Proposed Rule2021-26548
Beneficial Ownership Information Reporting Requirements
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
December 8, 2021
Issuing agencies
Treasury DepartmentFinancial Crimes Enforcement Network
Abstract
FinCEN is promulgating proposed regulations to require certain entities to file reports with FinCEN that identify two categories of individuals: The beneficial owners of the entity; and individuals who have filed an application with specified governmental authorities to form the entity or register it to do business. The proposed regulations would implement Section 6403 of the Corporate Transparency Act (CTA), enacted into law as part of the National Defense Authorization Act for Fiscal Year 2021 (NDAA), and describe who must file a report, what information must be provided, and when a report is due. Requiring entities to submit beneficial ownership and company applicant information to FinCEN is intended to help prevent and combat money laundering, terrorist financing, tax fraud, and other illicit activity. Once finalized, these proposed regulations will affect a large number of entities doing business in the United States. This document also invites comments from the public regarding all aspects of the proposed regulations as well as comments in response to specific questions.
Full Text
<html>
<head>
<title>Federal Register, Volume 86 Issue 233 (Wednesday, December 8, 2021)</title>
</head>
<body><pre>
[Federal Register Volume 86, Number 233 (Wednesday, December 8, 2021)]
[Proposed Rules]
[Pages 69920-69974]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-26548]
[[Page 69919]]
Vol. 86
Wednesday,
No. 233
December 8, 2021
Part VI
Department of the Treasury
-----------------------------------------------------------------------
Financial Crimes Enforcement Network
-----------------------------------------------------------------------
31 CFR Part 1010
Beneficial Ownership Information Reporting Requirements; Proposed Rule
Federal Register / Vol. 86 , No. 233 / Wednesday, December 8, 2021 /
Proposed Rules
[[Page 69920]]
-----------------------------------------------------------------------
DEPARTMENT OF THE TREASURY
Financial Crimes Enforcement Network
31 CFR Part 1010
RIN 1506-AB49
Beneficial Ownership Information Reporting Requirements
AGENCY: Financial Crimes Enforcement Network (FinCEN), Treasury.
ACTION: Notice of proposed rulemaking (NPRM).
-----------------------------------------------------------------------
SUMMARY: FinCEN is promulgating proposed regulations to require certain
entities to file reports with FinCEN that identify two categories of
individuals: The beneficial owners of the entity; and individuals who
have filed an application with specified governmental authorities to
form the entity or register it to do business. The proposed regulations
would implement Section 6403 of the Corporate Transparency Act (CTA),
enacted into law as part of the National Defense Authorization Act for
Fiscal Year 2021 (NDAA), and describe who must file a report, what
information must be provided, and when a report is due. Requiring
entities to submit beneficial ownership and company applicant
information to FinCEN is intended to help prevent and combat money
laundering, terrorist financing, tax fraud, and other illicit activity.
Once finalized, these proposed regulations will affect a large number
of entities doing business in the United States. This document also
invites comments from the public regarding all aspects of the proposed
regulations as well as comments in response to specific questions.
DATES: Written comments on this proposed rule may be submitted on or
before February 7, 2022.
ADDRESSES: Comments may be submitted by any of the following methods:
<bullet> Federal E-rulemaking Portal: <a href="https://www.regulations.gov">https://www.regulations.gov</a>.
Follow the instructions for submitting comments. Refer to Docket Number
FINCEN-2021-0005 and RIN 1506-AB49.
<bullet> Mail: Policy Division, Financial Crimes Enforcement
Network, P.O. Box 39, Vienna, VA 22183. Refer to Docket Number FINCEN-
2021-0005 and RIN 1506-AB49.
FOR FURTHER INFORMATION CONTACT: The FinCEN Regulatory Support Section
at 1-800-767-2825 or electronically at <a href="/cdn-cgi/l/email-protection#4c2a3e2f0c2a25222f2922622b233a"><span class="__cf_email__" data-cfemail="b1d7c3d2f1d7d8dfd2d4df9fd6dec7">[email protected]</span></a>.
SUPPLEMENTARY INFORMATION:
I. Executive Summary
These proposed regulations would implement the requirement in the
CTA \1\ that a reporting company submit to FinCEN a report containing
beneficial owner and company applicant information (together,
``beneficial ownership information'' or BOI). This proposal fulfills
the statutory direction to Treasury to promulgate regulations to
implement the CTA and reflects FinCEN's careful consideration of public
comments received in response to an advanced notice of proposed
rulemaking (the ``ANPRM'').\2\ To the extent practicable, and as
required by the CTA, the proposed regulations aim to minimize the
burden on reporting companies and to ensure that the information
collected is accurate, complete, and highly useful. More broadly, the
proposed regulations are intended to protect U.S. national security,
provide critical information to law enforcement, and promote financial
transparency and compliance. The CTA and these proposed regulations
represent the culmination of years of efforts by Congress, the
Department of the Treasury (Treasury), other national security
agencies, law enforcement, and other stakeholders to bolster the United
States' corporate transparency framework and to address deficiencies in
BOI reporting noted by the Financial Action Task Force (FATF),
Congress, law enforcement, and others. The proposed regulations
address: (1) Who must file; (2) when they must file; and (3) what
information they must provide. Collecting this information and
providing access to law enforcement, the intelligence community, and
other key stakeholders will diminish the ability of malign actors to
obfuscate their activities through the use of anonymous shell and front
companies. The proposed regulations would also specify circumstances in
which a person violates the reporting requirements.
---------------------------------------------------------------------------
\1\ The CTA is Title LXIV of the William M. (Mac) Thornberry
National Defense Authorization Act for Fiscal Year 2021, Public Law
116-283 (January 1, 2021) (the ``NDAA''). Division F of the NDAA is
the Anti-Money Laundering Act of 2020, which includes the CTA.
Section 6403 of the CTA, among other things, amends the Bank Secrecy
Act (BSA) by adding a new Section 5336, Beneficial Ownership
Information Reporting Requirements, to Subchapter II of Chapter 53
of Title 31, United States Code.
\2\ 86 FR 17557 (Apr. 5, 2021).
---------------------------------------------------------------------------
The proposed regulations describe two distinct types of reporting
companies that must file reports with FinCEN--domestic reporting
companies and foreign reporting companies. Generally, under the
proposed regulations, a domestic reporting company is any entity that
is created by the filing of a document with a secretary of state or
similar office of a jurisdiction within the United States. A foreign
reporting company is any entity formed under the law of a foreign
jurisdiction that is registered to do business within the United
States.
The proposed regulations also describe the twenty-three specific
exemptions from the definition of reporting company under the CTA. The
CTA also includes an option for the Secretary of the Treasury
(Secretary), with the written concurrence of the Attorney General and
the Secretary of Homeland Security, to exclude by regulation additional
types of entities. FinCEN does not currently propose to exempt
additional types of entities beyond those specified by the CTA.
The proposed regulations describe who is a beneficial owner and who
is a company applicant. A beneficial owner is any individual who meets
at least one of two criteria: (1) Exercising substantial control over
the reporting company; or (2) owning or controlling at least 25 percent
of the ownership interest of the reporting company. The proposed
regulations define the terms ``substantial control'' and ``ownership
interest'' and describe rules for determining whether an individual
owns or controls 25 percent of the ownership interests of a reporting
company. The proposed regulations would also describe five types of
individuals who the CTA exempts from the definition of beneficial
owner.
The proposed regulations also describe who is a company applicant.
In the case of a domestic reporting company, a company applicant is the
individual who files the document that forms the entity. In the case of
a foreign reporting company, a company applicant is the individual who
files the document that first registers the entity to do business in
the United States. The proposed regulations specify that a company
applicant includes anyone who directs or controls the filing of the
document by another.
Under the proposed regulations, the time at which a required report
is due would depend on: (1) When the reporting company was created or
registered; and (2) whether the report is an initial report, an updated
report providing new information, or a report correcting erroneous
information in a previous report. Domestic reporting companies created,
or foreign reporting companies registered to do business in the United
States, before the effective date of the final regulations would have
one year from the effective date of the final regulations to file their
initial
[[Page 69921]]
report with FinCEN. Domestic reporting companies created, or foreign
reporting companies registered to do business in the U.S. for the first
time, on or after the effective date of the final regulations would be
required to file their initial report with FinCEN within 14 calendar
days of the date on which they are created or registered, respectively.
If there is a change in the information previously reported to FinCEN
under these regulations, reporting companies would have 30 calendar
days to file an updated report. Finally, if a reporting company filed
information that was inaccurate at the time of filing, the reporting
company would have to file a corrected report within 14 calendar days
of the date it knew, or should have known, that the information was
inaccurate.
The proposed regulations also describe the type of information that
a reporting company is required to file. First, the reporting company
would have to identify itself. The proposed regulations describe the
information that a reporting company must submit to FinCEN about: (1)
The reporting company, and (2) each beneficial owner and company
applicant. This includes, for example, the name and address of each
beneficial owner and company applicant, among other things. In lieu of
providing specific information about an individual, the reporting
company may provide a unique identifier issued by FinCEN called a
FinCEN identifier. The proposed regulations describe how to obtain a
FinCEN identifier and when it may be used. The proposed regulations
also describe highly useful information that reporting companies are
encouraged, but not required, to provide. This additional information
would support efforts by government authorities and financial
institutions to prevent money laundering, terrorist financing, and
other illicit activities such as tax evasion.
The CTA provides that it is unlawful for any person to willfully
provide, or attempt to provide, false or fraudulent BOI to FinCEN, or
to willfully fail to report complete or updated BOI to FinCEN. The
proposed regulations describe persons that are subject to this
provision and what acts (or failures to act) trigger a violation.
II. Scope of the NPRM
In addition to the reporting requirements addressed by this
proposed rule, Section 6403 contains other requirements. Section 6403
requires FinCEN to maintain the information that it collects under the
CTA in a confidential, secure, and non-public database. It further
authorizes FinCEN to disclose the information to certain government
agencies, domestic and foreign, for certain purposes specified in the
CTA; and to financial institutions to assist them in meeting their
customer due diligence requirements. All disclosures of information
submitted pursuant to Section 6403 are subject to appropriate protocols
to protect the security and confidentiality of the BOI. FinCEN is
required to establish such protocols by rulemaking.
Section 6403 also requires that FinCEN revise its current
regulation concerning customer due diligence (CDD) requirements for
financial institutions at 31 CFR 1010.230 (the ``CDD Rule''). The
current CDD Rule requires certain financial institutions to identify
and verify the beneficial owners of legal entity customers when those
customers open new accounts as part of those financial institutions'
customer due diligence programs.\3\
---------------------------------------------------------------------------
\3\ See 31 CFR 1010.230. See also Final Rule: Customer Due
Diligence Requirements for Financial Institutions, 81 FR 29398 (May
11, 2016) (promulgating same).
---------------------------------------------------------------------------
FinCEN intends to issue three sets of rulemakings to implement the
requirements of Section 6403: A rulemaking to implement the beneficial
ownership information reporting requirements, a second to implement the
statute's protocols for access to and disclosure of beneficial
ownership information, and a third to revise the existing CDD Rule,
consistent with the requirements of section 6403(d) of the CTA. In this
proposed rule, however, FinCEN seeks comments only on the first--the
proposed regulations that would implement the reporting requirements of
Section 6403. FinCEN intends to issue proposed regulations that would
implement the other aspects of section 6403 of the CTA in the future
and will solicit public comments on those proposed rules through
publication in the Federal Register.
While developing the final BOI reporting regulations, the BOI
access regulations, and the revisions to the current CDD Rule, FinCEN
continues to evaluate options for verification of information submitted
in BOI reports.\4\
---------------------------------------------------------------------------
\4\ In addition, pursuant to section 6502(b)(1)(C) and (D) of
the NDAA, the Secretary, in consultation with the Attorney General,
will conduct a study no later than two years after the effective
date of the BOI reporting final rule, to evaluate the costs
associated with imposing any new verification requirements on FinCEN
and the resources necessary to implement any such changes.
---------------------------------------------------------------------------
III. Background
A. Beneficial Ownership of Entities
i. Overview and Current Status of BOI Reporting in the United States
Legal entities such as corporations, limited liability companies,
partnerships, and trusts play an essential and legitimate role in the
U.S. and global economies. They are used to engage in lawful business
activity, raise capital, limit personal liability, generate
investments, and can be engines for innovation and economic growth,
among other activities. They can also be used to engage in illicit
activity and launder its proceeds, and enable those who threaten U.S.
national security to access and transact in the U.S. economy. Because
of the ease of setting up legal entities and the minimal amount of
information required to do so in most U.S. states,\5\ combined with the
investment opportunities the United States presents, the United States
continues to be a popular jurisdiction for legal entity formation. The
number of legal entities currently operating in the United States is
difficult to estimate with certainty, but Congress found that more than
two million corporations and limited liability companies are being
formed under the laws of the states each year.\6\ According to Global
Financial Integrity, more public and anonymous corporations are formed
in the United States than in any other jurisdiction.\7\ The number of
legal entities already in existence in the United States that may need
to report information on themselves, their beneficial owners, and their
formation or registration agents pursuant to the CTA is very likely in
the tens of millions.\8\
---------------------------------------------------------------------------
\5\ For simplicity, in the remainder of this NPRM preamble the
term ``state'' means the 50 states and the Commonwealth of Puerto
Rico, the Commonwealth of the Northern Mariana Islands, American
Samoa, Guam, the United States Virgin Islands.
\6\ CTA, Section 6402(1). FinCEN's analysis estimating such
entities is included in the regulatory analysis in Section VI of
this NPRM.
\7\ Global Financial Integrity, The Library Card Project: The
Ease of Forming Anonymous Companies in the United States, (March
2019) (``GFI Report''), p. 1, available at <a href="https://secureservercdn.net/50.62.198.97/34n.8bd.myftpupload.com/wp-content/uploads/2019/03/GFI-Library-Card-Project.pdf?time=1635277837">https://secureservercdn.net/50.62.198.97/34n.8bd.myftpupload.com/wp-content/uploads/2019/03/GFI-Library-Card-Project.pdf?time=1635277837</a>. In
2011, the World Bank assessed that 10 times more legal entities were
formed in the United States than in all 41 tax haven jurisdictions
combined. See The World Bank, UNODC, Stolen Asset Recovery
Initiative, The Puppet Masters: How the Corrupt Use Legal Structures
to Hide Stolen Assets and What to Do About It (2011), p. 93,
available at <a href="https://star.worldbank.org/sites/star/files/puppetmastersv1.pdf">https://star.worldbank.org/sites/star/files/puppetmastersv1.pdf</a>.
\8\ In the regulatory analysis in Section VI of this NPRM,
FinCEN estimates that there will be at least 25 million ``reporting
companies'' (entities that are required to report BOI and are not
exempt) in existence when the proposed rule becomes effective.
---------------------------------------------------------------------------
[[Page 69922]]
The United States does not have a centralized or other complete
aggregation of information about who owns and operates legal entities
within the United States. The information about U.S. legal entities
that is readily available to law enforcement is limited to the
information required to be reported when the entity is formed at the
state or Tribal level, unless an entity opens an account at a covered
financial institution that is required to collect certain BOI pursuant
to the CDD Rule. Though state- and Tribal-level entity formation laws
vary, most jurisdictions do not require the identification of an
entity's individual beneficial owners at the time of formation.\9\ In
addition, the vast majority of states require disclosure of little to
no contact information or information about an entity's officers.\10\
---------------------------------------------------------------------------
\9\ See, e.g., GFI Report, pp. 4, 6. See also U.S. Government
Accountability Office, Company Formations: Minimal Ownership
Information Is Collected and Available (April 2006), available at
<a href="https://www.gao.gov/assets/gao-06-376.pdf">https://www.gao.gov/assets/gao-06-376.pdf</a>. A few jurisdictions
require information about entities' beneficial owners. For example,
effective January 1, 2020, the District of Columbia requires that
entity registration filings ``state the names, residence and
business addresses of each person whose aggregate share of direct or
indirect, legal or beneficial ownership of a governance or total
distributional interest of the entity:
(A) Exceeds 10%; or
(B) Does not exceed 10%; provided, that the person:
(i) Controls the financial or operational decisions of the
entity; or
(ii) Has the ability to direct the day-to-day operations of the
entity.''
D.C. Code sec. 29-102.01(a)(6) (2021), available at <a href="https://code.dccouncil.us/us/dc/council/code/sections/29-102.01">https://code.dccouncil.us/us/dc/council/code/sections/29-102.01</a>.
\10\ See U.S. Government Accountability Office, Company
Formations: Minimal Ownership Information Is Collected and Available
(April 2006), available at <a href="https://www.gao.gov/assets/gao-06-376.pdf">https://www.gao.gov/assets/gao-06-376.pdf</a>. See also, e.g., The National Association of Secretaries of
State (NASS), NASS Summary of Information Collected by States (June
2019), available at <a href="https://www.nass.org/sites/default/files/company%20formation/nass-business-entity-info-collected-june2019.pdf">https://www.nass.org/sites/default/files/company%20formation/nass-business-entity-info-collected-june2019.pdf</a>, noting that in its review of key business entity
information collected by states during the entity formation process
and in annual or periodic reports, it observed that while 49 states
and the District of Columbia request information on registered agent
and incorporators during formation, collection of other information
is less widespread. For corporation formation, only 24 states
collected a principal office address; 21 states collected contact or
filer information; 17 states and the District of Columbia collected
information about the directors, officers, managers, or members,
though NASS notes that several states specify this as optional; and
one state collected ownership or control information. For limited
liability company formation, 32 states and the District of Columbia
collected a principal office address; 20 states collected contact or
filer information; 20 states collected information about the
directors, officers, managers, or members (though NASS noted this
collection requirement may be optional; and 2 states collected
ownership or control information. It appears more states collected
information during periodic reports than formation, but ownership
information remained the least reported, with 3 states and 2 states
collecting such information from corporations and limited liability
companies, respectively. In its 2019 state-by state analysis of
incorporation requirements, the GFI found that (1) 23 states
(Alaska, Arkansas, Connecticut, Indiana, Illinois, Maine, Michigan,
Minnesota, Missouri, Mississippi, Montana, North Carolina, New
Hampshire, New Mexico, Nevada, Oklahoma, Pennsylvania, Rhode Island,
South Carolina, Texas, Virginia, Washington, and Wisconsin) and the
District of Columbia do not require that a company's address be
provided; (2) every state requires the name of the person who
incorporated the company; (3) four states (Alaska, California, Ohio
and Virginia) do not require the incorporator's address; (4) 13
states require information about a company's directors; and (5) five
states require information about a company's officers either upon
incorporation or within the first 90 days after incorporation. GFI
Report, supra note 4, p. 4.
