FinCEN Seeks to Turn Beneficial Ownership Disclosure of Private Entities on its Head

My colleagues over at our banking blog have highlighted proposed regulations by the Financial Crimes Enforcement Network, or FinCEN, under the Bank Secrecy Act  which are meant to combat illicit financial activity, including terrorist financing and money laundering.  The proposed regulations would require banks to identify the natural persons (as opposed to a legal entity) who are beneficial owners of customers that are legal entities.

“Beneficial ownership” would include:

  • each individual, if any, who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25% or more of the equity interests of a legal entity customer; and
  • an individual with significant responsibility to control, manage or direct a legal entity customer (including CEO, CFO, COO, managing member, general partner, president, vice president or treasurer), or any other individual who regularly performs similar functions.

As many know, when forming a corporation or other entity for a new venture, or opening a bank account, disclosure of this level of detail was never necessary.  Requiring that it be disclosed now could cause individuals to no longer invest in new entities and impair capital formation and other useful business transactions.  It’s not that these individuals are terrorists, launder money or cheat on their taxes, they just want to keep their private business kept private.  Even under current regulations, it is difficult for an honest foreign person to start a U.S. corporation and open a bank account without providing a SSN or equivalent for a live human being and showing up at the bank in person.

FinCENS’s idea isn’t new.   Senator Carl Levin introduced a bill requiring that this information be collected when a new corporation was formed.  The secretaries of our 50 states understandably didn’t want to collect this information (and as an aside, it would have assigned corollary duties to law firms that start corporations for clients).  The White House then proposed requiring all companies formed in any state to obtain a federal tax employee identification number. This proposal would have required the Internal Revenue Service to collect information on the beneficial owner of any legal entity organized in any state, and would allow law enforcement to access that information.  I guess the IRS didn’t want to do this either, so now the plan is to foist this information collection on banks.

I’m all for shutting down terrorists and money launderers.  But the benefits of these solutions and related costs on capital formation and economic activity need to be carefully considered.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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