As directed by the Anti-Money Laundering Act of 2020, the U.S. government has initiated a rule-making process to require beneficial ownership information from certain corporations, LLCs, and other legal entities.
Public comments are due no later than May 5, 2021 regarding the Advance Notice of Proposed Rulemaking (ANPRM) issued by the Financial Crimes Enforcement Network (FinCEN). FinCEN, an arm of the U.S. Treasury Department, issued the ANPRM pursuant to the recently enacted Corporate Transparency Act (CTA), which is part of the broader Anti-Money Laundering Act enacted at the end of last year. FinCEN is seeking responses to a range of questions relating to the reporting, maintenance, and disclosure of beneficial ownership information.
The ANPRM is the first in a series of regulatory actions FinCEN will take to implement the CTA.
On January 1, 2021, Congress overrode President Trump's veto and passed the FY2021 National Defense Authorization Act (NDAA). The NDAA, typically considered to be an annual must-pass piece of legislation, regularly includes provisions not directly related to defense policy. FY2021 was no different; this year, the NDAA included the CTA (as part of the Anti-Money Laundering Act of 2020).
American anti-money laundering and anti-corruption advocates long have argued that the U.S. should better regulate anonymously-owned shell companies. The CTA, which arguably constitutes the most significant changes to American anti-money laundering laws since the 2001 passage of USA PATRIOT Act, directly responds to those concerns.
The CTA amends the Bank Secrecy Act, long the lodestar for American anti-money laundering law, in three important ways. First, the CTA requires certain "reporting companies" (such as corporations and limited liability companies) to expressly identify the individuals who ultimately own or control them. Second, the CTA requires FinCEN to maintain this beneficial ownership information in a non-public database. Third, the CTA authorizes FinCEN to disclose this information to certain government agencies.
What Is a Reporting Company?
Under the new law—and with numerous statutory exceptions that the forthcoming regulations will amplify and/or clarify—corporations, limited liability companies, or "other similar" entities generally will need to file beneficial ownership information with FinCEN. Subject to the forthcoming regulations, a legal entity must abide by the CTA if the entity is either a) created by filing documents with offices such as a state's secretary of state, or b) created under foreign law but obligated to register with an office such as a state's secretary of state.
Who Are Beneficial Owners?
Reporting companies generally will need to provide identifying information to FinCEN for any person who exercises "substantial control" over, or owns or controls at least 25 percent of, that reporting company. The law requires the company provide each beneficial owner's a) full legal name, b) date of birth, c) address (business or residence), and d) unique identifying number (i.e., from an identifying document such as a passport or driver's license).
To limit reporting loopholes, the law specifies that children, reporting company employees, intermediaries, and creditors cannot serve as beneficial owners.
The CTA requires beneficial ownership information to be maintained confidentially, but it generally will be available to national security and federal law enforcement entities (pursuant to a request). FinCEN may also make the information available to foreign, state, and local law enforcement. The law also includes provisions for non-government access so long as the reporting company in question consents.
Questions Posed by the ANPRM
FinCEN, tasked with promulgating regulations needed to implement the new law, is seeking public input to help shape the implementing regulations. The law requires FinCEN to have promulgated these regulations no later than December 31, 2021.
Acknowledging that the CTA gives FinCEN significant leeway in interpreting the law, the ANPRM breaks its requests into five sections: "Definitions," "Reporting Of Beneficial Ownership Information," "FinCEN Identifier" (the CTA requires the creation of a system involving unique identifiers that can be associated with a reporting entity), "Security And Use Of Beneficial Ownership And Applicant Information," and "Cost, Process, Outreach, And Partnership." While some questions are fairly simple, such as those focused on the logistics of how reporting companies will provide FinCEN with the requisite information (i.e., whether FinCEN should support any reporting mechanism other than electronic filing), others address the law's potential scope.
For example, entities such as partnerships, trusts, and special purpose vehicles are notably absent from the definition of "reporting company." However, the CTA's inclusion of "other similar entity" in conjunction with corporations and limited liability companies in that definition gives FinCEN significant leeway to potentially expand its jurisdiction. The ANPRM addresses this by asking the public to help FinCEN interpret "other similar entity," as well as other baseline definitions such "own" and "control."
Additionally, there are notable statutory exceptions to the "reporting company" definition. Many of these exceptions are in place because of the entities' pre-existing regulatory requirements; they include banks, credit unions, broker dealers, investment companies and advisers, securities issuers, and money transmitters. However, the law lists one exemption in particular that could have significant impact on the its scope. Entities that have more than 20 full-time employees in the U.S., earn more than $5 million, and have "an operating presence at a physical office" in the U.S., will not be considered a "reporting company." While the first two prongs of this exemption may be straightforward, it is less clear what might constitute a "physical office" in the U.S. Will FinCEN consider someone's home as a physical office? In turn, would FinCEN require that person working from home to perform certain activities to qualify as an operating presence? Could a company's team of developers, each working from their own homes, satisfy this test—or will FinCEN require companies to host personnel, such as sales or human resources teams, in a traditional brick-and-mortar office in order to meet the exemption? While the ANPRM does not ask these questions expressly, it does invite comment on all aspects of the new law.
The ANPRM is the first step in defining the scope of the CTA; FinCEN's decisions regarding which participants in the American economy will be required to submit beneficial ownership information, when that information will need to be submitted, and who will be able to access it could result in significant new regulatory obligations for a wide array of businesses and investors.