---------------------------------------------------------------------------
ii. The Value of BOI and the Department of the Treasury's Efforts To
Address the Lack of Transparency in Legal Entity Ownership Structures
Access to BOI reported under the CTA would significantly enhance
the U.S. Government and law enforcement's ability to protect the U.S.
financial system from illicit use. It would also impede malign actors
from abusing legal entities to conceal proceeds from criminal acts that
undermine U.S. national security, such as corruption, human smuggling,
drug and arms trafficking, and terrorist financing. For example, BOI
can add valuable context to financial analysis in support of law
enforcement and tax investigations. It can also provide essential
information to the intelligence and security professionals who work to
prevent terrorists, proliferators, and those who seek to undermine our
democratic institutions or threaten other core U.S. interests from
raising, hiding, or moving money in the United States through anonymous
shell or front companies.\11\ Broadly, and critically, BOI can assist
in the identification of linkages between potential illicit actors and
business entities, including shell companies. Shell companies are
typically non-publicly traded corporations, limited liability
companies, or entities that have no physical presence beyond a mailing
address and generate little to no independent economic value,\12\ and
often are formed without disclosing their beneficial owners.
Furthermore, shell companies can be used to conduct financial
transactions without disclosing their true beneficial owners'
involvement.
---------------------------------------------------------------------------
\11\ A front company generates legitimate business proceeds to
commingle with illicit earnings. See U.S. Department of the
Treasury, National Money Laundering Risk Assessment (2018), p. 29,
available at <a href="https://home.treasury.gov/system/files/136/2018NMLRA_12-18.pdf">https://home.treasury.gov/system/files/136/2018NMLRA_12-18.pdf</a>.
\12\ FinCEN Advisory, FIN-2017-A003, ``Advisory to Financial
Institutions and Real Estate Firms and Professionals,'' p. 3 (August
22, 2017), available at <a href="https://www.fincen.gov/sites/default/files/advisory/2017-08-22/Risk%20in%20Real%20Estate%20Advisory_FINAL%20508%20Tuesday%20%28002%29.pdf">https://www.fincen.gov/sites/default/files/advisory/2017-08-22/Risk%20in%20Real%20Estate%20Advisory_FINAL%20508%20Tuesday%20%28002%29.pdf</a>. ``Most shell companies are formed by individuals and
businesses for legitimate purposes, such as to hold stock or assets
of another business entity or to facilitate domestic and
international currency trades, asset transfers, and corporate
mergers. Shell companies can often be formed without disclosing the
individuals that ultimately own or control them (i.e., their
beneficial owners) and can be used to conduct financial transactions
without disclosing their true beneficial owners' involvement.'' Id.
While shell companies are used for legitimate corporate structuring
purposes including in mergers or acquisitions, they are also used in
common financial crime schemes. See FinCEN, The Role of Domestic
Shell Companies in Financial Crime and Money Laundering: Limited
Liability Companies (November 2006), p. 4, available at <a href="https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf">https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf</a>.
---------------------------------------------------------------------------
Some of the principal authors of the CTA in the Senate and U.S.
House of Representatives recently wrote to Department of the Treasury
Secretary Janet L. Yellen that ``[e]ffective and timely implementation
of the new BOI reporting requirement will be a dramatic step forward,
strengthening U.S. national security by making it more difficult for
malign actors to exploit opaque legal structures to facilitate and
profit from their bad acts. . . . This means writing the rule broadly
to include in the reporting as many corporate entities as possible
while narrowly limiting the exemptions to the smallest possible set
permitted by the law.'' \13\ They went on to note that such an approach
``will address the current and evolving strategies that terrorists,
criminals, and kleptocrats employ to hide and launder assets. It will
also foreclose loophole options for creative criminals and their
financial enablers, maximize the quality of the information collected,
and prevent the evasion of BOI reporting.'' \14\ The integration of BOI
reported pursuant to the CTA with the current data collected under the
Bank Secrecy Act (BSA),\15\ and other
[[Page 69923]]
relevant government data, is expected to improve efforts to target
illicit actors and their financial activities. The collection of BOI in
a centralized database accessible to U.S. Government departments and
agencies, law enforcement, tax authorities, and financial institutions
may also help to level the playing field for honest businesses,
particularly small businesses with fewer resources, that are at a
disadvantage when competing against criminals who use shell companies
to evade taxes, hide their illicit wealth, and defraud employees and
customers.\16\
---------------------------------------------------------------------------
\13\ United States Congress, Letter from Senator Sherrod Brown,
Chairman of the Senate Committee on Banking, Housing and Urban
Affairs, Representative Maxine Waters, Chairwoman of the House
Committee on Financial Services, and Representative Carolyn B.
Maloney, Chairwoman of the House Committee on Oversight and Reform,
letter to Department of the Treasury Secretary Janet L. Yellen
(November 3, 2021), available at <a href="https://financialservices.house.gov/uploadedfiles/11.04_waters_brown_maloney_letter_on_cta.pdf">https://financialservices.house.gov/uploadedfiles/11.04_waters_brown_maloney_letter_on_cta.pdf</a>.
\14\ Id.
\15\ Section 6003(1) of the Anti-Money Laundering Act of 2020
defines the BSA as comprising Section 21 of the Federal Deposit
Insurance Act (12 U.S.C. 1829b), Chapter 2 of Title I of Public Law
91-508 (12 U.S.C. 1951 et seq.), and Subchapter II of Chapter 53 of
Title 31, United States Code. Congress has authorized the Secretary
to administer the BSA. The Secretary has delegated to the Director
of FinCEN the authority to implement, administer, and enforce
compliance with the BSA and associated regulations (Treasury Order
180-01 (Jan. 14, 2020)).
\16\ FinCEN, Prepared Remarks of FinCEN Director Kenneth A.
Blanco, delivered at the Federal Identity (FedID) Forum and
Exposition, Identity: Attack Surface and a Key to Countering Illicit
Finance, noting also that ``[f]or many of the companies here today--
those that are developing or dealing with sensitive technologies--
understanding who may want to invest in your ventures, or who is
competing with you in the marketplace, would allow for better, safer
decisions to protect intellectual property.'' (September 24, 2019).
<a href="https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-federal-identity-fedid">https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-federal-identity-fedid</a>.
---------------------------------------------------------------------------
Since 2000, the Department of the Treasury, including FinCEN, has
been raising awareness about the role of shell companies, their
obfuscation of beneficial owners, and their role in facilitating
criminal activity.\17\ In a 2006 report on the role of domestic shell
companies in financial crime and money laundering, FinCEN found that
shell companies enabled the movement of billions of dollars across
borders by unknown beneficial owners, thereby facilitating money
laundering or terrorist financing.\18\ Concurrently with the issuance
of the report in 2006, FinCEN published an advisory alerting financial
institutions to the money laundering risks involved in providing
financial services to shell companies.\19\ In 2010, FinCEN, along with
the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the National Credit Union
Administration, the Office of the Comptroller of the Currency, the
Office of Thrift Supervision, and the Securities and Exchange
Commission, and in consultation with the Commodity Futures Trading
Commission, issued guidance clarifying and consolidating regulatory
expectations at the time for obtaining BOI for certain accounts and
customer relationships.\20\ The guidance noted that BOI in account
relationships provides another tool for financial institutions to
better understand and address money laundering and terrorist financing
risks, protect themselves from criminal activity, and assist law
enforcement with investigations and prosecutions.\21\
---------------------------------------------------------------------------
\17\ See, e.g., Suspicious Activity (SAR) Report Review Issue #1
(October 2000) (noting that SARS filed in 2000 reflected suspicious
wire transfer patterns involving shell companies that lacked
legitimate business purposes and that were being used to transfer
large amounts of funds), p. 11. <a href="https://www.fincen.gov/sites/default/files/shared/sar_tti_01.pdf">https://www.fincen.gov/sites/default/files/shared/sar_tti_01.pdf</a>.
\18\ FinCEN, The Role of Domestic Shell Companies in Financial
Crime and Money Laundering: Limited Liability Companies (November
2006), available at <a href="https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf">https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf</a>.
\19\ FinCEN, Potential Money Laundering Risks Associated with
Shell Companies (November 2006), available at <a href="https://www.fincen.gov/resources/statutes-regulations/guidance/potential-money-laundering-risks-related-shell-companies">https://www.fincen.gov/resources/statutes-regulations/guidance/potential-money-laundering-risks-related-shell-companies</a>.
\20\ FinCEN, FIN-2010-G001, Guidance on Retaining and Obtaining
Beneficial Ownership Information (March 5, 2010), available at
<a href="https://www.fincen.gov/resources/statutes-regulations/guidance/guidance-obtaining-and-retaining-beneficial-ownership">https://www.fincen.gov/resources/statutes-regulations/guidance/guidance-obtaining-and-retaining-beneficial-ownership</a>. The CDD Rule
and subsequent guidance and examination guidelines have superseded
the 2010 beneficial ownership guidance.
\21\ Id., noting that ``[h]eightened risks can arise with
respect to beneficial owners of accounts because nominal account
holders can enable individuals and business entities to conceal the
identity of the true owner of assets or property derived from or
associated with criminal activity. Moreover, criminals, money
launderers, tax evaders, and terrorists may exploit the privacy and
confidentiality surrounding some business entities, including shell
companies and other vehicles designed to conceal the nature and
purpose of illicit transactions and the identities of the persons
associated with them.''
---------------------------------------------------------------------------
In 2006, the FATF \22\ issued its Third Mutual Evaluation Report on
Anti-Money Laundering and Combating the Financing of Terrorism, with
respect to the United States (``2006 FATF Report''). The 2006 FATF
Report highlighted the United States' lack of timely BOI available to
relevant stakeholders.\23\ Following this report, both the U.S. Senate
and the U.S. House of Representatives introduced bipartisan legislation
to establish a nationwide beneficial ownership registry. These initial
beneficial ownership registry bills included the Incorporation
Transparency and Law Enforcement Assistance Act, first introduced in
the U.S. Senate in 2008 and in the U.S. House of Representatives in
2010.\24\
---------------------------------------------------------------------------
\22\ The FATF, of which the United States is a founding member,
is an international, inter-governmental task force whose purpose is
the development and promotion of international standards and the
effective implementation of legal, regulatory, and operational
measures to combat money laundering, terrorist financing, the
financing of proliferation, and other related threats to the
integrity of the international financial system. The FATF assesses
over 200 jurisdictions against its minimum standards for beneficial
ownership transparency. Among other things, it has established
standards on transparency and beneficial ownership of legal persons,
so as to deter and prevent the misuse of corporate vehicles. See
FATF Recommendation 24, Transparency and Beneficial Ownership of
Legal Persons, The FATF Recommendations: International Standards on
Combating Money Laundering and the Financing of Terrorism and
Proliferation (updated October 2020), available at <a href="https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html">https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html</a>; FATF Guidance, Transparency and Beneficial
Ownership, Part III (October 2014), available at <a href="https://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf">https://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf</a>.
\23\ Third Mutual Evaluation Report on Anti-Money Laundering and
Combating the Financing of Terrorism, United States (2006), p. 237-
239, 299, 302, 305, 308 available at <a href="https://www.fatf-gafi.org/media/fatf/documents/reports/mer/MER%20US%20full.pdf">https://www.fatf-gafi.org/media/fatf/documents/reports/mer/MER%20US%20full.pdf</a>.
\24\ Incorporation Transparency and Law Enforcement Assistance
Act, S. 2956 110th Cong. (2008), available at <a href="https://www.congress.gov/110/bills/s2956/BILLS-110s2956is.pdf">https://www.congress.gov/110/bills/s2956/BILLS-110s2956is.pdf</a>; Incorporation
Transparency and Law Enforcement Assistance Act, H.R. 6098 111th
Cong. (2010).
---------------------------------------------------------------------------
FinCEN took its first major regulatory step to collecting BOI when
it initiated the CDD rulemaking process in March 2012 by issuing an
advance notice of proposed rulemaking (ANPRM),\25\ followed by a NPRM
in August 2014.\26\ FinCEN published the final CDD Rule in May
2016.\27\ The CDD Rule was the culmination of years of study and
consultation with industry, law enforcement, civil society
organizations, and other stakeholders, on the need for financial
institutions to collect BOI and the value of that information. Citing a
number of examples, the preamble to the CDD Rule noted that, among
other things, BOI collected by financial institutions pursuant to the
CDD Rule would: (1) Assist financial investigations by law enforcement
and examinations by regulators; (2) increase the ability of financial
institutions, law enforcement, and the intelligence community to
address threats to national security; (3) facilitate reporting and
investigations in support of tax compliance; and (4) advance Treasury's
broad strategy to enhance financial transparency of legal entities.\28\
---------------------------------------------------------------------------
\25\ 77 FR 13046 (March 5, 2012).
\26\ 79 FR 45151 (August 4, 2014).
\27\ 81 FR 29397 (May 11, 2016).
\28\ 81 FR 29399-29402.
---------------------------------------------------------------------------
In December 2016, the FATF issued another Anti-Money Laundering and
Counter-Terrorist Financing Measures, United States Mutual Evaluation
Report (``2016 FATF Report''), and continued to note U.S. deficiencies
in the area of beneficial ownership transparency. The 2016 FATF Report
identified the lack of BOI reporting requirements as one of the
fundamental gaps in the U.S. anti-money laundering/countering the
financing of terrorism (AML/CFT)
[[Page 69924]]
regime.\29\ The 2016 FATF Report also observed that ``the relative ease
with which U.S. corporations can be established, their opaqueness and
their perceived global credibility makes them attractive to abuse for
[money laundering and terrorism financing], domestically as well as
internationally.'' \30\ The Assistant Attorney General of the Criminal
Division and Acting Assistant Attorney General of the National Security
Division at the Department of Justice issued a statement following the
publication of the 2016 FATF Report stating that ``[f]ull transparency
of corporate ownership would strengthen our ability to trace illicit
financial flows in a timely fashion and firmly declare that the United
States will not be a safe haven for criminals and terrorists looking to
disguise their identities for nefarious purposes.'' \31\
---------------------------------------------------------------------------
\29\ See FATF, Anti-Money Laundering and Counter-Terrorist
Financing Measures United States Mutual Evaluation Report (2016), p.
4 (key findings) and Ch. 7., available at <a href="https://www.fatf-gafi.org/media/fatf/documents/reports/mer4/MER-United-States-2016.pdf">https://www.fatf-gafi.org/media/fatf/documents/reports/mer4/MER-United-States-2016.pdf</a>.
\30\ Id., p. 153.
\31\ U.S. Department of Justice, Assistant Attorney General
Leslie Caldwell of the Criminal Division and Acting Assistant
Attorney General Mary McCord of the National Security Division,
Financial Action Task Force Report Recognizes U.S. Anti-Money
Laundering and Counter-Terrorist Financing Leadership, but Action is
Needed on Beneficial Ownership, (December 1, 2016), available at
<a href="https://www.justice.gov/archives/opa/blog/financial-action-task-force-report-recognizes-us-anti-money-laundering-and-counter">https://www.justice.gov/archives/opa/blog/financial-action-task-force-report-recognizes-us-anti-money-laundering-and-counter</a>.
---------------------------------------------------------------------------
While the CDD Rule increased transparency by requiring the
collection of BOI by covered financial institutions at the time of an
account opening, the Rule did not address the collection of BOI at the
time of a legal entity's formation. Following the issuance of the 2016
FATF Report, Treasury and Department of Justice officials remained
committed to working with Congress on beneficial ownership legislation
that would require companies to report adequate, accurate, and current
beneficial ownership information at the time of a company's formation.
In addition, between the initial 2008 Incorporation Transparency and
Law Enforcement Assistance Act \32\ and the 2016 FATF Report,
bipartisan beneficial ownership registry legislation continued to be
introduced in each Congress. The introduction of the Corporate
Transparency Act of 2017 in June 2017 (in the U.S. House of
Representatives) and August 2017 (in the U.S. Senate) \33\ followed the
2016 FATF Report. In November 2017, testimony at a Senate Judiciary
Committee hearing, Deputy Assistant Secretary of the Treasury Jennifer
Fowler, head of the U.S. FATF delegation during the 2016 FATF Report,
highlighted the significant vulnerability identified by FATF, noting
that ``this has permitted criminals to shield their true identities
when forming companies and accessing our financial system.'' She also
remarked that, while Treasury's CDD Rule was an important step forward,
more remained to be done working with Congress to find a solution to
collecting BOI.\34\
---------------------------------------------------------------------------
\32\ See supra note 23.
\33\ Corporate Transparency Act of 2017, H.R. 3089 115th Cong.
(2017); Corporate Transparency Act of 2017, S. 1717 115th Cong.
(2017).
\34\ U.S. Department of the Treasury, Testimony of Jennifer
Fowler, Deputy Assistant Secretary Office of Terrorist Financing and
Financial Crimes, Senate Judiciary Committee (November 28, 2017),
available at <a href="https://www.judiciary.senate.gov/imo/media/doc/Fowler%20Testimony.pdf">https://www.judiciary.senate.gov/imo/media/doc/Fowler%20Testimony.pdf</a>.
---------------------------------------------------------------------------
Over the years, Treasury and Department of Justice officials
repeatedly and publicly articulated the need for the United States to
enhance and improve authorities to collect BOI. In February 2018,
Acting Deputy Assistant Attorney General M. Kendall Day testified at a
Senate Judiciary Committee hearing on beneficial ownership reporting
that ``[t]he pervasive use of front companies, shell companies,
nominees, or other means to conceal the true beneficial owners of
assets is one of the greatest loopholes in this country's AML regime.''
