On April 5, 2021, the Financial Crimes Enforcement Network (FinCEN) published an advanced notice of proposed rulemaking (ANPR) seeking feedback through May 5 from financial institutions (and others) regarding the beneficial ownership reporting requirements to be adopted under the Corporate Transparency Act (CTA). This call to action presents financial institutions the opportunity to offer perspective and insights that may help inform FinCEN’s rulemaking in connection with beneficial ownership reporting.

As many of you likely know, Congress passed the CTA in late 2020 as part of the Anti-Money Laundering Act of 2020 (which was included as part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA)). U.S. government reports identified the ability to operate through legal entities without identifying such entities’ beneficial owners as a significant risk to the U.S. finance system. Thus, Congress passed the CTA to develop a framework under which certain “reporting companies” would be required to report beneficial ownership information to FinCEN in order to protect U.S. national interests and better enable law enforcement to fight money laundering and other illicit activity.

What organizations will be required to report beneficial ownership information under the CTA?

The CTA defines a “reporting company” as any corporation, limited liability company, or other similar entity that is (i) created by the filing of a document with a secretary of state or similar office under state (or tribal) law; or (ii) formed under the law of a foreign country and registered to do business in the U.S. by the filing of a document with a secretary of state or similar office under state (or tribal) law. Notably, the CTA does not generally consider banks, credit unions, registered money transmitters, non-profits, or certain larger entities operating at a physical office within the U.S. to be reporting companies for purposes of the beneficial ownership reporting requirements.

What kind of information will reporting companies need to provide FinCEN?

The CTA requires a reporting company to provide FinCEN identifying information for each of the reporting company’s beneficial owners. A “beneficial owner” includes any individual who, directly or directly, exercises substantial control over the reporting company or who owns or controls not less than 25 percent of the ownership interests of the company. Beneficial owners do not include individuals acting as custodians or agents on behalf of another individual or individuals who have control over (or receive economic benefit from) a reporting company solely due to their status as employees of such company. Identifying information should include the beneficial owner’s full legal name, date of birth, current residential or street address, and a unique identifying number from an acceptable identification document. Reporting companies will have two years to submit their beneficial ownership information to FinCEN if those companies were formed or registered prior to the effective date of FinCEN’s implementing CTA regulations, which must be promulgated by January 1, 2022 but may have a later effective date. Reporting companies formed after the CTA regulations take effect will have an immediate reporting obligation.

How will FinCEN use the beneficial ownership information received under the CTA?

Information reported to FinCEN under the CTA is confidential and may not be used or disclosed by FinCEN except as expressly permitted under the CTA and applicable CTA regulations. Permissible uses by FinCEN of such information include disclosure to (i) federal agencies engaged in national security, intelligence or law enforcement activity; (ii) state, local, or tribal law enforcement agencies if a court has authorized such agencies to seek the information in a criminal or civil investigation; (iii) financial institutions (with the consent of the reporting company) to facilitate compliance with customer due diligence requirements; and (iv) federal functional regulators or other appropriate regulatory agencies.

How will the CTA impact financial institutions’ beneficial ownership obligations under FinCEN’s customer due diligence (CDD) rule?

In 2016, FinCEN promulgated the CDD rule, which requires financial institutions to identify the beneficial owner(s) of legal entity customers at the time a new account is opened and verify such identification according to risk-based procedures. Many of the beneficial ownership reporting obligations under the CTA overlap with the CDD rule. For example, the definitions for who is a “beneficial owner” are substantially similar and both rules require similar information to be obtained from beneficial owners.

Congress appears to be aware of the overlap between the CDD rule and the CTA. The NDAA also provides that, one year after the effective date of FinCEN’s CTA regulations, FinCEN should revise the CDD rule to bring it into conformance with the CTA and account for financial institution’s access to beneficial ownership information filed by reporting companies under the CTA.

Unfortunately, this likely does not mean that financial institutions will be able to avoid collecting beneficial ownership information in the future. The NDAA also states that FinCEN’s revisions to the CCD rule should only account for financial institution’s access to beneficial ownership information under the CTA “in order to confirm the beneficial ownership information provided directly to the financial institution.” In addition, the NDAA states that FinCEN shall revise the CDD rule by rescinding paragraphs (b) through (j) of 31 C.F.R. § 1010.230 (the CDD rule). Even if these paragraphs were rescinded, paragraph (a) of the CCD rule would remain in effect. Paragraph (a) generally requires that financial institutions maintain procedures designed to identify and verify the beneficial owners of legal entity customers.

Nonetheless, financial institutions have the opportunity to comment on the ANPR and provide feedback on how, in light of the CTA, some financial institution beneficial ownership obligations might be unnecessary or duplicative. For example, the ANPR specifically requests feedback on how FinCEN can make beneficial ownership information available to financial institutions with CDD obligations in order to make such information most useful to financial institutions. Responding to FinCEN’s request for comments on the ANPR is one action financial institutions can take now to help shape how the CTA might impact financial institution’s obligations under the CDD rule. However, until FinCEN’s CTA regulations go into effect, and until FinCEN acts on the NDAA directive to revise the CDD rule to conform to the CTA, the CTA will have little immediate impact on financial institution’s beneficial ownership obligations.

Davenport Evans stands ready to help our banking clients with questions. Contact a lawyer at 605-336-2880, [email protected], or visit www.dehs.com.

Sign up for eNews

Davenport, Evans, Hurwitz & Smith, LLP, located in Sioux Falls, South Dakota, is one of the State’s largest law firms. The firm’s attorneys provide business and litigation counsel to individuals and corporate clients in a variety of practice areas. For more information about Davenport Evans, visit www.dehs.com.