As we recently blogged, the Financial Crimes Enforcement Network (“FinCEN”) issued an advance notice of proposed rulemaking (“ANPRM”) on April 5, 2021 to solicit public comment on the implementation of the Corporate Transparency Act (“CTA”). In response, FinCEN received over 200 letters from industry stakeholders. This post will focus on one such letter, from the American Bankers Association (“ABA”), which highlights the industry perspective of large financial institutions.
The CTA, passed as part of the Anti-Money Laundering Act of 2020 (“AMLA”), requires certain legal entities to report their beneficial owners to a database accessible by U.S. and foreign law enforcement and regulators, and to U.S. financial institutions seeking to comply with their own Anti-Money Laundering (“AML”) compliance obligations, particularly FinCEN’s existing BO regulation which is part of the Customer Due Diligence Rule (“CDD Rule”) implemented in 2018. The beneficial ownership database is one of the most important and long-awaited changes to the AML legal framework in the United States.
To understand the paradigm shift, it is useful to recall the CDD rule currently in existence. Under FinCEN’s existing regulations, covered financial institutions have the requirement to collect and verify beneficial ownership information from their customers, and maintain records of such information. But until now their customers, which may include individuals and companies of all sizes, did not have to report such information to the government. The CTA makes companies (like LLCs and corporations) subject to such beneficial ownership reporting requirements. The CTA also requires FinCEN to revise the CDD Rule to try to make it consistent with the CTA and remove any unnecessary or duplicative burdens on financial institutions and legal entity customers.
In anticipation of these significant changes, industry groups have submitted comments to FinCEN on topics ranging from who will be covered to the logistics of implementation. The ABA, representing large banks, submitted a lengthy comment letter showcasing a strong interest in how these regulations shake out. The ABA first makes clear its support for Congress and FinCEN in ramping up efforts to combat money laundering and terrorism financing. It then lays out its recommendations for filling in gaps left by the CTA, largely tracking the questions that FinCEN solicited in its ANPRM. We summarize the most salient points below.
As a baseline matter, the ABA requested clarity on exactly which entities will be covered by the new regulations. While the CTA defines many of the covered entities, it also includes the catchall phrase “similar entities” that is not further defined.
The ABA has recommended that FinCEN take the same approach set forth in its existing CDD rule: if a company must register documentation with a State or Tribal chartering authority, then it should be covered by the reporting rule. The ABA reasoned that this rule will be straightforward and clear-cut, which is important because many entities will be reporting for the first time.
Another term that requires an easy-to-apply definition is “beneficial owner.” While the CTA defines this term as “one who owns 25% or more of the interests of the company,” the ABA found that definition somewhat hard to implement. For example, does the 25% include a calculation of both direct and indirect ownership? When looking at a “control beneficial owner,” how is “control” defined?
These are open questions that the ABA has grappled with based on FinCEN’s existing regulations. Therefore, speaking from experience, the ABA requested FinCEN to both explain the calculation of beneficial ownership and to provide examples of such. Further, the ABA recommended that “substantial control” include “the power to vote, direct votes, appoint board members, make decisions involving the share or merger or the company, or direct the control or disposition of the assets of the company.” Again, because these definitions were left broad in the CDD rule, the ABA has experience with navigating the ins and outs of FinCEN’s regulatory scheme. FinCEN’s new regulations will provide a fresh start to clarify some of the trickier elements of complying with BSA/AML legal requirements.
Information Reporting Process
The ABA then commented on the reporting process itself. The ABA asserted that FinCEN should collect the same type of data under the new regulations that is collected by banks under existing regulations. That would include the name of the company, its physical address, and its tax ID number. The ABA’s position is that additional data—such as the company’s NAICs code or information on the company’s affiliates, subsidiaries, or holding companies—could quickly lead to a data dump, rendering the database useless. Here, presumably, the reporting community will align with the ABA.
One of FinCEN’s primary concerns in its ANPRM was verification of the information collected in the database. The ABA has taken the view that the burden of verification should be shared by the entity submitting beneficial ownership information. Specifically, the ABA suggested that the person submitting such data should verify its accuracy under penalty of perjury. Again, the ABA noted that this would be similar to the current process taken by individuals who report beneficial ownership information to banks upon opening an account. The next step in the verification process would be for FinCEN to verify that the company is in good standing with the state in which it is registered, confirm its physical address with the postal service, and confirm its tax ID number with the IRS.
Database Access and Data Security
Another critical component of the new regulations is balancing access to the database with privacy concerns. Banks and financial institutions, with their high BSA/AML compliance requirements, are hoping to use this database to alleviate some of the regulatory burden of hunting down beneficial ownership information under the existing CDD regulations. Reiterating that expectation, the ABA “urges FinCEN to make the registry as accessible to the financial sector as possible.”
In order to balance widespread access with privacy of personal information, the ABA suggested an identification code for each person accessing the database. This would allow FinCEN to provide a gateway to the database, in addition to tracking what information was viewed and whether any changes were made.
With further consideration of BSA/AML regulatory burdens, another concern from the banking perspective is potential discrepancies in beneficial ownership information between the database and the bank’s records. The ABA laid out its recommended process: a bank should contact the customer for an explanation of the discrepancy, and if the explanation is satisfactory, that should be the end of the bank’s obligation. In other words, the ABA recommended placing the burden on the reporting entity to file an update, rather than requiring the bank to report clarifying information to FinCEN.
Although the ABA did not draw too much attention to it, the issue of discrepancies is clearly front of mind. Later in the letter, the ABA states that “[c]osts for the financial sector will depend on expectations about how it uses information from the registry, including what steps are required to research and resolve any potential discrepancies.”
Of course, a cost-benefit analysis is always a driving factor when formulating regulations. From the ABA’s perspective, there are potential benefits to the new database, most especially driving down the cost of regulatory compliance. Further, because financial institutions already are familiar with the CDD Rule, and have instituted and invested in processes to track it, the ABA repeatedly recommended FinCEN to follow the same regulatory approach. The same cannot be said necessarily for the reporting institutions; on the other end of the spectrum, groups like the National Small Business Association and National Federation of Independent Business have opposed the CTA and its new reporting requirements, and presumably will want to limit its scope as much as possible.
FinCEN is due to write its regulations under the CTA by January 2021, with another two years before those regulations take effect. Ultimately, someone will need to bear the cost of this enhanced regulatory regime. We will be watching closely to see how this plays out.