\35\ In December 2019, FinCEN Director Kenneth Blanco noted that
``[t]he lack of a requirement to collect information about who really
owns and controls a business and its assets at company formation is a
dangerous and widening gap in our national security apparatus.'' \36\
He also highlighted how this gap has been addressed in part through the
CDD Rule and how much more work needed to be done, stating that ``[t]he
next critical step to closing this national security gap is collecting
beneficial ownership information at the corporate formation stage. If
beneficial ownership information were required at company formation, it
would be harder and more costly for criminals, kleptocrats, and
terrorists to hide their bad acts, and for foreign states to avoid
detection and scrutiny. This would help deter bad actors accessing our
financial system in the first place, denying them the ability to profit
and benefit from its power while threatening our national security and
putting people at risk.'' \37\
---------------------------------------------------------------------------
\35\ U.S. Department of Justice, Statement of M. Kendall Day,
Acting Deputy Assistant Attorney General, Criminal Division, U.S.
Department of Justice, Before the Committee on the Judiciary, United
States Senate, for a Hearing Entitled ``Beneficial Ownership:
Fighting Illicit International Financial Networks Through
Transparency,'' presented February 6, 2018, p. 3, available at
<a href="https://www.judiciary.senate.gov/imo/media/doc/02-06-18%20Day%20Testimony.pdf">https://www.judiciary.senate.gov/imo/media/doc/02-06-18%20Day%20Testimony.pdf</a>.
\36\ FinCEN, Prepared Remarks of FinCEN Director Kenneth A.
Blanco, delivered at the American Bankers Association/American Bar
Association Financial Crimes Enforcement Conference, (December 10,
2019), available at <a href="https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-american-bankers">https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-american-bankers</a>.
\37\ Id.
---------------------------------------------------------------------------
Continuing its analysis of the use of shell and front companies to
hide ill-gotten gains, in its 2018 National Money Laundering Risk
Assessment, and in its 2018 and 2020 National Strategies for Combating
Terrorist and Other Illicit Financing (``2018 Illicit Financing
Strategy'' and ``2020 Illicit Financing Strategy,'' respectively), the
Department of the Treasury discussed the money laundering risks
inherent in the United States' lack of a comprehensive beneficial
ownership reporting regime.\38\ In the 2018 National Money Laundering
Risk Assessment, Treasury highlighted a number of cases where shell and
front companies were used in the United States to disguise funds
generated in Medicare and Medicaid fraud, trade-based money laundering,
or drug trafficking, among other crimes.\39\ In the 2018 Illicit
Financing Strategy, Treasury flagged the use of shell companies by
Russian organized crime groups in the United States, as well as the
Iranian Government's use of shell companies to obfuscate the source of
funds and its role as it tried to generate revenue.\40\ The 2020
Illicit Financing Strategy cited the lack of a requirement to collect
BOI at the time of company formation and after changes in ownership as
one of the most significant vulnerabilities of the U.S. financial
system.\41\
---------------------------------------------------------------------------
\38\ See e.g., id., p. 28, and U.S. Department of the Treasury,
National Strategy for Combating Terrorist and Other Illicit
Financing (2020) (``2020 Illicit Financing Strategy''), pp. 13-14,
27, 34, available at <a href="https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf">https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf</a>.
\39\ U.S. Department of the Treasury, National Money Laundering
Risk Assessment (2018), pp. 28-30, available at <a href="https://home.treasury.gov/system/files/136/2018NMLRA_12-18.pdf">https://home.treasury.gov/system/files/136/2018NMLRA_12-18.pdf</a>.
\40\ U.S. Department of the Treasury, National Strategy for
Combating Terrorist and Other Illicit Financing (2018), pp. 20, 47,
available at <a href="https://home.treasury.gov/system/files/136/nationalstrategyforcombatingterroristandotherillicitfinancing.pdf">https://home.treasury.gov/system/files/136/nationalstrategyforcombatingterroristandotherillicitfinancing.pdf</a>.
\41\ 2020 Illicit Financing Strategy, supra note 35, p. 12,
available at <a href="https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf">https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf</a>.
---------------------------------------------------------------------------
Most recently, Congress enacted the Anti-Money Laundering Act of
2020 (the ``AML Act''), of which the CTA is a part.\42\ Congress
explained that among
[[Page 69925]]
other purposes, the AML Act was meant to ``improve transparency for
national security, intelligence, and law enforcement agencies and
financial institutions concerning corporate structures and insight into
the flow of illicit funds through those structures'' and ``discourage
the use of shell corporations as a tool to disguise and move illicit
funds.'' \43\ As part of its ongoing efforts to implement the AML Act,
FinCEN published in June 2021 the first national AML/CFT priorities,
further highlighting the use of shell companies by human traffickers,
smugglers, and weapons proliferators, among others, to generate
revenues and transfer funds in support of illicit conduct.\44\
---------------------------------------------------------------------------
\42\ The Anti-Money Laundering Act of 2020 was enacted as
Division F, Sec. Sec. 6001-6511, of the William M. (Mac) Thornberry
National Defense Authorization Act for Fiscal Year 2021, Public Law
116-283 (2021).
\43\ Id., Section 6002(5)(A)-(B).
\44\ FinCEN, Anti-Money Laundering and Countering the Financing
of Terrorism Priorities (June 30, 2021), pp. 11-12, available at
<a href="https://www.fincen.gov/sites/default/files/shared/AML_CFT%20Priorities%20">https://www.fincen.gov/sites/default/files/shared/AML_CFT%20Priorities%20</a>(June%2030%2C%202021).pdf.
---------------------------------------------------------------------------
iii. National Security and Law Enforcement Implications of Legal
Entities With Anonymous Beneficial Owners
While many legal entities are used for legitimate purposes, they
can also be misused, as highlighted above and as Congress recognized in
the CTA.\45\ Corrupt actors and their financial facilitators, as a
general matter, take advantage of the administrative ease of entity
formation, the low cost, and the lack of information needed to
establish such structures in the United States. Those actors then use
the resulting anonymity and perceived legitimacy afforded to legal
entities, such as shell companies, to disguise and convert the proceeds
of crime before introducing them into the financial system. For
example, such legal entities are used to: (1) Obscure the proceeds of
bribery and large-scale corruption, money laundering, narcotics
offenses, terrorist or proliferation financing, and human trafficking;
(2) disguise efforts to undermine the integrity of U.S. elections and
institutions; and (3) conduct other threatening and illegal activities.
The ability of malign actors to hide behind opaque corporate
structures, including anonymous shell and front companies, and to
generate funding to finance their illicit activities continues to be a
significant threat to the national security of the United States. The
lack of a centralized BOI repository accessible to law enforcement and
the intelligence community not only erodes the safety and security of
our nation, but also undermines the U.S. Government's ability to
address these threats to the United States.
---------------------------------------------------------------------------
\45\ ``[Ma]lign actors seek to conceal their ownership of
corporations, limited liability companies, or other similar entities
in the United States to facilitate illicit activity, including money
laundering, the financing of terrorism, proliferation financing,
serious tax fraud, human and drug trafficking, counterfeiting,
piracy, securities fraud, financial fraud, and acts of foreign
corruption[.]'' CTA, Section 6402(3).
---------------------------------------------------------------------------
In the United States, the deliberate misuse of legal entities,
including corporations and limited liability companies, continues to
significantly enable money laundering and other illicit financial
activity and national security threats. Treasury noted in its 2020
Illicit Financing Strategy that ``[m]isuse of legal entities to hide a
criminal beneficial owner or illegal source of funds continues to be a
common, if not the dominant, feature of illicit finance schemes,
especially those involving money laundering, predicate offences, tax
evasion, and proliferation financing . . . A Treasury study based on a
statistically significant sample of adjudicated IRS cases from 2016-
2019 found legal entities were used in a substantial proportion of the
reviewed cases to perpetrate tax evasion and fraud. According to
federal prosecutors and law enforcement, large-scale schemes that
generate substantial proceeds for perpetrators and smaller white-collar
cases alike routinely involve shell companies, either in the underlying
criminal activity or subsequent laundering.'' \46\ The Drug Enforcement
Administration also recently highlighted that drug trafficking
organizations (DTOs) use shell and front companies to commingle illicit
drug proceeds with legitimate revenue of front companies, thereby
enabling the DTOs to launder their drug proceeds.\47\
---------------------------------------------------------------------------
\46\ 2020 Illicit Financing Strategy, supra note 35, pp. 13-14,
available at <a href="https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf">https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf</a>.
\47\ Drug Enforcement Administration, 2020 Drug Enforcement
Administration National Drug Threat Assessment (``DEA 2020 NDTA''),
pp. 87-88 (2020), available at <a href="https://www.dea.gov/sites/default/files/2021-02/DIR-008-212020NationalDrugThreatAssessment_WEB.pdf">https://www.dea.gov/sites/default/files/2021-02/DIR-008-212020NationalDrugThreatAssessment_WEB.pdf</a>.
---------------------------------------------------------------------------
Recently, in a joint Federal Bureau of Investigation (FBI) and
Internal Revenue Service--Criminal Investigations (IRS-CI)
investigation, the Department of Justice filed civil forfeiture
complaints aggregating to $1.7 billion under the Kleptocracy Asset
Recovery Initiative related to the 1Malaysia Development Berhad (1MDB)
investigation. From 2009 through 2015, more than $4.5 billion in funds
belonging to 1MDB was allegedly misappropriated by high-level officials
of 1MDB and their associates. 1MDB was created by the Government of
Malaysia to promote economic development in Malaysia through global
partnerships and foreign direct investment, and the associated funds
were intended to be used for improving the well-being of the Malaysian
people. However, using fraudulent documents and representations, the
co-conspirators allegedly laundered the funds through a series of
complex transactions and shell companies with bank accounts located in
the United States and abroad. These transactions allegedly served to
conceal the origin, source and ownership of the funds, and ultimately
passed through U.S. financial institutions to then be used to acquire
and invest in assets located in the United States and overseas.
Included in the forfeiture were multiple luxury properties in New York
City, Los Angeles, Beverly Hills, and London, mostly titled in the name
of shell companies, as well as paintings by Van Gogh, Monet, Picasso, a
yacht, several items of extravagant jewelry, and numerous other items
of personal property. The investigation into the location and holders
of the assets associated with the alleged 1MDB scheme was made much
more difficult by the shell companies with connections in foreign
destinations.\48\
---------------------------------------------------------------------------
\48\ FBI, Testimony of Steven M. D'Antuono, Section Chief,
Criminal Investigative Division, ``Combatting Illicit Financing by
Anonymous Shell Companies'' (May 21, 2019), available at <a href="https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies">https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies</a>.
---------------------------------------------------------------------------
Shell companies also are used to evade sanctions imposed by the
U.S. Government, thereby endangering U.S. national security. In a 2020
bipartisan report, the Senate Permanent Subcommittee on Investigations
detailed, for example, how after Treasury's Office of Foreign Assets
Control (OFAC) had sanctioned certain Russian oligarchs in connection
with Russia's annexation of Crimea and for supporting Russian President
Vladimir Putin,\49\ those sanctioned oligarchs used shell companies to
engage in a total of $91 million in transactions, and to purchase $18
million dollars in high-value art in the United States.\50\ In a
[[Page 69926]]
more recent example, in a federal criminal complaint unsealed in March
2021, the Department of Justice charged 10 Iranian nationals with
running a nearly 20-year-long scheme to evade U.S. sanctions on the
Government of Iran by disguising more than $300 million worth of
transactions--including the purchase of two $25 million oil tankers--on
Iran's behalf through front companies in the San Fernando Valley,
Canada, Hong Kong and the United Arab Emirates.\51\ The U.S. State
Department has designated Iran as a state sponsor of terrorism. During
the scheme, the defendants allegedly created and used more than 70
front companies, money service businesses, and exchange houses in the
United States, Iran, Canada, the United Arab Emirates and Hong Kong.
The defendants also allegedly made false representations to financial
institutions to disguise more than $300 million worth of transactions
on Iran's behalf, using money wired in U.S. dollars and sent through
U.S.-based banks.\52\
---------------------------------------------------------------------------
\49\ U.S. Department of Treasury, Treasury Sanctions Russian
Officials, Members of the Russian Leadership's Inner Circle, and an
Entity for Involvement in the Situation in Ukraine (March 20, 2014),
available at <a href="https://www.treasury.gov/press-center/press-releases/Pages/jl23331.aspx">https://www.treasury.gov/press-center/press-releases/Pages/jl23331.aspx</a>.
\50\ United States Senate Permanent Subcommittee on
Investigations, Committee on Homeland Security and Governmental
Affairs, Staff Report: The Art Industry And U.S. Policies That
Undermine Sanctions (July 2020), pp. 7 and 144, available at <a href="https://www.hsgac.senate.gov/imo/media/doc/2020-07-29%20PSI%20Staff%20Report%20-%20The%20Art%20Industry%20and%20U.S.%20Policies%20that%20Undermine%20Sanctions.pdf">https://www.hsgac.senate.gov/imo/media/doc/2020-07-29%20PSI%20Staff%20Report%20-%20The%20Art%20Industry%20and%20U.S.%20Policies%20that%20Undermine%20Sanctions.pdf</a>.
\51\ U.S. Department of Justice (U.S. Attorney's Office, Central
District of California), Iranian Nationals Charged with Conspiring
to Evade U.S. Sanctions on Iran by Disguising $300 Million in
Transactions Over Two Decades (March 19, 2021), available at <a href="https://www.justice.gov/usao-cdca/pr/iranian-nationals-charged-conspiring-evade-us-sanctions-iran-disguising-300-million">https://www.justice.gov/usao-cdca/pr/iranian-nationals-charged-conspiring-evade-us-sanctions-iran-disguising-300-million</a>.
\52\ Id.
---------------------------------------------------------------------------
iv. The Law Enforcement Need for Improved BOI Collection
Although the U.S. Government has tools capable of obtaining some
beneficial ownership information, their limitations and the time and
cost required to successfully deploy them demonstrate the significant
benefits that a centralized repository of information would provide law
enforcement. The CTA explains that ``malign actors seek to conceal
their ownership of corporations, limited liability companies, or other
similar entities in the United States to facilitate illicit activity,''
yet ``most or all States do not require information about the
beneficial owners of the corporations, limited liability companies, or
other similar entities formed under the laws of the State.'' The CTA
continues, ``money launderers and others involved in commercial
activity intentionally conduct transactions through corporate
structures in order to evade detection, and may layer such structures .
. . across various secretive jurisdictions such that each time an
investigator obtains ownership records for a domestic or foreign
entity, the newly identified entity is yet another corporate entity,
necessitating a repeat of the same process.'' \53\
---------------------------------------------------------------------------
\53\ CTA, Section 6402.
---------------------------------------------------------------------------
As Kenneth A. Blanco, then-Director of FinCEN observed in testimony
to the U.S. Senate Committee on Banking, Housing and Urban Affairs, and
based on his experience as a former state and Federal prosecutor,
identifying the ultimate beneficial owner of a shell or front company
in the United States ``often requires human source information, grand
jury subpoenas, surveillance operations, witness interviews, search
warrants, and foreign legal assistance requests to get behind the
outward facing structure of these shell companies. This takes an
enormous amount of time--time that could be used to further other
important and necessary aspects of an investigation--and wastes
resources, or prevents investigators from getting to other equally
important investigations. The collection of beneficial ownership
information at the time of company formation would significantly reduce
the amount of time currently required to research who is behind
anonymous shell companies, and at the same time, prevent the flight of
assets and the destruction of evidence.'' \54\ He also noted during the
testimony that ``[i]dentifying and disrupting illicit financial
networks not only assists in the prosecution of criminal activity of
all kinds, but also allows law enforcement to halt and dismantle
criminal organizations and other bad actors before they harm our
citizens or our financial system.'' \55\
---------------------------------------------------------------------------
\54\ FinCEN, Testimony for the Record, Kenneth A. Blanco,
Director, U.S. Senate Committee on Banking, Housing and Urban
Affairs (May 21, 2019), available at <a href="https://www.banking.senate.gov/imo/media/doc/Blanco%20Testimony%205-21-19.pdf">https://www.banking.senate.gov/imo/media/doc/Blanco%20Testimony%205-21-19.pdf</a>.
\55\ Id.
---------------------------------------------------------------------------
The FBI's Steven M. D'Antuono elaborated on these difficulties,
testifying before the Senate Banking Housing and Urban Affairs
Committee in 2019 that ``[t]he process for the production of records
can be lengthy, anywhere from a few weeks to many years, and . . . .
can be extended drastically when it is necessary to obtain information
from other countries . . . . [I]f an investigator obtains the ownership
records, either from a domestic or foreign entity, the investigator may
discover that the owner of the identified corporate entity is an
additional corporate entity, necessitating the same process for the
newly discovered corporate entity. Many professional launderers and
others involved in illicit finance intentionally layer ownership and
financial transactions in order to reduce transparency of transactions.
As it stands, it is a facially effective way to delay an
investigation.'' \56\ D'Antuono acknowledged that these challenges may
be even more stark for state, local, and Tribal law enforcement
agencies that may not have the same resources as their federal
counterparts to undertake long and costly investigations to identify
the beneficial owners of these entities.\57\ During the testimony, he
noted that requiring the disclosure of BOI by legal entities and the
creation of a central BOI repository available to law enforcement and
regulators could address these challenges.\58\
---------------------------------------------------------------------------
\56\ FBI, Testimony of Steven M. D'Antuono, Section Chief,
Criminal Investigative Division, ``Combatting Illicit Financing by
Anonymous Shell Companies'' (May 21, 2019), available at <a href="https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies">https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies</a>.
\57\ Id.
\58\ Id.
---------------------------------------------------------------------------
The process of obtaining BOI through grand jury subpoenas and other
means can be time consuming and of limited utility in some cases. Grand
jury subpoenas, for example, require an underlying grand jury
investigation into a possible violation of law. In addition, the law
enforcement officer or investigator must work with a prosecutor's
office, such as a U.S. Attorney's Office, to open a grand jury
investigation, obtain the grand jury subpoena, and issue it on behalf
of the grand jury. The investigator also needs to determine the proper
recipient of the subpoena and coordinate service, which raises
additional complications in cases where there is excessive layering of
corporate structures to hide the identity of the ultimate beneficial
owners. In some cases, however, BOI still may not be attainable via
grand jury subpoena because it does not exist. For example, because
most states do not require the disclosure of BOI when forming or
registering an entity, BOI cannot be obtained from the secretary of
state or similar office. Furthermore, many states permit corporations
to acquire property without disclosing BOI, and therefore BOI cannot be
obtained from property records.
