possessions, local jurisdictions, and Indian tribes; law enforcement; regulatory agencies; other consumers of BSA data; to any other interested parties.

FinCEN suggests that the new beneficial owner reporting system under the CTA will:

• set a clear federal standard for incorporation practices;
• protect vital US national security interests;
• protect interstate and foreign commerce;
• better enable critical national security, intelligence and law enforcement efforts to counter money laundering, the financing of terrorism, and other illicit activity; and
• bring the US into compliance with international AML/CFT standards.

At the same time, as highlighted in the questions posed in the Proposed Rule, FinCEN raises potential issues that could arise from the CTA’s implementation, including:

• what security and privacy measures should be implemented to protect this information and limit its use to authorized purposes, and how those who misuse the information should be penalized;
• the potential financial burdens for businesses in connection with the new requirements, particularly the costs to small businesses;
• how to define certain key terms and concepts in the CTA, such as “other similar entity,” which impact the types of entities that are included and excluded from the reporting requirements;
• how to obtain, verify, and protect a FinCEN identifier, which is a unique identifier that the CTA requires FinCEN to issue to an individual or entity that has submitted the required beneficial ownership information, upon request; and
• how FinCEN will ensure that beneficial ownership information being reported is accurate and complete.

Therefore, with hopes to reconcile and navigate those issues and address any concerns, FinCEN seeks comments on 48 specific, discrete questions based on the statutory requirements, and also welcomes comments on any other issues relevant to the implementation of the CTA.

Key takeaways

The CTA’s implementation will tighten the restrictions and requirements for use of shell companies. While the goal is to stop bad actors from avoiding detection while committing fraud, money laundering, funding terrorism or engaging in other illicit activity, the CTA also will undoubtedly burden innocent actors, by increasing reporting obligations and requiring disclosure of more personal and business information than in the past.

All companies that may meet the CTA’s definition of “reporting company” should carefully review the Proposed Rule and consider the opportunity to submit comments to FinCEN. FinCEN encourages all interested parties to provide their views. Comments must be submitted by May 5, 2021 via the following link: Federal Register: Beneficial Ownership Information Reporting Requirements.

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