News

U.S. officials on Tuesday published their long-awaited roadmap for building a national database of corporate owners as mandated by the Corporate Transparency Act, or CTA, legislation widely considered the most comprehensive set of anti-money laundering reforms since 2001.

In a 188-page notice of proposed rulemaking, or NPRM, Treasury’s Financial Crimes Enforcement Network drilled down on the definition of beneficial owner, the specific information legal entities formed in the U.S. or foreign entities with U.S. operations should have to disclose, and the timing for making those disclosures, among other substantive and technical issues.

FinCEN published the NPRM eight months after first formally petitioning the public in an advanced notice to give feedback on more than 50 questions on the registry’s possible structure and functioning, and nearly a year after federal lawmakers passed the CTA, which tasked it with developing and finalizing rules to underpin the effort.

The bureau referenced the CTA repeatedly in Tuesday’s proposal.

The legislation requires “reporting companies” to provide FinCEN the names, birthdates, addresses and unique identifying numbers of each beneficial owner or company applicant—”four readily accessible pieces of information that should not be unduly burdensome for individuals to produce, or for reporting companies to collect and submit,” officials wrote.

The data

The bureau favors collecting a beneficial owner’s “residential address for tax residency purposes” rather than a business address, as the latter can be shared by multiple individuals who do not typically live onsite and therefore offers diminished value as a point of contact.

FinCEN prefers a “bifurcated” approach to obtaining identifying data from company applicants, the bureau’s term for corporate services providers and agents who register legal entities on behalf of others. Firms that qualify as company applicants must list their business address under the proposal, while individuals who qualify must list their residential address.

Pursuant to the CTA, the NPRM also proposes requiring legal entities to provide a unique identifying number for any beneficial owner and company applicant along with a scanned copy of any passport or other formal identification document from which the number is drawn.

“FinCEN believes that the collection of an image would significantly contribute to the creation of a highly useful database for law enforcement and other authorized users,” officials wrote in the proposal.

Rather than having to submit the full identifying information of all beneficial owners and company applicants each time they must make a filing, legal entities could instead obtain a unique “FinCEN identifier” from the bureau that would exclusively and permanently pinpoint those parties within the database.

Legal entities themselves would have to provide identifying information to the bureau, including any name under which they operate, their business address, the state or Tribal jurisdiction where they incorporated, and a tax identification number or other similarly unique identifier.

“Many commenters … encouraged FinCEN to require a reporting company to report a significant amount of additional information about … intermediate legal-entity owners through which ultimate natural-person beneficial owners … own their interests,” officials wrote. “However, the commenters … did not identify the statutory authority for the collection of such information.”

Legal entities formed or registered to do business in the U.S. after the beneficial ownership rulemaking takes effect would have 14 days from their date of incorporation to submit the information to FinCEN, while those already in existence would have one year.

Afterwards, entities would have 14 days to flag incorrect identifying data submitted to FinCEN and 30 days to flag updated data.

The filers

The bureau also sought to add granularity to the CTA’s definition of beneficial owner, which the legislation describes as any individual who directly or indirectly exercises “significant control” over a legal entity or owns or controls at least 25 percent of an entity’s “ownership interests.”

Serving as a “senior officer,” having authority to appoint or dismiss other senior officers or a majority of directors, and substantially influencing an entity’s operations would qualify individuals as beneficial owners under the control prong of the definition, as would any other similarly situated role or authority that the regulation does not list by name, FinCEN clarified.

The bureau cautioned, however, that “the ordinary execution of day-to-day managerial decisions with respect to one part of a reporting company’s assets or employees typically should not, in isolation, cause the decision maker to be considered in substantial control of a reporting company, unless that person satisfies another element of the ‘substantial control’ criteria.”

FinCEN further proposed defining “ownership interests” as equity, capital or profit interests, convertible instruments, warrants, or other options or privileges to buy such interests in the legal entity, as well as bonds or other debt instruments insofar as they allow the holder to convert them into equity.

“The proposed language aims to make clear that an individual may own or control ownership interests by way of the individual’s position as a grantor or settlor, a beneficiary, a trustee, or another individual with authority to dispose of trust assets,” officials wrote.

The proposal embraces a broader interpretation of control and ownership than FinCEN’s customer due-diligence rule, which since 2018 has required financial institutions to identify any individual that holds 25 percent or more equity in a legal entity for whom they open an account and at least one person with managerial responsibilities over the entity.

“FinCEN believes that limiting reporting of individuals in substantial control to one person as in the CDD rule—or indeed to impose any other numerical limit—would artificially limit the reporting,” officials wrote. “Second, the CDD rule does not provide transparency with respect to complex ownership structures, extensive use of trusts … and other mechanisms.”

The point

FinCEN published the NPRM after reviewing 220 “frequently conflicting” comments already submitted by businesses, nonprofits, trade groups, corporate services professionals, federal, state and local officials, and private individuals since the beginning of the rulemaking process.

The NPRM does not address the CTA’s requirement that the bureau protect the privacy and security of the data while ensuring that law enforcement, financial institutions and other relevant stakeholders can access it; nor revise the CDD rule to reflect the existence of the database as the legislation mandated.

FinCEN pledged Tuesday to tackle those issues in future rulemakings.

The CDD rule increased transparency by requiring financial institutions to collect beneficial ownership data when legal entities opened accounts with them, but may have fallen short by not requiring those same entities or their administrators to submit the data at the time of their incorporation, officials wrote.

As a result, ownership data in the U.S. “is generally not comprehensive, not reported to government, and therefore not immediately available to law enforcement, intelligence and national security agencies,” FinCEN concluded Tuesday.

Financial services representatives and other stakeholders have until Feb. 7 to answer 60 questions related to the potential efficacy, shortcomings and cost of the proposal.

“It is clear that FinCEN intends to cast a broad net – in particular, the definition of ‘beneficial owner’ is much broader than in the existing CDD rule and will require many more individuals to provide their information,” Dan Stipano, former deputy chief counsel with the Office of the Comptroller of the Currency, told ACAMS moneylaundering.com.

At the same time, the NPRM lists more exceptions to the definition of “reporting company” than those that apply to the CDD rule’s current, counterpart definition of “legal-entity customer,” said Stipano, now an attorney with the Davis Polk & Wardwell law firm in Washington, D.C.

“Some entities currently covered by the CDD rule would not be covered by the proposal,” he said. “This lack of alignment makes it likely that FinCEN will make substantial changes to the CDD rule when it issues conforming amendments. Notwithstanding this, there is likely to be a significant period of time when the proposal and the existing CDD rule exist side-by-side, which will raise issues.”

Contact Valentina Pasquali at vpasquali@acams.org