FinCEN's existing regulatory tools also have significant
limitations. The current CDD Rule, for example, requires that certain
types of U.S. financial institutions identify and verify the beneficial
owners of legal entity customers at the time those financial
institutions open a new account for a legal entity customer,\59\ but
the rule
[[Page 69927]]
provides only a partial solution.\60\ The information about beneficial
owners of certain U.S. entities is generally not comprehensive and not
reported to the Government, and therefore not immediately available to
law enforcement, intelligence, and national security agencies. Other
FinCEN authorities--geographic targeting orders \61\ and the so-called
``311 measures'' (i.e., special measures imposed on jurisdictions,
financial institutions, or international transactions of primary money
laundering concern) \62\--offer temporary and targeted tools. Neither
provides law enforcement the ability to quickly and efficiently follow
the money.
---------------------------------------------------------------------------
\59\ The CDD Rule NPRM contained a requirement that covered
financial institutions conduct ongoing monitoring to maintain and
update customer information on a risk basis, specifying that
customer information includes the beneficial owners of legal entity
customers. As noted in the supplementary material to the final rule,
FinCEN did not construe this obligation as imposing a categorical,
retroactive requirement to identify and verify BOI for existing
legal entity customers. Rather, these provisions reflect the
conclusion that a financial institution should obtain BOI from
existing legal entity customers when, in the course of its normal
monitoring, the financial institution detects information relevant
to assessing or reevaluating the risk of such customer. Final Rule,
Customer Due Diligence Requirements for Financial Institutions, 81
FR 29398, 29404 (May 11, 2016).
\60\ See U.S. Money Laundering Threat Assessment Working Group,
U.S. Money Laundering Threat Assessment (2005), pp. 48-49, available
at <a href="https://www.treasury.gov/resource-center/terrorist-illicit-finance/documents/mlta.pdf">https://www.treasury.gov/resource-center/terrorist-illicit-finance/documents/mlta.pdf</a>. See also Congressional Research Service,
Miller, Rena S. and Rosen, Liana W., Beneficial Ownership
Transparency in Corporate Formation, Shell Companies, Real Estate,
and Financial Transactions (July 8, 2019), available at <a href="https://crsreports.congress.gov/product/pdf/R/R45798">https://crsreports.congress.gov/product/pdf/R/R45798</a>.
\61\ 31 U.S.C. 5326(a); 31 CFR 1010.370.
\62\ 31 U.S.C. 5318A, as added by section 311 of the USA PATRIOT
Act (Pub. L. 107-56).
---------------------------------------------------------------------------
Shell companies, in particular, demonstrate how critical a
centralized database of beneficial ownership information is for
investigators. Treasury's 2020 Illicit Financing Strategy addressed in
part how current sources of information are inadequate to prosecute the
use of shell entities to hide ill-gotten gains. In particular, while
law enforcement agencies may be able to use subpoenas and access public
databases to collect information to identify the owners of corporate
structures, the 2020 Illicit Financing Strategy explained that
``[t]here are numerous challenges for federal law enforcement when the
true beneficiaries of illicit proceeds are concealed through shell or
front companies.'' \63\ In May 2019 testimony before the Senate
Banking, Housing, and Urban Affairs Committee, then-FinCEN Director
Blanco provided examples of criminals who used anonymous shell
corporations, including: ``A Russian arms dealer nicknamed `The
Merchant of Death,' who sold weapons to a terrorist organization intent
on killing Americans. Executives from a supposed investment group that
perpetrated a Ponzi scheme that defrauded more than 8,000 investors,
most of them elderly, of over $1 billion. A complex nationwide criminal
network that distributed oxycodone by flying young girls and other
couriers carrying pills all over the United States. A New York company
that was used to conceal Iranian assets, including those designated for
providing financial services to entities involved in Iran's nuclear and
ballistic missile program. A former college athlete who became the head
of a gambling enterprise and a violent drug kingpin who sold
recreational drugs and steroids to college and professional football
players. A corrupt Venezuelan treasurer who received over $1 billion in
bribes.'' He continued, ``These crimes are very different, as are the
dangers they pose and the damage caused to innocent and unsuspecting
people. The defendants and bad actors come from every walk of life and
every corner of the globe. The victims--both direct and indirect--
include Americans exposed to terrorist acts; elderly people losing life
savings; a young mother becoming addicted to opioids; a college athlete
coerced to pay extraordinary debts by violent threats; and an entire
country driven to devastation by corruption. But all these crimes have
one thing in common: shell corporations were used to hide, support,
prolong, or foster the crimes and bad acts committed against them.
These criminal conspiracies thrived at least in part because the
perpetrators could hide their identities and illicit assets behind
shell companies. Had beneficial ownership information been available,
and more quickly accessible to law enforcement and others, it would
have been harder and more costly for the criminals to hide what they
were doing. Law enforcement could have been more effective and
efficient in preventing these crimes from occurring in the first place,
or could have intercepted them sooner and prevented the scope of harm
these criminals caused from spreading.'' \64\
---------------------------------------------------------------------------
\63\ 2020 Illicit Financing Strategy, supra note 35, p. 14,
available at <a href="https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf">https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf</a>.
\64\ FinCEN, Testimony for the Record, Kenneth A. Blanco,
Director, U.S. Senate Committee on Banking, Housing and Urban
Affairs (May 21, 2019), available at <a href="https://www.banking.senate.gov/imo/media/doc/Blanco%20Testimony%205-21-19.pdf">https://www.banking.senate.gov/imo/media/doc/Blanco%20Testimony%205-21-19.pdf</a>.
---------------------------------------------------------------------------
During the same hearing in front of the Senate's Committee on
Banking, Housing, and Urban Affairs in May 2019, the FBI's D'Antuono
explained that ``[t]he strategic use of [shell and front companies]
makes investigations exponentially more difficult and laborious. The
burden of uncovering true beneficial owners can often handicap or delay
investigations, frequently requiring duplicative, slow-moving legal
process in several jurisdictions to gain the necessary information.
This practice is both time consuming and costly. The ability to easily
identify the beneficial owners of these shell companies would allow the
FBI and other law enforcement agencies to quickly and efficiently
mitigate the threats posed by the illicit movement of the succeeding
funds. In addition to diminishing regulators', law enforcement
agencies', and financial institutions' ability to identify and mitigate
illicit finance, the lack of a law requiring production of beneficial
ownership information attracts unlawful actors, domestic and abroad, to
abuse our state-based registration system and the U.S. financial
industry.'' \65\
---------------------------------------------------------------------------
\65\ FBI, Testimony of Steven M. D'Antuono, Section Chief,
Criminal Investigative Division, ``Combatting Illicit Financing by
Anonymous Shell Companies'' (May 21, 2019), available at <a href="https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies">https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies</a>.
---------------------------------------------------------------------------
In February 2020, then-Secretary of the Treasury Steven T. Mnuchin
testified at a Senate hearing on the President's Fiscal Year 2021
Budget that the lack of information on who controls shell companies is
``a glaring hole in our system.'' \66\ In his December 9, 2020, floor
statement accompanying the AML Act, Senator Sherrod Brown, the then-
Ranking Member of the Senate Committee on Banking, Housing, and Urban
Affairs and one of the primary authors of the enacted CTA, stated that
the reporting of BOI ``will help address longstanding problems for U.S.
law enforcement. It will help them investigate and prosecute cases
involving terrorism, weapons proliferation, drug trafficking, money
laundering, Medicare and Medicaid fraud, human trafficking, and other
crimes. And it will provide ready access to this information under
long-established and effective privacy rules. Without these reforms,
criminals, terrorists, and even rogue nations could continue to use
layer upon layer of shell companies to disguise and launder illicit
funds. That makes it harder to hold bad actors accountable, and puts
[[Page 69928]]
us all at risk.'' \67\ Senators Sheldon Whitehouse, Charles Grassley,
Ron Wyden, and Marco Rubio, who were co-sponsors of the CTA and its
predecessor legislation in the Senate, commented on the ANPRM that
``the CTA marked the culmination of a years-long effort in Congress to
combat money laundering, international corruption, and kleptocracy by
requiring certain companies to disclose their beneficial owners to law
enforcement, national security officials, and financial institutions
with customer due diligence obligations.'' \68\
---------------------------------------------------------------------------
\66\ Steven T. Mnuchin (Secretary, Department of the Treasury),
Transcript: Hearing on the President's Fiscal Year 2021 Budget
before the Senate Committee on Finance (February 12, 2020),'' p. 25,
available at <a href="https://www.finance.senate.gov/imo/media/doc/45146.pdf">https://www.finance.senate.gov/imo/media/doc/45146.pdf</a>.
\67\ Senator Sherrod Brown, ``National Defense Authorization
Act,'' Congressional Record 166:208 (December 9, 2020), p. S7311,
available at <a href="https://www.govinfo.gov/content/pkg/CREC-2020-12-09/pdf/CREC-2020-12-09.pdf">https://www.govinfo.gov/content/pkg/CREC-2020-12-09/pdf/CREC-2020-12-09.pdf</a>.
\68\ Senators Sheldon Whitehouse, Chuck Grassley, Ron Wyden, and
Marco Rubio, Letter to the Financial Crimes Enforcement Network,
(May 5, 2021), available at <a href="https://www.rubio.senate.gov/public/_cache/files/ceb65708-7973-4b66-8bd4-c8254509a6f3/13D55FBEE293CAAF52B7317C5CA7E44C.senators-cta-comment-letter-05.04.2021.pdf">https://www.rubio.senate.gov/public/_cache/files/ceb65708-7973-4b66-8bd4-c8254509a6f3/13D55FBEE293CAAF52B7317C5CA7E44C.senators-cta-comment-letter-05.04.2021.pdf</a>.
---------------------------------------------------------------------------
v. The United States' Corporate Transparency Measures Within the
Broader International Framework
The laundering of illicit proceeds frequently entails cross-border
transactions involving jurisdictions with weak AML/CFT compliance
frameworks, as these jurisdictions may present more ready options for
criminals to place, launder, or store the proceeds of crime. For over a
decade, through the former Group of Eight (G8), Group of Twenty
(G20),\69\ FATF, and the Egmont Group,\70\ the global community has
worked to establish a set of mutual standards to enhance beneficial
ownership transparency across all jurisdictions. U.S. efforts to
collect BOI are part of this growing international consensus by
jurisdictions to enhance beneficial ownership transparency, and will be
reinforced by similar efforts by foreign jurisdictions.
---------------------------------------------------------------------------
\69\ See, e.g., United States G-8 Action Plan for Transparency
of Company Ownership and Control (June 2013), <a href="https://obamawhitehouse.archives.gov/the-press-office/2013/06/18/united-states-g-8-action-plan-transparency-company-ownership-and-control">https://obamawhitehouse.archives.gov/the-press-office/2013/06/18/united-states-g-8-action-plan-transparency-company-ownership-and-control</a>;
G8 Lough Erne Declaration (July 2013), <a href="https://www.gov.uk/government/publications/g8-lough-erne-declaration">https://www.gov.uk/government/publications/g8-lough-erne-declaration</a>; G20 High Level
Principles on Beneficial Ownership (2014), <a href="https://www.g20.utoronto.ca/2014/g20_high-level_principles_beneficial_ownership_transparency.pdf">https://www.g20.utoronto.ca/2014/g20_high-level_principles_beneficial_ownership_transparency.pdf</a> ; United
States Action Plan to Implement the G-20 High Level Principles on
Beneficial Ownership (Oct. 2015), <a href="https://obamawhitehouse.archives.gov/blog/2015/10/16/us-action-plan-implement-g-20-high-level-principles-beneficial-ownership">https://obamawhitehouse.archives.gov/blog/2015/10/16/us-action-plan-implement-g-20-high-level-principles-beneficial-ownership</a>.
\70\ FATF has also collaborated with the Egmont Group of
Financial Intelligence Units on a study that identifies key
techniques used to conceal beneficial ownership and identifies
issues for consideration that include coordinated national action to
limit the misuse of legal entities. FATF-Egmont Group, Concealment
of Beneficial Ownership (2018), <a href="https://egmontgroup.org/sites/default/files/filedepot/Concealment_of_BO/FATF-Egmont-Concealment-beneficial-ownership.pdf">https://egmontgroup.org/sites/default/files/filedepot/Concealment_of_BO/FATF-Egmont-Concealment-beneficial-ownership.pdf</a>. The Egmont Group is a body of 166
Financial Intelligence Units (FIUs); FinCEN is the FIU of the United
States and a founding member of the Egmont Group. The Egmont Group
provides a platform for the secure exchange of expertise and
financial intelligence amongst FIUs to combat money laundering and
terrorist financing.
---------------------------------------------------------------------------
The current lack of a centralized U.S. BOI reporting requirement
and database makes the United States a jurisdiction of choice to
establish shell companies that hide the ultimate beneficiaries. This
makes it easier for bad actors to exploit these companies for the
placement, laundering, and investment of the proceeds of crime. Global
financial centers such as the United States are particularly exposed to
transnational illicit finance threats, as they tend to have
characteristics--such as extensive links to the international financial
system, sophisticated financial sectors, and robust institutions--that
make them appealing destinations for the proceeds of illicit
transnational activity. Corrupt foreign officials, sanctions evaders,
and narco-traffickers, among others, exploit the current gap in the
U.S. BOI reporting regime to park their ill-gotten gains in a stable
jurisdiction, thereby exposing the United States to serious national
security threats. For example, the Department of Justice indicted the
alleged heads of the Los Zetas Mexican drug cartel for their roles in
using the race horse industry and shell companies to launder millions
of dollars in drug proceeds.\71\ The FBI's D'Antuono noted that the
wide use of shell companies, in both the United States and Mexico, made
it challenging for banks and investigators to associate the drug cartel
with horses and bank accounts. If not for solid witness testimony and
extremely diligent forensic accounting, it would have been difficult to
prove the case, he noted.\72\
---------------------------------------------------------------------------
\71\ FBI, Testimony of Steven M. D'Antuono, Section Chief,
Criminal Investigative Division, ``Combatting Illicit Financing by
Anonymous Shell Companies'' (May 21, 2019), available at <a href="https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies">https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies</a>.
\72\ Id.
---------------------------------------------------------------------------
As noted previously, the United States' lack of a centralized BOI
reporting requirement constitutes a weak link in the integrity of the
global financial system. In the CTA, Congress explained that the
statute is necessary to ``bring the United States into compliance with
international [AML/CFT] standards.'' \73\ Many countries, including the
United Kingdom and all member states of the European Union, have
incorporated elements derived from these standards into their domestic
legal or regulatory frameworks. At the same time, FATF mutual
evaluations show that jurisdictions, including the United States, still
have work to do to meet the standards for beneficial ownership
transparency. Establishing the requirements to report BOI to a
centralized database at FinCEN is another step in Treasury's decades-
long efforts to strengthen the U.S. and global financial systems and to
combat money laundering and corruption.
---------------------------------------------------------------------------
\73\ CTA, Section 6402(5)(E).
---------------------------------------------------------------------------
B. The CTA
The CTA added a new section, 31 U.S.C. 5336, to the BSA to address
the broader objectives of enhancing beneficial ownership transparency
while minimizing the burden on the regulated community.
In brief, 31 U.S.C. 5336 requires certain types of domestic and
foreign entities, called ``reporting companies,'' to submit specified
BOI to FinCEN. FinCEN is authorized to share this BOI with certain
Government agencies, financial institutions, and regulators, subject to
appropriate protocols.\74\ The requirement for reporting companies to
submit BOI takes effect ``on the effective date of the regulations
prescribed by the Secretary of the Treasury under [31 U.S.C. 5336].''
\75\ Reporting companies formed or registered after the effective date
will need to submit the requisite BOI to FinCEN at the time of
formation, while preexisting reporting companies will have a specified
period to comply and report.\76\
---------------------------------------------------------------------------
\74\ See generally 31 U.S.C. 5336(b), (c).
\75\ 31 U.S.C. 5336(b)(5).
\76\ See 31 U.S.C. 5336(b)(1)(B), (C).
---------------------------------------------------------------------------
The CTA reporting requirements target generally smaller, more
lightly regulated entities that may not be subject to any other BOI
reporting requirements. In contrast, the CTA exempts certain more
heavily regulated entities from its reporting requirements, including
to avoid imposing duplicative requirements.
The provision at 31 U.S.C. 5336 requires reporting companies to
submit to FinCEN, for each beneficial owner and company applicant, the
individual's full legal name, date of birth, current residential or
business street address, and either a unique identifying number from an
acceptable identification document (e.g., a passport) or a FinCEN
identifier--four readily accessible pieces of information that should
not be unduly burdensome for individuals to produce, or for reporting
companies to collect and submit to FinCEN.\77\ A FinCEN identifier is a
unique identifying number that FinCEN will
[[Page 69929]]
issue to individuals or entities upon request.\78\ In certain
instances, the FinCEN identifier provides a substitute to individuals
who do not wish to provide their names, birth dates, or addresses to a
reporting company.\79\
---------------------------------------------------------------------------
\77\ See 31 U.S.C. 5336(b)(2).
\78\ See 31 U.S.C. 5336(b)(3)(A)(i).
\79\ See 31 U.S.C. 5336(b)(3)(B).
---------------------------------------------------------------------------
Given the sensitivity of the reportable information, the CTA
imposes strict confidentiality, security, and access restrictions on
the data. FinCEN is authorized to disclose reportable BOI to a
statutorily defined group of governmental authorities and financial
institutions, in limited circumstances. Federal agencies, for example,
may only obtain access to BOI when acting in furtherance of national
security, intelligence, or law enforcement activity.\80\ State, local,
and Tribal law enforcement agencies require ``a court of competent
jurisdiction'' to authorize them to seek BOI as part of a criminal or
civil investigation.\81\ Foreign government access is limited to
foreign law enforcement agencies, prosecutors, and judges in specified
circumstances.\82\ FinCEN may also disclose reported BOI to financial
institutions that need such BOI to facilitate compliance with customer
due diligence requirements under applicable law, with the consent of
the reporting company.\83\ Moreover, a financial institution's
regulator can obtain BOI that has been provided to a regulated
financial institution for the purpose of performing regulatory
oversight that is specific to that financial institution.\84\ Taken
together, these measures, along with other restrictions, requirements,
and security protocols delineated in the CTA, will help to ensure that
BOI collected under 31 U.S.C. 5336 is only used for statutorily
described purposes. As noted above, FinCEN intends to address the
regulatory requirements related to access to information reported
pursuant to the CTA through a future rulemaking process.
---------------------------------------------------------------------------
\80\ See 31 U.S.C. 5336(c)(2)(B)(i)(I).
\81\ See 31 U.S.C. 5336(c)(2)(B)(i)(II).
\82\ See 31 U.S.C. 5336(c)(2)(B)(ii).
\83\ See 31 U.S.C. 5336(c)(2)(B)(iii).
\84\ See 31 U.S.C. 5336(c)(2)(C).
---------------------------------------------------------------------------
The CTA also requires that FinCEN rescind and revise portions of
the current CDD Rule within one year after the effective date of the
BOI reporting rule.\85\ The CTA does not direct FinCEN to rescind the
requirement for financial institutions to identify and verify the
beneficial owners of legal entity customers under 31 CFR 1010.230(a),
but does direct FinCEN to rescind the beneficial ownership
identification and verification requirements of 31 CFR 1010.230(b)-
(j).\86\ The CTA identifies three purposes for this revision: (1) To
bring the rule into conformity with the AML Act as a whole, including
the CTA; (2) to account for financial institutions' access to BOI
reported to FinCEN ``in order to confirm the beneficial ownership
information provided directly to the financial institutions'' for AML/
CFT and customer due diligence purposes; and (3) to reduce unnecessary
or duplicative burdens on financial institutions and legal entity
customers.\87\
---------------------------------------------------------------------------
\85\ CTA, Section 6403(d)(1).
\86\ CTA, Section 6403(d)(2). The CTA orders the rescission of
paragraphs (b) through (j) directly (``the Secretary of the Treasury
shall rescind paragraphs (b) through (j)'') and orders the retention
of paragraph (a) by a negative rule of construction (``nothing in
this section may be construed to authorize the Secretary of the
Treasury to repeal . . . [31 CFR] 1010.230(a)[.]'').
\87\ CTA, Section 6403(d)(1)(A)-(C).
---------------------------------------------------------------------------
FinCEN intends to satisfy the requirements related to the revision
of the CDD Rule through a future rulemaking process that will provide
the public with an opportunity to comment on the effect of the final
provisions of the beneficial ownership reporting rule on financial
institutions' customer due diligence obligations. The rulemaking
process will also allow FinCEN to reach informed conclusions about the
proper scope of the CDD Rule.\88\ FinCEN anticipates that this
rulemaking process will touch on the issue of the interplay between the
FinCEN-hosted BOI information technology (IT) system and financial
institutions' diligence efforts.
---------------------------------------------------------------------------
\88\ Final Rule, Customer Due Diligence Requirements for
Financial Institutions, 81 FR 29398-29402 (May 11, 2016).
---------------------------------------------------------------------------
C. The Advance Notice of Proposed Rulemaking
On April 5, 2021, FinCEN published an ANPRM on the BOI reporting
requirements.\89\ The ANPRM sought public input in five open-ended
categories of questions, including on clarifying key definitions,
developing reporting procedures, and establishing compliance standards
for reporting companies. The ANPRM also sought comment on FinCEN's
implementation of the related provisions of the CTA that govern
FinCEN's maintenance and disclosure of BOI subject to appropriate
protocols.
---------------------------------------------------------------------------
\89\ ANPRM, Beneficial Ownership Information Reporting
Requirements, 86 FR 17557-17565 (April 5, 2021).
---------------------------------------------------------------------------
In response to the ANPRM, FinCEN received 220 public comments from
a wide variety of commenters, including businesses, civil society
organizations, trade associations, law firms, secretaries of state and
other state officials, Indian Tribes, Members of Congress, and numerous
individuals. Commenters expressed a range of opinions, frequently
conflicting, about which entities should report, what information they
should report, about whom they should report, how to ensure that the
implementation of the CTA generates highly useful data for authorized
users, how to minimize burden on reporting companies, and more.
FinCEN has considered all of the comments that it received in
response to the ANPRM in drafting this proposed rule. The section-by-
section analysis that follows incorporates discussion of certain issues
raised by commenters.
D. Outreach
FinCEN has also engaged in outreach with a variety of potential
stakeholders, including state and Tribal entities (e.g., secretaries of
state), law enforcement, representatives of civil society
organizations, financial institution trade associations, and broader
business trade associations, to make them aware of the CTA and
encourage them to provide written comments during the rulemaking
process to ensure FinCEN's consideration of their perspectives.
IV. Section-by-Section Analysis
This proposed rule would revise the regulations implementing the
BSA by adding a new reporting requirement at Sec. 1010.380 (``Reports
of beneficial ownership information''), in subpart C (``Reports
Required to be Made'') of part 1010 (``General Provisions'') of chapter
X (``Financial Crimes Enforcement Network'') of title 31, Code of
Federal Regulations.
The analysis that follows addresses the key elements of the
proposed rule: (A) Information to be reported; (B) beneficial owners;
(C) company applicant; (D) reporting company; (E) timing, format, and
mechanics of reports; (F) reporting violations; and (G) definitions.
The analysis has a final subsection (H) that discusses the issue of the
effective date of the regulation.
A. Information To Be Reported
The CTA requires each reporting company to submit to FinCEN a
report identifying each beneficial owner of the reporting company and
each company applicant by: (1) Full legal name, (2) date of birth, (3)
current residential or business street address, and (4) unique
identifying number from an acceptable identification document; or, if
this
[[Page 69930]]
information has already been provided to FinCEN, by a FinCEN
identifier.\90\
---------------------------------------------------------------------------
\90\ 31 U.S.C. 5336(b)(1)(A) (reporting requirement); 31 U.S.C.
5336(b)(2) (required information).
---------------------------------------------------------------------------
To implement this requirement, proposed 31 CFR 1010.380(b)
specifies that each report or application under that section must be
filed with FinCEN in the form and manner FinCEN prescribes, and each
person filing such report shall certify that the report is accurate and
complete.\91\ It then sets forth the requirement for reporting
companies to report to FinCEN identifying information about their
beneficial owners, the company applicant, and the reporting company
itself. Finally, it outlines certain special reporting rules and sets
forth the requirements for obtaining a FinCEN identifier.
---------------------------------------------------------------------------
\91\ Commenters to the ANPRM discussed the potential for FinCEN
to require an attestation of accuracy or other certification on
either a one-time or periodic basis, including financial institution
trade associations and civil society organizations, which argued
that such a requirement would encourage reporting companies to keep
their information up to date. However, others argued that FinCEN
lacks the statutory authority to include such a requirement in the
regulations. FinCEN invites further comments on its proposal that a
person filing a report or application with FinCEN pursuant to 31 CFR
1010.380(a) shall certify that the report is accurate and complete.
---------------------------------------------------------------------------
i. Information To Be Reported on Beneficial Owners and Company
Applicants
Proposed 31 CFR 1010.380(b)(1)(ii) sets forth the specific items of
information that a reporting company must report about each individual
beneficial owner and each individual company applicant.\92\ The
language is drawn nearly verbatim from 31 U.S.C. 5336(b)(2)(A). In
addition, for clarity, it incorporates the statutory definition of
``acceptable identification document,'' 31 U.S.C. 5336(a)(1), rather
than leaving the reader to identify the cross-reference based on the
CTA's reference to a ``unique identifier number from an acceptable
identification document.'' \93\ Also for clarity, the proposed rule
consolidates discussion of the FinCEN identifier in proposed 31 CFR
1010.380(b)(5).
---------------------------------------------------------------------------
\92\ ``Company applicant'' is the proposed rule's term for what
the statute refers to as the ``applicant.'' See 31 U.S.C.
5336(a)(2).
\93\ See 31 U.S.C. 5336(b)(2)(A)(iv)(I) (for information
submission requirement); 31 U.S.C. 5336(a)(1) (for definition of
``acceptable identification document''). The definition of
``acceptable identification document'' is not inserted entirely
verbatim because FinCEN has made certain minor changes to the
statutory language to clarify the text.
---------------------------------------------------------------------------
The proposed rule also clarifies what address information should be
reported. The statute requires reporting companies to identify
beneficial owners and applicants by their ``residential or business
street address.'' 31 U.S.C. 5336(b)(2)(A)(iii). The statutory
requirement does not specify when or whether one type of address should
be used in preference to another or resolve more specific questions
regarding secondary addresses or whether addresses should be domestic,
if possible, or can be foreign. FinCEN considered leaving to the
reporting company the choice of which address to report, but assessed
that this would unduly diminish the usefulness of the reported
information to national security, intelligence, and law enforcement
activity. Beneficial owners are of interest because of their economic
status as persons who own or control a reporting company. Business
addresses or secondary residence addresses are of some investigative
value as points of contact in the event that an investigation requires
follow-up, but such addresses do not definitively establish a
beneficial owner's primary residence jurisdiction. A beneficial owner's
residential address for tax residency purposes, by contrast, is of
value both as a point of contact and for tax administration
purposes.\94\ Moreover, multiple persons may be associated with a
business address. FinCEN believes that the residential street address
will therefore be more useful for establishing the unambiguous identity
of an identified beneficial owner. The reporting of a residential
street address will also likely allow for easier follow-up by law
enforcement in the event of investigative need. Accordingly, FinCEN
believes that requiring the disclosure of beneficial owners'
residential street address for tax residency purposes is appropriate.
FinCEN therefore proposes that the reporting company report the
residential address for tax residency purposes of each beneficial
owner.
---------------------------------------------------------------------------
\94\ See 31 U.S.C. 5336(c)(5)(B) (``Officers and employees of
the Department of the Treasury may obtain access to beneficial
ownership information for tax administration purposes . . . .'').
---------------------------------------------------------------------------
With respect to a company applicant's address, FinCEN proposes a
bifurcated approach. For company applicants that provide a business
service as a corporate or formation agent, the reporting company would
need to report the business address of any company applicant that files
a document in the course of such individual's business. Company
applicants that provide a business service as a corporate or formation
agent are of particular interest because of their role in creating or
registering reporting companies. While any address for such a company
applicant is of some value as a point of contact in an inquiry or
investigation, company applicants who file formation documents in the
course of their business may be more easily identified by their
business address. To the extent company applicants make a business of
filing documents on behalf of many companies, reporting the associated
business address may provide more useful information to national
security, intelligence, and law enforcement agencies. The business
address will also allow law enforcement to identify patterns of
entities that are created or registered by company applicants working
at the same business address; such patterns would not be easily
identifiable if the name and address reported is specific to an
individual operating on a formation agent's behalf. This information
could provide insight into business practices and relationships between
individuals and entities, including patterns of entity formation that
suggest persons are engaged in the business of creating legal entities
for the purpose of obscuring the beneficiaries of transactions or the
owners of valuable assets. This information may therefore provide
valuable information for national security, intelligence, and law
enforcement activity.
For all other company applicants, the reporting company would need
to report the residential street address that the individual uses for
tax residency purposes. This establishes a uniform rule for the
selection of addresses to be reported and provides specificity to the
reporting company for ease of administration. It would also help to
maximize the benefit to be gained from the reporting of this data
element because stakeholders will not have to figure out which address
was reported.
In addition, the CTA authorizes FinCEN to prescribe procedures and
standards governing the reports identifying beneficial owners and
applicants ``by,'' among other things, a ``unique identifying number
from an acceptable identification document.'' \95\ The CTA does not
specify how an individual is to be identified ``by'' such number
``from'' such document. However, the CTA also makes it unlawful to
``willfully provide, or attempt to provide . . . a false or fraudulent
identifying photograph or document . . . to FinCEN,'' indicating an
assumption that identifying photographs or documents would be
reported.\96\ This provision therefore
[[Page 69931]]
indicates that FinCEN has authority to collect a scanned copy of an
identification document, along with the document's number, in
prescribing reporting procedures and standards. Therefore, the proposed
rule specifies that the reporting company provide a scanned copy of the
identification document from which the unique identifying number of the
beneficial owner or company applicant is obtained, in connection with
reporting that unique number.
---------------------------------------------------------------------------
\95\ 31 U.S.C. 5336(b)(4), (b)(2)(A)(iv).
\96\ 31 U.S.C. 5336(h)(1)(A).
---------------------------------------------------------------------------
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. The image submitted by a
reporting company in connection with a specific beneficial owner or
company applicant could help to confirm the accuracy of the reported
unique identification number because the image would contain the
number. FinCEN also believes this requirement would make it more
difficult to provide false identification information because it is
likely to be significantly more difficult to falsify an image of an
identification document than to report an inaccurate number. The image
may also assist law enforcement in identifying an individual because it
would contain a picture of the individual associated with the
identifying number, providing further confirmation of the individual's
identity. While such pictures may already be available to law
enforcement from existing records associated with the reported
identification numbers, it would be highly useful for law enforcement
to obtain such information from a centralized BOI database than to
obtain the identification number from the BOI database and the picture
from a different source. FinCEN considered that, as noted by several
commenters, requiring an image may impose some additional burdens on
reporting companies (e.g., gathering and submitting images of the
identification documents for each beneficial owner and company
applicant). FinCEN anticipates, however, that the burdens should be
minimal because requesting a copy of an individual's identification
document appears routine (e.g., to verify an employee's immigration
status), and technological advances have made it relatively easy for
individuals to provide scanned images. FinCEN welcomes comments on the
proposed collection of a scanned copy of an identification document.
FinCEN recognizes that several commenters encouraged FinCEN to require
reporting companies to report significantly more information on each
beneficial owner than is required by statute. For example, various
commenters suggested FinCEN should require reporting of whether a
beneficial owner fell under the ``ownership interests'' or
``substantial control'' components of the definition of ``beneficial
owner,'' precise reporting of ownership interest percentages, whether
ownership interests are held directly or indirectly, and other types of
information. Such additional information might enhance the utility of
the database to authorized users. FinCEN welcomes further comments on
the statutory authority for and practical effect of requiring
additional information to be reported.
Proposed 31 CFR 1010.380(b)(2) would permit a reporting company to
report the Taxpayer Identification Number \97\ (TIN) of its beneficial
owners and company applicants on a voluntary basis, solely with the
prior consent of each individual whose TIN would be reported and with
such consent to be recorded on a form that FinCEN will provide. While
the statute requires reporting companies to provide certain specified
information, it does not prohibit reporting companies from providing
additional information on a voluntary basis. FinCEN has proposed this
voluntary reporting option because such information would help ensure
that the database of beneficial ownership information is highly useful
for authorized users, in furtherance of the CTA's purpose and mandate.
For example, having access to a TIN will allow authorized users such as
FinCEN, law enforcement, investigators, and financial institutions to
cross-reference other databases and more easily verify the information
of an individual. FinCEN believes that the inclusion of TIN reporting,
even if voluntary, may help to raise standards for due diligence and
transparency expectations for financial institutions and other
governments. FinCEN is particularly interested in comments on this
proposal to provide a voluntary mechanism to report beneficial owner
and company applicant TINs.
---------------------------------------------------------------------------
\97\ A TIN is an identification number used by the Internal
Revenue Service (IRS) in the administration of tax laws and assists
in identifying entities and individuals and distinguishing them from
one another. See IRS, Taxpayer Identification Numbers (TINs),
available at <a href="https://www.irs.gov/individuals/international-taxpayers/taxpayer-identification-numbers-tin">https://www.irs.gov/individuals/international-taxpayers/taxpayer-identification-numbers-tin</a>. A TIN is unique to an
entity or individual.
---------------------------------------------------------------------------
ii. Information To Be Reported on Reporting Companies
Proposed 31 CFR 1010.380(b)(1)(i) would require reporting companies
to report certain information to identify the reporting company. While
the CTA specifies the information required to be reported to ``identify
each beneficial owner of the applicable reporting company and each
applicant with respect to that reporting company,'' the CTA does not
specify what, if any, information a reporting company must report about
itself.\98\ However, the CTA's express requirement to identify
beneficial owners and applicants for each reporting company clearly
implies a requirement to identify the associated company. That implicit
requirement is confirmed by the structure and overriding objective of
the CTA, which is to identify the individuals who own, control, and
register each particular entity, as well as by the CTA's direction to
``ensure that information is collected in a form and manner that is
highly useful.'' \99\ Without identifying information about the
reporting company itself, FinCEN would have no ability to determine the
entity that is associated with each reported beneficial owner or
company applicant. For example, an investigator could not determine
what entities a known drug trafficker uses to launder money.
Conversely, an investigator also could not determine who owns or
controls an entity it knows is being used to launder money. This would
frustrate Congress's express purposes in enacting the CTA and would
amount to an absurd result.\100\
---------------------------------------------------------------------------
\98\ 31 U.S.C. 5336(b)(2)(A).
\99\ CTA, Section 6402. See also 31 U.S.C. 5336(b)(1)(F)(iv)(I),
(b)(4)(B)(ii), (d)(2)-(3).
\100\ See, e.g., Griffin v. Oceanic Contractors, Inc., 458 U.S.
564, 575 (1982) (noting that ``interpretations of a statute which
would produce absurd results are to be avoided if alternative
interpretations consistent with the legislative purpose are
available''); Arkansas Dairy Co-op Ass'n, Inc. v. Dep't of Agr., 573
F.3d 815, 829 (D.C. Cir. 2009) (rejecting a reading of a statute
that would produce a ``glaring loophole'' in Congress's instruction
to an agency); Ass'n of Admin. L. Judges v. FLRA, 397 F.3d 957, 962
(D.C. Cir. 2005) (``Unless it has been extraordinarily rigid in
expressing itself to the contrary . . . the Congress is always
presumed to intend that pointless expenditures of effort be
avoided.'' (cleaned up)); Pub. Citizen v. Young, 831 F.2d 1108, 1112
(D.C. Cir. 1987) (explaining that ``a court must look beyond the
words to the purpose of the act where its literal terms lead to
absurd or futile results'' (cleaned up)).
---------------------------------------------------------------------------
Therefore, to ensure that each reporting company can be identified,
the proposed regulations would require each reporting company to report
its name, any alternative names through which the company is engaging
in business (``d/b/a names''), its business street address, its
jurisdiction of formation or registration, as well as a unique
identification number.
FinCEN believes that a company name alone may not be sufficient
[[Page 69932]]
information to uniquely identify each reporting company and distinguish
it from other companies with similar names. Companies formed in
different states may have the same names because the entity formation
practices of many states require a new entity to choose a legal name
that is unique within that state but do not require a new entity's
legal name to be unique within the United States. In addition,
companies with similar names may be mistaken for each other due to
misspellings or other errors. Moreover, FinCEN must have enough
specific information about a reporting company to enable accurate
searching of the database of beneficial ownership information. Given
that companies may have similar names, addresses, and states of
formation or registration, FinCEN believes that having a unique
identification number for each reporting company is critical to
enabling the unique identification of a reporting company and
effectively searching the database to identify the beneficial ownership
information reported for a particular company. The proposed rules would
thus require the submission of additional information beyond each
company's name.
Specifically, the reporting company would be required to submit a
TIN (including an Employer Identification Number (EIN)), or where a
reporting company has not yet been issued a TIN, a Dun & Bradstreet
Data Universal Numbering System (DUNS) number or a Legal Entity
Identifier (LEI). A reporting company must furnish a TIN on all tax
returns, statements, and other tax related documents filed with the
IRS. As a result, FinCEN believes that there will be limited burdens
for a reporting company with a tax filing obligation in the United
States to provide its TIN. However, FinCEN recognizes that an entity
may not be able to provide a TIN, such as in the case of a newly formed
entity that does not yet have a TIN when it submits a report to FinCEN
at the time of formation or registration. Accordingly, in FinCEN's
proposal, a reporting company may provide a DUNS \101\ or LEI \102\ if
it does not yet have a TIN. The DUNS and LEI numbers are commonly used
in the United States and globally to distinguish entities from one
another and to create unique identifying codes to facilitate financial
and other transactions. Over 1.8 million LEIs have been created
globally and the LEI is being adopted as a global standard in business
transactions. More than 240,000 entities in the United States use LEIs
to identify and distinguish themselves.\103\ Pursuant to 31 CFR
1010.380(b)(5)(ii)(B), if a reporting company has applied for and
received a FinCEN identifier, it may submit the FinCEN identifier in
lieu of a TIN, DUNS, or LEI number.
---------------------------------------------------------------------------
\101\ See Dun & Bradstreet, What is a D-U-N-S Number?, available
at <a href="https://www.dnb.com/duns-number.html">https://www.dnb.com/duns-number.html</a>.
\102\ See LEI Worldwide, What is a Legal Entity Identifier?,
available at <a href="https://www.lei-worldwide.com/what-is-a-legal-entity-identifier.html">https://www.lei-worldwide.com/what-is-a-legal-entity-identifier.html</a>.
\103\ See Global LEI Foundation, LEI Statistics--Global LEI
Index--LEI Data--GLEIF, available at <a href="https://www.gleif.org/en/lei-data/global-lei-index/lei-statistics">https://www.gleif.org/en/lei-data/global-lei-index/lei-statistics</a>.
---------------------------------------------------------------------------
FinCEN expects that there should be minimal burden on a reporting
company to obtain and report basic identifying information about itself
in light of the need to have a TIN to pay taxes in the United States
and the need for other identifying numbers and information to conform
to other business requirements. Additionally, the information that
FinCEN is proposing to collect does not extend beyond basic identifying
information that should be readily available to the reporting company.
However, FinCEN welcomes comments on the anticipated burden of this
reporting requirement, particularly for newly formed entities that may
not have a unique identifying number shortly after formation, and
potential alternatives that would allow for the unique identification
of the reporting company and effective searching of the beneficial
ownership database.
FinCEN recognizes the perspective of the many commenters who
encouraged FinCEN to require a reporting company to report a
significant amount of additional information about itself and about
intermediate legal entity owners through which ultimate natural person
beneficial owners of the reporting company own their interests. FinCEN
believes that requiring detailed reporting of intermediate legal entity
owners and other information about reporting companies could
substantially enhance the transparency of companies' ownership
structures and make the collected data more useful for law enforcement,
financial institutions, and other authorized users. However, the
commenters who urged collection of this information did not identify
the statutory authority for the collection of such information from
reporting companies. FinCEN welcomes further comments on the authority
for and practical effect of collecting such additional information
under the CTA.
FinCEN further recognizes certain commenters have raised concerns
that a reporting company may list the address of a formation agent or
other third party as its ``business street address,'' rather than its
principal place of business or the business entity's actual physical
location. FinCEN believes that requirement to submit a reporting
company's business street address precludes the reporting of the
address of the reporting company's formation agent or other third party
representatives, but welcomes comments on whether the term ``business
street address'' is sufficiently clear or whether further clarification
is needed to avoid the reporting of addresses of formation agents and
other third parties as a reporting company's ``business street
address.''
iii. Special Rules
Proposed 31 CFR 1010.380(b)(3) sets forth special reporting rules
for ownership interests held by exempt entities, minor children,
foreign pooled investment vehicles, and deceased company applicants.
Specifically, proposed 31 CFR 1010.380(b)(3)(i) sets forth a special
rule for reporting companies with ownership interests held by exempt
entities, consistent with the requirements of 31 U.S.C. 5336(b)(2)(B).
As set forth in the special rule, if an exempt entity under 31 CFR
1010.380(c)(2) has, or will have, a direct or indirect ownership
interest in a reporting company, and an individual is a beneficial
owner of the reporting company by virtue of such ownership interest,
the report shall include the name of the exempt entity rather than the
information required under paragraph (b)(1) with respect to such
beneficial owner. This rule is intended to avoid a situation in which
an entity that is exempt from the beneficial ownership reporting
requirement is nonetheless required to disclose its beneficial owners
as a result of its ownership of a reporting company.
Proposed 31 CFR 1010.380(b)(3)(ii) provides a special rule for
reporting the information of a parent or guardian in lieu of
information about a minor child. Specifically, proposed 31 CFR
1010.380(b)(3)(ii) provides that if a reporting company reports the
information required under paragraph (b)(1) with respect to a parent or
legal guardian of a minor child consistent with the exception outlined
at 31 CFR 1010.380(d)(4)(i), then the report shall indicate that such
information relates to the parent or legal guardian. Without this
information, stakeholders would not know that the parent or legal
guardian is not the actual beneficial owner.
Proposed 31 CFR 1010.380(b)(3)(iii) explains the special rule for
foreign pooled investment vehicles that the CTA established in 31
U.S.C.
[[Page 69933]]
5336(b)(2)(C). Under proposed 31 CFR 1010.380(b)(3)(iii), a foreign
legal entity that is formed under the laws of a foreign country, and
that would be a reporting company but for the pooled investment vehicle
exemption in 31 CFR 1010.380(c)(2)(xviii), must report to FinCEN the
BOI of the individual who exercises substantial control over the legal
entity.
Proposed 31 CFR 1010.380(b)(3)(iv) sets forth a special reporting
rule for situations where a reporting company is created before the
effective date of the regulations and the company applicant has died
before the reporting obligation is effective. The proposed rule
elaborates at 31 CFR 1010.380(e) that a company applicant is the
individual who files, including by directing or controlling the filing,
the document that created the reporting company. This may present
substantial challenges for a longstanding company (e.g., one that was
formed a century ago). In specifying the information to be reported
about beneficial owners and applicants, the CTA appears to presume that
such individuals are not deceased, as it requires a current address and
a number from a nonexpired identification document.\104\ Thus, for
deceased individuals, Congress does not appear to have spoken directly
to the information required to be reported to identify such
individuals, and FinCEN must ``prescribe procedures and standards
governing any report'' for such individuals.\105\
---------------------------------------------------------------------------
\104\ 31 U.S.C. 5336(b)(2)(A).
\105\ 31 U.S.C. 5336(b)(4)(A).
---------------------------------------------------------------------------
To minimize burdens in this unique situation, proposed 31 CFR
1010.380(b)(3)(iv) would allow a reporting company formed or registered
before the effective date of the regulations, and whose company
applicant died before the reporting company had an obligation to obtain
identifying information from a company applicant, to report that fact
along with whatever identifying information the reporting company
actually knows about the company applicant. FinCEN believes that this
tailored approach balances stakeholders' need for information on
company applicants with the challenges older reporting companies may
face. FinCEN welcomes comments on this special rule or any other
special rules that may be required to alleviate the burden of company
applicant reporting, and would encourage commenters to include an
explanation of why they believe such further proposed special rules are
consistent with the CTA.
FinCEN does not propose to apply the same rule to deceased
beneficial owners because, as the statute makes clear and as the
proposed rule elaborates at proposed 31 CFR 1010.380(d), the
requirement to report beneficial owners pertains to those who are the
current beneficial owners of the reporting company. While a company
applicant will remain the same for all time after the entity is
created, an individual will cease to be a beneficial owner upon death.
As a result, no beneficial owners will be deceased at the time a
company must report them. A reporting company thus will not face the
same burdens in reporting information about current beneficial owners
as it may face in reporting information about deceased company
applicants.
iv. FinCEN Identifier; Other Matters
Proposed 31 CFR 1010.380(b)(4) would specify the contents of
corrected and updated reports, making clear that such reports filed in
the time and manner specified in 31 CFR 1010.380(a) must contain the
corrected or updated information, and in the case of newly exempt
entities, shall contain a notification that the exempt entity is no
longer a reporting company. These updated and corrected reports are
explained in 31 CFR 1010.380(a)(2) and (3).
Proposed 31 CFR 1010.380(b)(5) sets forth rules that relate to
obtaining and using a FinCEN identifier, reflecting requirements that
are found in several different parts of 31 U.S.C. 5336. Consistent with
31 U.S.C. 5336(b)(3)(A), an individual may obtain a FinCEN identifier
by providing FinCEN with the information that the individual would
otherwise have to provide to a reporting company if the individual were
a beneficial owner or applicant of the reporting company; an entity can
obtain a FinCEN identifier from FinCEN when it submits a filing as a
reporting company or any time thereafter.\106\ This means that an
individual or legal entity must still disclose information to FinCEN,
but once an individual or legal entity has a FinCEN identifier, the
individual or legal entity can provide the identifier to a reporting
company in lieu of the personal details required under paragraph
(b)(1). For instance, an individual can provide his or her FinCEN
identifier to the reporting company, and the reporting company can
provide the FinCEN identifier to FinCEN in lieu of any information the
reporting company would otherwise have to report about the individual
under paragraph (b)(1). Similarly, an entity can provide the FinCEN
identifier to the reporting company, and the reporting company can
provide the FinCEN identifier to FinCEN in lieu of any information the
reporting company would otherwise have to report about that entity's
beneficial owners if they qualified as beneficial owners of the
reporting company through their interests in the entity. In such
circumstances, the underlying information associated with a FinCEN
identifier would still be available to FinCEN.
---------------------------------------------------------------------------
\106\ The statute provides that only entities that report their
beneficial ownership information to FinCEN are eligible to receive
FinCEN identifiers. 31 U.S.C. 5336(b)(3)(A)(i).
---------------------------------------------------------------------------
B. Beneficial Owners
The CTA defines a beneficial owner, with respect to a reporting
company, as ``any individual who, directly or indirectly, through any
contract, arrangement, understanding, relationship, or otherwise--(i)
exercises substantial control over the entity; or (ii) owns or controls
not less than 25% of the ownership interests of the entity.'' \107\ The
statute, however, does not define ``substantial control'' or
``ownership interests.'' FinCEN proposes to clarify these terms in the
rule so that a reporting company has sufficient guidance to identify
and report its beneficial owners.
---------------------------------------------------------------------------
\107\ 31 U.S.C. 5336(a)(3)(A).
---------------------------------------------------------------------------
Consistent with the CTA, the proposed rule would require a
reporting company to identify any individual who satisfies either of
these two components. Based on the breadth of the substantial control
component, FinCEN expects that a reporting company would identify at
least one beneficial owner under that component regardless of whether
(1) any individual satisfies the ownership component, or (2) exclusions
to the definition of beneficial owner apply. FinCEN is interested in
comments addressing whether that expectation is reasonable, under what
circumstances a reporting company may not have at least one reportable
beneficial owner, and how to address such circumstances, if they exist.
i. Substantial Control
Proposed 31 CFR 1010.380(d)(1) sets forth three specific indicators
of substantial control: (1) Service as a senior officer of a reporting
company; (2) authority over the appointment or removal of any senior
officer or dominant majority of the board of directors (or similar
body) of a reporting company; and (3) direction, determination, or
decision of, or substantial influence over, important
[[Page 69934]]
matters of a reporting company. The regulation also includes a catch-
all provision to make clear that substantial control can take
additional forms not specifically listed. Each of these indicators
supports the basic goal of requiring a reporting company to identify
the individuals who stand behind the reporting company and direct its
actions. The first indicator identifies the individuals with nominal or
de jure authority, the second and third indicators identify the
individuals with functional or de facto authority, and the catch-all
provision recognizes that control exercised in novel and unorthodox
ways can still be substantial. This last approach is consistent with
the common law tradition and the standards that FinCEN examined, as
well as the broader objective of preventing individuals from evading
identification as beneficial owners by hiding behind formalisms such as
job descriptions, job titles, and nominal lack of authority.
In developing the proposed definition of substantial control,
FinCEN looked to the common law of agency and corporate law and the
usage of that term in other federal statutes, which generally
incorporate similar agency-law concepts. FinCEN considered these
statutes in framing functional tests for assessing whether an
individual exercises substantial control over an entity. FinCEN also
considered the FATF Recommendations, established beneficial-owner
reporting standards such as that used with the United Kingdom's (UK's)
People with Significant Control (or PSC) Register, U.S. Federal tax
law, and the statutory law and administrative practice informing the
activity of the Committee on Foreign Investment in the United States
(CFIUS). Drawing in part on these standards, and supported by many
commenters' suggestions that FinCEN do so, proposed 31 CFR
1010.380(d)(1)(iii) provides specific examples of indicators of
substantial control. This non-exhaustive list of examples is intended
to clarify the types of matters FinCEN considers relevant to an
analysis of whether an individual is ``direct[ing], determin[ing], or
deci[ding] . . . important matters affecting [a] reporting company''
and thus exercising substantial control. Reporting companies should be
guided by the specific examples in the proposed rule, but they should
also consider how individuals could exercise substantial control in
other ways.
FinCEN acknowledges the concerns raised by commenters that too
broad a definition of substantial control could engender confusion. One
commenter pointed out that property managers make decisions that
influence the operations of the property but are hired by and report to
the owners of the property; the commenter did not think such
individuals should necessarily be considered beneficial owners on these
facts alone, and FinCEN agrees. 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.
Proposed 31 CFR 1010.380(d)(2) provides a general reminder that an
individual can exercise substantial control directly or indirectly.
This incorporates statutory language from the CTA that applies to all
beneficial ownership determinations and includes additional language
applying the concept found in the CTA to the specific instances of
substantial control found in proposed 31 CFR 1010.380(d)(1).
FinCEN carefully considered the burden that this approach to
defining substantial control might impose on reporting companies, small
businesses in particular. Based on the comments to the ANPRM, FinCEN
recognizes that the CTA may require certain entities to disclose BOI on
more and different individuals than they are accustomed to under the
control prong of the current CDD Rule. FinCEN also recognizes that
reporting companies will likely incur some additional costs in
complying with this obligation. That said, FinCEN expects the amount of
additional time and effort required to comply with the proposed rule to
be minimal. Specifically, under the proposed rule, a reporting company
would not need to spend significant time assessing which of its
beneficial owners would be the most appropriate to report as being in
substantial control. Rather, entities would simply report all persons
in substantial control as beneficial owners, with no need to
distinguish among them. Additionally, FinCEN believes that entities are
already aware of their own ownership structures, regardless of
complexity, and should be able to readily identify their beneficial
owners. Therefore, FinCEN expects that compliance should not be
particularly burdensome for most businesses. While FinCEN's approach
could be viewed to raise concerns about the disclosure of personal
information about a broader range of individuals, the privacy impact of
reporting BOI to FinCEN is relatively light, because, unlike beneficial
ownership registries in many other countries, FinCEN's database will
not be public and will be subject to stringent access protocols.
FinCEN recognizes that its proposed definition of substantial
control diverges from the approach that a number of commenters to the
ANPRM stated they would prefer, i.e., the approach laid out in the
current CDD Rule. Under the ``control prong'' of the current CDD Rule,
new legal entity customers of a financial institution must provide BOI
for the one individual who exercises a ``significant degree of
control'' over the entity. FinCEN considered whether the proposed rule
should adopt a comparable approach. As some ANPRM commenters argued,
limiting the number of persons identified under the substantial control
component to one could minimize burden to reporting companies and help
clarify when reporting companies had complied with the CTA's reporting
requirements.
However, the CTA does not require the identification of only one
person in substantial control.\108\ The CTA also mandates that FinCEN
rescind and revise portions of the CDD Rule, including the paragraph on
beneficial owners, to bring the pre-CTA CDD Rule into conformity with
the CTA.\109\ FinCEN therefore need not adopt the framework established
by the current CDD Rule, and incorporating the CDD Rule's numerical
limitation would appear inconsistent with the CTA's objective of
establishing a comprehensive BOI database for all beneficial owners of
reporting companies. 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 of beneficial owners who may exercise substantial control
over an entity, and could become a means of evasion. Requiring
reporting companies to identify all individuals who exercise
[[Page 69935]]
substantial control would provide law enforcement and others a much
more complete picture of who makes important decisions at a reporting
company.
---------------------------------------------------------------------------
\108\ The proposed approach would also be consistent with the
text of the CTA, which--unlike the CDD Rule that preceded it--does
not expressly limit the definition of beneficial owner to ``a single
individual.'' Compare 31 U.S.C. 5336(a)(3)(A) (``The term beneficial
owner means, with respect to an entity, an individual who . . .
exercises substantial control over the entity.'') with 31 CFR
1010.230(d)(2) (defining ``beneficial owner'' as ``a single
individual with significant responsibility to control, manage or
direct a legal entity'' (emphasis added)). Under well-established
principles of agency law, moreover, more than one individual can
exercise substantial control over a single agent. See, e.g.,
Restatement (Third) of Agency Sec. 3.14, Agents with Multiple
Principals; id. Sec. 3.16, Agents for Coprincipals (``Two or more
persons may as coprincipals appoint an agent to act for them in the
same transaction or matter.'').
\109\ 31 U.S.C. 5336(d).
---------------------------------------------------------------------------
FinCEN also considered but rejected a per se rule that would have
deemed all officers of a reporting company to be in ``substantial
control'' of the entity, and therefore, beneficial owners. While a per
se rule is clear and easy to administer, FinCEN ultimately concluded
that the CTA's consistent focus on individuals that are in actual
substantial control of a reporting company argued against creating a
definition of ``substantial control'' that relies on titles alone.
Thus, while FinCEN has retained a per se element in its proposed
definition of substantial control--requiring the reporting of any
``senior officer'' as a person in substantial control--this is only a
part of the definition in proposed 31 CFR 1010.380(d)(1). Despite
comments from some that FinCEN should adopt a definition of substantial
control drawn from another BOI disclosure regime, such as the UK's PSC
Register, FinCEN believes that its proposed definition of ``substantial
control,'' which, as discussed above, is based on established legal
principles and usages of this term in other contexts, provides
specificity to the regulated community while being flexible enough to
account for unique ways in which individuals can exercise substantial
control over an entity.
FinCEN seeks comments on the overall proposed approach to
substantial control as well as on the specific indicators and examples,
including whether they are clear and useful. FinCEN welcomes additional
suggestions for possible indicators and specific language in this
regard.
ii. Ownership or Control of Ownership Interests
The other component of the definition of beneficial owner concerns
individuals who own or control 25 percent of a reporting company's
ownership interests. The CTA defines a beneficial owner to include ``an
individual who . . . owns or control not less than 25 percent of the
ownership interests of the entity.'' \110\ Proposed 31 CFR
1010.380(d)(3)(i) provides that ``ownership interests,'' for the
purposes of this rule, would include both equity in the reporting
company and other types of interests, such as capital or profit
interests (including partnership interests) or convertible instruments,
warrants or rights, or other options or privileges to acquire equity,
capital, or other interests in a reporting company. Debt instruments
are included if they enable the holder to exercise the same rights as
one of the specified equity or other interests, including the ability
to convert the instrument into one of the specified equity or other
interests. This is similar to the U.S. Securities and Exchange
Commission's definition of ``equity security'' in 17 CFR 230.405.\111\
FinCEN proposes to adopt this understanding as a way of ensuring that
the underlying reality of ownership, not the form it takes, drives the
identification of beneficial owners. The approach also thwarts the use
of complex ownership structures and ownership vehicles other than
direct equity ownership to obscure a reporting company's real owners.
---------------------------------------------------------------------------
\110\ 31 U.S.C. 5336(a)(3)(A)(ii).
\111\ Securities Act Rule 405.
---------------------------------------------------------------------------
Proposed 31 CFR 1010.380(d)(3)(ii) identifies ways in which an
individual may ``own or control'' interests. It restates statutory
language that an individual may own or control an ownership interest
directly or indirectly. It also gives a non-exhaustive list of examples
to further emphasize that an individual can own or control ownership
interests through a variety of means. FinCEN's proposed approach
requires reporting companies to consider all facts and circumstances
when making determinations about who owns or controls ownership
interests. FinCEN believes that the specific examples will illustrate
what FinCEN believes to be relevant to an ownership-interests analysis.
For example, with proposed 31 CFR 1010.380(d)(3)(ii)(A) (joint
ownership), FinCEN's objective is to highlight that an individual may
reach the 25 percent threshold by jointly owning or controlling with
one or more other persons an undivided ownership interest in a
reporting company.
Proposed 31 CFR 1010.380(d)(3)(ii)(C) specifies that an individual
may directly or indirectly own or control an ownership interest in a
reporting company through a trust or similar arrangement. 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. In relation to trust beneficiaries in
particular, FinCEN believes that it is appropriate to consider an
individual as owning or controlling ownership interests held in trust
if the individual is the sole permissible recipient of both income and
principal from the trust, or has the right to demand a distribution of,
or withdraw substantially all of the assets from, the trust. Other
individuals with authority to dispose of trust assets, such as
trustees, will also be considered as controlling the ownership
interests held in trust, as will grantors or settlors that have
retained the right to revoke the trust, or to otherwise withdraw the
assets of the trust. FinCEN believes that these circumstances comport
with the general understanding of ownership and control in the context
of trusts and furthers the CTA's objective of identifying true
beneficial owners regardless of formalities that may vary across
different jurisdictions. However, FinCEN acknowledges that these
concepts do not map easily onto every trust or similar arrangement.
Accordingly, FinCEN is seeking comment on its general approach to the
attribution of ownership interests held in trust to certain
individuals, as well as the particular circumstances in which
individuals may be considered to own or control ownerships interests
held in trust. More broadly, FinCEN seeks comments on whether these and
the other proposed examples of how one might own or control ownership
interests are clear and useful, and which, if any, require elaboration.
Proposed 31 CFR 1010.380(d)(3)(iii) concludes the ownership
interest section with general guidance on determining whether an
individual owns or controls 25 percent of the ownership interests of a
reporting company. An individual's ownership interests of the reporting
company shall include all ownership interests of any class or type, and
the percentage of such ownership interests that an individual owns or
controls shall be determined by aggregating all of the individual's
ownership interests in comparison to the undiluted ownership interests
of the company. FinCEN believes this approach would further the CTA's
objective of identifying true beneficial owners by accounting for
complex ownership or investment structures. FinCEN seeks comments on
this approach to the 25 percent calculation, including any issues that
FinCEN should consider in relation to reporting companies with more
complex ownership structures.
FinCEN considered alternative approaches to identifying beneficial
owners according to their ownership interests, in particular the
approach laid out in the ownership prong of the CDD Rule. In that
approach, only ``equity interests'' are relevant, joint ownership is
not explicitly addressed, and assets in trust are deemed to be owned by
their
[[Page 69936]]
trustees.\112\ The ownership prong of the CDD Rule is well known,
easily understood, and easy to comply with. Many commenters urged
FinCEN to adopt the CDD Rule approach to trusts. However, FinCEN has
declined to follow the CDD Rule approach for a combination of reasons.
---------------------------------------------------------------------------
\112\ See 31 CFR 1010.230(d)(3) (CDD Rule provision stating that
``[i]f a trust owns directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, 25 percent or
more of the equity interests of a legal entity customer, the
beneficial owner for purposes of [the definition of beneficial
owner] shall mean the trustee.'').
---------------------------------------------------------------------------
First, as discussed above, the CTA does not require following the
CDD Rule by default. The same statutory interpretation arguments that
led FinCEN to believe that the CDD Rule is not an appropriate standard
in connection with substantial control apply equally to the subject of
ownership interests.
Second, the CDD Rule does not provide transparency with respect to
complex ownership structures, extensive use of trusts, voting
arrangements among owners, golden shares entitling their owners to
voting rights disproportionate to their equity stake, and other
mechanisms that can obscure the connection between an individual owner
and a reporting company. Therefore, it is not at all clear that the CDD
Rule results in the identification of all individuals who should be
identified as 25 percent owners. Instead, the CDD Rule standard could
permit obfuscatory behavior. In connection with trusts, for example,
FinCEN believes that requiring the reporting only of the trustee under
the ownership interests component would promote the misuse of trusts to
hide beneficial ownership interests and complicate the ability of
reporting companies to comply with the CTA and the proposed rule. As
with the definition of substantial control, FinCEN believes its
proposed approach would provide law enforcement with a more accurate
and complete picture of an entity's true ownership, regardless of
formalities.
Finally, FinCEN considered the burden this proposed approach would
have on reporting companies. FinCEN is mindful of the effect of new
regulations on small businesses, given their critical role in the U.S.
economy and the special consideration that Congress and successive
administrations have mandated that federal agencies should give to
small business concerns. FinCEN expects that most reporting companies
that are small businesses will have simple ownership structures with
easily identifiable beneficial owners, thereby minimizing the potential
burden on such entities. FinCEN's expectation is supported by a recent
empirical analysis on the compliance burden that resulted from the
creation of a beneficial ownership registry in the UK. In its post-
implementation review of the PSC Register, the UK Government found that
only 13% of companies had three or more beneficial owners.\113\ It also
found that the mean overall cost of compliance for small and micro
businesses (defined as businesses with less than 50 employees) to file
an initial report and provide required updates was [pound]265
(approximately $358 at current exchange rates).\114\ Notably, the UK's
beneficial owner database is public and the UK requires businesses to
provide considerably more information about each beneficial owner. This
suggests that the reporting burden of FinCEN's approach may be
materially less than the burden of compliance borne by small businesses
and other reporting companies in the UK since the establishment of the
PSC Register. FinCEN seeks comments on these considerations,
particularly regarding its assessment of the effect on small businesses
based on the assessment of the UK's implementation of its register.
FinCEN further welcomes specific data on this topic.
---------------------------------------------------------------------------
\113\ See United Kingdom Department for Business, Energy &
Industrial Strategy, Review of the Implementation of the PSC
Register, (March 2019), p. 4, available at <a href="https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/822823/review-implementation-psc-register.pdf">https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/822823/review-implementation-psc-register.pdf</a>.
\114\ Id., Table 3.9.
---------------------------------------------------------------------------
Entities for which relative burden may be higher are likely very
small entities with complex structures. As noted above, FinCEN believes
that most reporting companies will not have complex ownership
structures, and that the few that do previously chose their structures
recognizing that costs associated with legal and tax advice and other
filing and compliance obligations might be higher as a result.
Moreover, in FinCEN's experience administering the BSA and other AML
efforts, small-but-complex entities often are the highest risk for
money laundering, terrorist financing, and other illicit financial
activity. Indeed, both the CTA's statutory text and legislative history
indicate that Congress was concerned with ensuring effective BOI
reporting for these entities. Thus, in FinCEN's experience, such a
reporting burden is justified because these are the entities most at
risk for abuse of the corporate form and, therefore, an additional
compliance burden is necessary to make the BOI database ``highly useful
to law enforcement'' under the statute.
iii. Exceptions to Definition of Beneficial Owner
Proposed 31 CFR 1010.380(d)(4) describes five exceptions to the
definition of beneficial owners that are included in the CTA. These
exceptions relate to minor children, nominees or other intermediaries,
employees, inheritors, and creditors. Proposed 31 CFR 1010.380(d)(4)
mirrors the statutory text with additional clarification to ensure that
reporting companies identify real parties in interest, not only the
nominal beneficial owners.
a. Minor Children
In the case of minor children, consistent with the statute,
proposed 31 CFR 1010.380(d)(4)(i) states that the term beneficial owner
does not include a minor child, provided that the reporting company
reports the required information for a parent or legal guardian of the
minor child.\115\ Proposed 31 CFR 1010.380(b)(3)(ii) provides
additional clarification regarding the manner in which a reporting
company would need to provide information of a parent or legal
guardian.
---------------------------------------------------------------------------
\115\ 31 U.S.C. 5336(a)(3)(B)(i).
---------------------------------------------------------------------------
b. Nominees
With respect to the exception for an individual acting as a
nominee, intermediary, custodian, or agent on behalf of another
individual, FinCEN notes that the statute affirms that reporting
companies must report real parties in interest who exercise control
indirectly.\116\ In implementing this statutory exception, FinCEN
emphasizes the obligation of a reporting company to report identifying
information of the individual on whose behalf an apparent beneficial
owner is acting, not the apparent beneficial owner.
---------------------------------------------------------------------------
\116\ 31 U.S.C. 5336(a)(3)(B)(ii).
---------------------------------------------------------------------------
c. Employees
The CTA further exempts from the definition of a beneficial owner
an employee of a reporting company, ``acting solely as an employee,''
whose ``control over or economic benefits from'' a reporting company
are derived solely from the employment status of the person. Proposed
31 CFR 1010.380(d)(4)(iii) adopts the statutory language, with two
clarifications. First, the word ``substantial'' is added to modify
``control'' to clarify that the control referenced in the exception is
the same type of ``substantial control'' over the reporting company
referenced
[[Page 69937]]
in the definition of beneficial owner and defined in the regulations.
Second, the proposed rule clarifies that a person acting as a senior
officer of a reporting company could not avail himself or herself of
the exception. Under the CTA, only employees who are ``acting solely as
an employee'' may be exempt. The statute does not, however, specify
what it means to act ``solely as an employee,'' and this phrase may be
viewed as ambiguous. FinCEN proposes to address this ambiguity by
distinguishing between employees and senior officers and by clarifying
that a person acting as a senior officer of an entity is not a person
acting ``solely as an employee.'' In the common law of agency and
corporate law, senior officers have long been distinguished from
employees, with officers often regarded as principals and employees
regarded as agents.\117\ Senior officers may be considered employees in
some contexts, such as for certain tax purposes where the distinction
between officers and employees may be less relevant. But in contexts
focused more on an individual's ownership or control of an entity, such
as disclosure requirements or imputation of conduct for various
purposes, senior officers are often treated differently.\118\ In the
context of the CTA's exceptions from the definition of beneficial
owner, FinCEN believes that distinguishing employees from senior
officers would appropriately ensure that individuals whose functions
enable them to exercise substantial control over an entity in many
important ways are reported as beneficial owners.\119\ Exempting senior
officers from the definition of beneficial owner would seem to
frustrate the CTA's objective of identifying individuals who exercise
substantial control over an entity, and who may thereby be in a
position to use the entity for illicit purposes. FinCEN welcomes
comments on the exclusion of senior officers from this exemption.
---------------------------------------------------------------------------
\117\ See, e.g., Goldman v. Shahmoon, 208 A.2d 492, 494 (D. Ch.
1965) (``It is clear that the terms officers and agents are by no
means interchangeable. Officers as such are the corporation. An
agent is an employee . . . .''); Rosenblum v. New York Cent. R. Co.,
57 A.2d 690, 691 (Pa. Sup. Ct. 1948) (distinguishing ``regular
employees'' and ``mere agents'' from ``executive officers'').
\118\ See, e.g., 12 U.S.C. 308.602 (debarment of accounting
firms); 15 U.S.C. 78p (requiring disclosures from directors,
officers, and principal stakeholders); 15 U.S.C. 77aa (disclosure of
directors and officers in securities issuer's registration
statement); 22 CFR 126.7 (revocation of export licenses on the basis
of senior officer conduct).
\119\ In corporate and agency-law contexts, a formal or
functional position as a senior officer can be a key indicator of an
individual's substantial control over an entity. See United States
ex rel. Vavra v. Kellong Brown & Root, Inc., 848 F.3d 366, 374 (5th
Cir. 2017); see also, e.g., U.S. Sentencing Commission Guidelines,
U.S.S.G. sec. 8A1.2 cmt. 3(B) (`` 'High-level personnel of the
organization, means individuals who have substantial control over
the organization or who have a substantial role in the making of
policy within the organization. The term includes: A director; an
executive officer; an individual in charge of a major business or
functional unit of the organization, such as sales, administration,
or finance; and an individual with a substantial ownership
interest.'').
---------------------------------------------------------------------------
d. Inheritance
The inheritor exception restates statutory text with one added
clarification. The CTA's definition of beneficial owner excludes ``an
individual whose only interest . . . is through a right of
inheritance.'' \120\ Proposed 31 CFR 1010.380(d)(4)(iv) clarifies that
this exception refers to a ``future'' interest associated with a right
of inheritance, not a present interest that a person may acquire as a
result of exercising such a right. In proposing this addition, FinCEN
seeks to emphasize that once an individual has inherited an ownership
interest in an entity, that individual owns it. Individuals who may in
the future come to own ownership interests in an entity through a right
of inheritance do not have ownership until the inheritance occurs. But
once an ownership interest is inherited and comes to be owned by an
individual, that individual has the same relationship to an entity as
any other individual who acquires an ownership interest through another
means. FinCEN thus believes this clarification is necessary to avoid
exempting individuals on the basis of how ownership interests are
acquired.
---------------------------------------------------------------------------
\120\ 31 U.S.C. 5336(a)(3)(B)(iv).
---------------------------------------------------------------------------
e. Creditors
Finally, the CTA's definition of beneficial owner excludes a
creditor of a reporting company unless the creditor exercises
substantial control over the entity or owns or controls 25 percent of
the entity's ownership interests.\121\ Based on FinCEN's understanding
that the overarching intent of the CTA is to identify real parties in
interest, FinCEN interprets this exception to mean that the mere fact
that an individual is a creditor cannot make that individual a
beneficial owner of the reporting company: What is relevant is whether
the individual exercises substantial control of the reporting company
or owns or controls 25 percent of the reporting company's ownership
interests. However, the CTA does not define the term ``creditor.''
Drawing from U.S. tax law, proposed 31 CFR 1010.380(d)(4)(v) clarifies
that an exempt creditor is an individual who meets the definition of
beneficial owner in proposed 31 CFR 1010.380(d) solely through rights
or interests in the reporting company for the payment of a
predetermined sum of money, such as a debt and the payment of interest
on such debt. The proposed rules clarify that any capital interest in
the reporting company, or any right or interest in the value of the
reporting company or its profits, would not be considered rights or
interests for payment of a predetermined sum, regardless of whether
they take the form of a debt instrument. Accordingly, if an individual
has a right or ability to convert the right to payment of a
predetermined sum to any form of ownership interest in the company,
that would prevent that individual from claiming the creditor
exception. FinCEN believes this approach is necessary to prevent
individuals from obscuring their ownership of a company by structuring
their ownership interests in the form of debt, when in substance they
hold an interest with characteristics of equity.
---------------------------------------------------------------------------
\121\ 31 U.S.C. 5336(a)(3)(B)(v).
---------------------------------------------------------------------------
One commenter noted that it is not uncommon for creditors to have
so-called ``equity kickers'' allowing some form of sharing in cash flow
or capital gains in addition to fixed interest. FinCEN believes such
arrangements would not be within the proposed creditor exemption
because the payments would not be for a predetermined sum. Therefore,
it would be considered an ownership interest that could aggregate to a
reportable ownership interest. FinCEN welcomes further comments on
whether there are specific creditor or security interests that involve
equity-like attributes that should be considered as within the creditor
exemption and how such exemptions could be integrated into the proposed
rule, including an explanation of how such interests would not affect
the proposed rule's ability to generate a highly useful database.
FinCEN also welcomes comments on whether the proposed rules
implementing these statutory exceptions are sufficiently clear, and
which, if any, require further clarification.
C. Company Applicant
A reporting company would be required to report identifying
information about a company applicant under proposed 31 CFR
1010.380(a)(1). Proposed 31 CFR 1010.380(e) defines a company applicant
as any individual who files a document that creates a domestic
reporting company or who first registers a foreign reporting
[[Page 69938]]
company with a secretary of state or similar office in the United
States.
The proposed definition of a company applicant would also include
any individual who directs or controls the filing of such a document by
another person. This additional requirement is designed to ensure that
the reporting company provides information on individuals that are
responsible for the decision to form a reporting company given that, in
many cases, the company applicant may be an employee of a business
formation service or law firm, or an associate, agent, or family member
who is filing the document on behalf of another individual. In such a
case, the individual directing or controlling the formation of a legal
entity should not be able to remain anonymous simply by directing
another individual to file the requisite paperwork, and must therefore
disclose his or her identity to FinCEN along with the individual that
made the filing. FinCEN believes that this additional information about
the person directing or controlling the formation or registration of
the reporting company will be highly useful to law enforcement, which
may be able to draw connections between and among seemingly unrelated
reporting companies, beneficial owners, and company applicants based on
this additional information. In addition, FinCEN believes that it will
be better positioned to investigate the submission of inaccurate BOI if
it is able to identify both the individual who submitted the report and
the person who directed or controlled that activity. It may also give a
company applicant executing the filing an incentive to reasonably
satisfy himself or herself that the BOI being submitted to FinCEN at
the direction of another is accurate because they could also be held
accountable, thereby improving data quality. FinCEN believes that the
burden of this reporting requirement is minimal because the identity of
any individual that meets the definition of ``company applicant''--both
the person submitting the report and the person directing it--should be
readily available to reporting companies. FinCEN welcomes comments on
this proposal.
D. Reporting Company
The CTA defines a reporting company as ``a corporation, limited
liability company, or other similar entity'' that is either (1)
``created by the filing of a document with a secretary of state or a
similar office under the law of a State or Indian Tribe;'' or (2)
``formed under the law of a foreign country and registered to do
business in the United States by the filing of a document with a
secretary of state or a similar office under the laws of a State or
Indian Tribe.'' \122\
---------------------------------------------------------------------------
\122\ 31 U.S.C. 5336(a)(11)(A)(i)-(ii).
---------------------------------------------------------------------------
To facilitate application of the statutory definition of reporting
company, proposed 31 CFR 1010.380(c)(1) defines two new terms:
``Domestic reporting company'' and ``foreign reporting company.''
i. Domestic Reporting Company
Consistent with the CTA's statutory language, FinCEN proposes to
define a domestic reporting company to include: (1) A corporation; (2)
a limited liability company; or (3) other entity that is created by the
filing of a document with a secretary of state or a similar office
under the law of a state or Indian Tribe.\123\ Because corporate
formation is governed by state or Tribal law, and because the CTA does
not provide independent definitions of the terms ``corporation'' and
``limited liability company,'' FinCEN intends to interpret these terms
by reference to the governing law of the domestic jurisdiction in which
a reporting company that is a corporation or limited liability company
is formed. For clarity and ease of administration, the proposed rule
defines ``reporting company'' to include all domestic corporations and
limited liability companies based on FinCEN's understanding that all
corporations and limited liability companies are created by the filing
of a document with a secretary of state or a similar office under the
law of a state or Indian Tribe. FinCEN, however, invites comment on
whether this understanding is accurate.\124\
---------------------------------------------------------------------------
\123\ 31 U.S.C. 5336(a)(11)(A)(i)-(ii).
\124\ A 2016 World Bank guide to beneficial ownership
information in the United States notes that the actual mechanics of
creating a corporation or limited liability company may vary
slightly from state to state, but are generally very similar.
Specifically, the guide notes that ``[f]or corporations, every state
requires the filing of a corporate governance document (called the
`articles of incorporation,' `certificate of incorporation,' or
`charter') with the state filing office, together with the payment
of a filing fee.'' It further states that ``[f]or limited liability
companies. . . [e]very state requires the filing of an organization
document (generally called a `certificate of organization,'
`certificate of formation,' or `articles of organization') which
constitutes proof of its organization, form, and existence.'' World
Bank G-20 Anti-Corruption Working Group, Guide to Beneficial
Ownership Information: Legal Entities and Legal Arrangements (United
States) (2016), p. 3, available at <a href="https://star.worldbank.org/resources/beneficial-ownership-guide-united-states-america-2016">https://star.worldbank.org/resources/beneficial-ownership-guide-united-states-america-2016</a>.
(accessed on November 1, 2021).
---------------------------------------------------------------------------
The proposed rule does not separately define the statutory clause
``other similar entity,'' but rather reflects FinCEN's interpretation
of ``other similar entity'' as referring to any entity that is created
by the filing of a document with a secretary of state or similar
office, the only common characteristic the statute identifies. FinCEN
considered alternative approaches when determining how to interpret
``similar entity,'' but those alternatives do not appear to accord with
Congress's objective of enabling law enforcement and others to counter
illicit activity conducted through such entities, or are otherwise
unworkable.\125\ For example, FinCEN considered defining ``similar
entity'' narrowly to include entities that limit their owners' personal
liability under state or Indian Tribe law, but it is not clear how this
limitation would align with the purpose of the statute because legal
entities can be used by malign actors to further or hide illicit
activity regardless of whether they enjoy limited liability.
Alternatively, ``similar entity'' might be defined somewhat more
broadly to include entities that are legally distinct from their
natural person owners, but this definition would depend on varying
state law and could be difficult to apply. Moreover, any approach that
unduly narrows the scope of the reporting company definition could
exclude entities that malign actors can use to obscure their true
ownership or control structures, thereby limiting the usefulness of the
reported information for law enforcement, tax authorities, and other
stakeholders. In passing the CTA, Congress was concerned with entities
that can be created without needing to report who their beneficial
owners are.\126\ And Congress was aware that malign actors take
advantage of these entities to conceal their involvement in illicit
activity.\127\ As explained above, this creates a significant hurdle
for investigators who are forced to use time-consuming and resource-
intensive tools to try to obtain this information, if it can be
obtained at all. An unduly narrow interpretation of ``similar entity''
could therefore impede a key objective of the CTA. Thus, FinCEN
proposes to focus on the act of filing to create the entity as the
determinative factor in defining entities besides corporations and
limited liability companies that are also reporting companies. FinCEN
welcomes comments on this approach.
---------------------------------------------------------------------------
\125\ CTA, Section 6402(5)(D).
\126\ CTA, Section 6402(2).
\127\ CTA, Section 6402(3)-(4).
---------------------------------------------------------------------------
In general, FinCEN believes the proposed definition of domestic
reporting company would likely include limited liability partnerships,
limited liability limited partnerships, business trusts (a/k/a
statutory trusts or
[[Page 69939]]
Massachusetts trusts), and most limited partnerships, in addition to
corporations and limited liability companies (LLCs), because such
entities appear typically to be created by a filing with a secretary of
state or similar office. FinCEN estimates that there are now
approximately 30 million such entities in the United States, and that
approximately three million such entities are created in the United
States each year.\128\ FinCEN understands that state and Tribal laws
may differ on whether certain other types of legal or business forms--
such as general partnerships, other types of trusts, and sole
proprietorships--are created by a filing, and therefore does not
propose to categorically include any particular legal forms other than
corporations and limited liability companies within the scope of the
definition. FinCEN invites commenters to provide information on state
and Indian Tribe legal entity formation practices and requirements for
consideration.
---------------------------------------------------------------------------
\128\ See Section VI of this NPRM for more information on these
estimates.
---------------------------------------------------------------------------
ii. Foreign Reporting Company
Proposed 31 CFR 1010.380(c)(1)(ii) defines a foreign reporting
company as any entity that is a corporation, limited liability company,
or other entity that is formed under the law of a foreign country and
that is registered to do business in the United States by the filing of
a document with a secretary of state or equivalent office under the law
of a state or Indian Tribe. Similar to the treatment of the phrase
``corporation, limited liability company, or other similar entity'' for
domestic reporting companies, FinCEN intends to interpret these terms
by reference to the requirement to register to do business in the
United States by the filing of a document in a state or Tribal
jurisdiction. The proposed regulation otherwise tracks the statutory
text except to clarify that registration to do business in any state or
Tribal jurisdiction suffices as registration to do business in the
United States.
As with domestic reporting companies that are ``created by a
filing,'' there may be questions about how the ``registered to do
business'' standard applies to different entity types across state and
Tribal jurisdictions. The phrase ``registered to do business'' may
capture more entities than ``created by the filing of a document''
because typically a jurisdiction within the United States will require
any legal entity formed under the law of any other jurisdiction--
including another jurisdiction within the United States--to register to
do business as a ``foreign'' entity if it engages in certain types of
activities.\129\ FinCEN welcomes comments on what activities will
trigger foreign entity registration requirements in particular state or
Tribal jurisdictions, whether compliance with those requirements
constitutes ``registering to do business,'' and whether FinCEN should
further clarify the ``registered to do business'' requirement.
---------------------------------------------------------------------------
\129\ See, e.g., Cal. Corp. Code sec. 2107, Del. Code tit. 8,
sec. 371, New York Consolidated Laws (N.Y.C.L.), Business and
Corporations Code secs. 1301-1305, Mass. Gen. L. Ann. Ch. 156D,
secs. 15.01-15.03, Va. Code tit. 13.1, secs. 757-759.
---------------------------------------------------------------------------
iii. Exemptions
The CTA specifically excludes from the definition of ``reporting
company'' twenty-three types of entities.\130\ The statute also
authorizes the Secretary to exempt, by regulation, additional entities
for which collecting BOI would neither serve the public interest nor be
highly useful in national security, intelligence, law enforcement, or
other similar efforts.\131\ Except for the proposed clarifications
discussed below, as well as minor alterations to paragraph structure
and the addition of short titles, FinCEN proposes to adopt verbatim the
statutory language granting the twenty-three specified exemptions. Each
proposed short title summarizes the applicable exemptions, which cover
securities issuers, domestic governmental authorities, banks, domestic
credit unions, depository institution holding companies, money
transmitting businesses, brokers or dealers in securities, securities
exchange or clearing agencies, other Securities Exchange Act of 1934
entities,\132\ registered investment companies and advisers, venture
capital fund advisers, insurance companies, state licensed insurance
producers, Commodity Exchange Act registered entities,\133\ accounting
firms, public utilities, financial market utilities, pooled investment
vehicles, tax exempt entities, entities assisting tax exempt entities,
large operating companies, subsidiaries of certain exempt entities, and
inactive businesses. These categories of exempt entities either are
already generally subject to substantial Federal or state regulation
under which their beneficial ownership may be known.
---------------------------------------------------------------------------
\130\ See 31 U.S.C. 5336(a)(11)(B)(i)-(xxiii).
\131\ See 31 U.S.C. 5336(a)(11)(B)(xxiv).
\132\ See 15 U.S.C. 78l.
\133\ See 15 U.S.C. 78o(d).
---------------------------------------------------------------------------
While most of the reporting company exemptions are straightforward,
several contain ambiguous language that FinCEN proposes to clarify in
its regulations. FinCEN first proposes to define ``public utility''
\134\ via reference to the Internal Revenue Code definition of
``regulated public utility'' at 26 U.S.C. 7701(a)(33)(A). Under this
definition, a ``public utility'' would generally be a corporation that
furnishes or sells electric energy, gas, water, or sewage disposal
services, or transportation, at rates established or approved by a
government body. Using this preexisting definition should promote
predictability and continuity across Treasury and other federal
regulations, which may reduce compliance burdens that would otherwise
arise from definitional differences among regulatory regimes.
---------------------------------------------------------------------------
\134\ 31 U.S.C. 5336(a)(11)(B)(xvi).
---------------------------------------------------------------------------
Proposed 31 CFR 1010.380(c)(2)(xxi) clarifies an exemption relating
to what the proposed regulations refer to as ``large operating
companies.'' An entity falls into this category, and therefore is not a
reporting company, if it: (1) ``Employs more than 20 employees on a
full-time basis in the United States''; (2) ``filed in the previous
year Federal income tax returns in the United States demonstrating more
than $5,000,000 in gross receipts or sales in the aggregate,''
including the receipts or sales of other entities owned by the entity
and through which the entity operates; and (3) ``has an operating
presence at a physical office within the United States.'' \135\ Under
the proposed regulations, an entity with an ``operating presence at a
physical office within the United States'' would be one for which the
physical office is owned or leased by the entity, is not a residence,
and is not shared space (beyond being shared with affiliated
entities)--in short, a genuine working office of the entity. In the
exemption, FinCEN also proposes to clarify what it means to employ
someone on a full-time basis through reference to the Internal Revenue
Service definition of ``full-time employee'' and related determination
methods at 26 CFR 54.4980H-1(a)(21) and 54.4980H-3. These regulations
generally count as a full-time employee anyone employed an average of
at least 30 service hours per week or 130 service hours per month, with
adaptations for non-hourly employees. As with the ``public utility''
definition, FinCEN is borrowing the IRS concept to promote regulatory
consistency and because most large operating companies should already
be familiar with it from compliance with the Affordable Care Act.\136\
Therefore, FinCEN believes its
[[Page 69940]]
proposed approach will help minimize compliance burdens.
---------------------------------------------------------------------------
\135\ 31 U.S.C. 5336(a)(11)(B)(xxi).
\136\ See 26 U.S.C. 4980H.
---------------------------------------------------------------------------
Regarding the $5,000,000 filing threshold, FinCEN proposes to make
clear that the relevant filing may be a federal income tax or
information return, and that the $5,000,000 must be reported as gross
receipts or sales (net of returns and allowances) on the entity's IRS
Form 1120, consolidated IRS Form 1120, IRS Form 1120-S, IRS Form 1065,
or other applicable IRS form, excluding gross receipts or sales from
sources outside the United States, as determined under federal income
tax principles. For entities that are part of an affiliated group of
corporations within the meaning of 26 U.S.C. 1504 that filed a
consolidated return, FinCEN proposes that the applicable amount should
be the amount reported on the group's consolidated return. FinCEN's
proposal to exclude gross receipts or sales from sources outside the
United States reflects the CTA's domestic focus in requiring that a
qualifying entity have filed ``Federal tax returns in the United
States.'' \137\ This focus on the United States is reinforced in other
prongs requiring that an entity's 20 or more employees be employed in
the United States, and that the entity have an operating presence at an
office within the United States.\138\ FinCEN believes that focusing on
gross receipts or sales from U.S. sources would maintain consistency
with the exemption's overall United States-centric approach, but
welcomes comments on the feasibility of applying this test to only
U.S.-sourced gross receipts.
---------------------------------------------------------------------------
\137\ 31 U.S.C. 5336(a)(11)(B)(xxi)(II) (emphasis added).
\138\ 31 U.S.C. 5336(a)(11)(B)(xxi)(I).
---------------------------------------------------------------------------
Proposed 31 CFR 1010.380(c)(2)(xxii) would clarify the exemption
for entities in which ``the ownership interests are owned or
controlled, directly or indirectly, by 1 or more [specified entity
types that do not qualify as reporting companies].'' \139\ FinCEN is
calling this the ``subsidiary exemption,'' and interprets the definite
article ``the'' in the quoted statutory text as requiring an entity to
be owned entirely by one or more specified exempt entities in order to
qualify for it. In addition to expressing greater fidelity to the
statutory language, this interpretation also prevents entities that are
only partially owned by exempt entities from shielding all of their
ultimate beneficial owners--including those that beneficially own the
entity through a non-exempt parent--from disclosure.
---------------------------------------------------------------------------
\139\ 31 U.S.C. 5336(a)(11)(B)(xxii) (emphasis added).
---------------------------------------------------------------------------
The last category of exempt entities for which FinCEN proposes to
clarify ambiguous statutory language is the exemption for ``dormant
entities'' that meet the criteria provided at 31 U.S.C.
5336(a)(11)(B)(xxiii). Under the CTA, the exemption applies to any
entity: (1) ``In existence for over 1 year;'' (2) that is not engaged
in active business; (3) that is not owned, directly or indirectly, by a
foreign person; (4) that has not, in the preceding 12-month period,
experienced a change in ownership or sent or received more than $1,000;
and (5) that does not otherwise hold assets of any type.
The phrase ``in existence for over 1 year'' is ambiguous because
the CTA did not specify whether it refers to entities in existence for
over one year at the time of the CTA's enactment or to entities in
existence for over one year at any time the statute is applied. While
other prongs of the exemption use the present tense (``is'' not engaged
in active business; ``does'' not hold assets) and such present-tense
language generally does not include the past, the first prong notably
lacks any verb, much less one in the present tense.\140\ Moreover, both
the CTA's text and its legislative history suggest that the exemption
was understood to be a ``grandfathering'' provision for entities in
existence before the CTA's enactment. Another CTA provision expressly
refers to entities subject to this exemption as ``exempt grandfathered
entities.'' \141\ And in a floor statement made just before the passage
of the CTA, Senator Brown explained that ``[t]he exemption for dormant
companies is intended to function solely as a grandfathering provision
that exempts from disclosure only those dormant companies in existence
prior to the bill's enactment.'' \142\ He added, ``No entity created
after the date of enactment of the bill is intended to qualify for
exemption as a dormant company.'' \143\ It therefore appears reasonable
to interpret the dormant entity exemption as a grandfathering provision
applicable only to entities in existence for over one year at the time
the CTA was enacted. This interpretation also limits opportunities for
bad actors to exploit the exemption by forming exempt shelf companies
for later use.
---------------------------------------------------------------------------
\140\ See Carr v. United States, 130 S. Ct. 2229, 2236 (2010).
\141\ 31 U.S.C. 5336(b)(2)(E).
\142\ Senator Sherrod Brown, National Defense Authorization Act,
Congressional Record 166:208 (December 9, 2020), p. S7311, available
at <a href="https://www.govinfo.gov/content/pkg/CREC-2020-12-09/pdf/CREC-2020-12-09.pdf">https://www.govinfo.gov/content/pkg/CREC-2020-12-09/pdf/CREC-2020-12-09.pdf</a>.
\143\ Id.
---------------------------------------------------------------------------
FinCEN notes that this exemption's first prong may appear to bear
some similarity to its fourth, with the latter requiring an entity to
have not experienced a change in ownership or sent or received more
than $1,000 ``in the preceding 12-month period.'' However, FinCEN does
not propose to interpret this language as applying to the 12-month
period before the enactment of the CTA. This fourth prong not only uses
different language from the first, but also focuses on repeatable
actions by the entity rather than its creation date. Requiring an
entity to be in existence one year before the CTA's enactment is
consistent with an understanding of the exemption as a grandfathering
provision for entities created before that date because creation is a
one-time event. Changes in ownership and funds transfers, by contrast,
are not necessarily events that occur once and then never again. They
may occur at any time after an entity comes into existence. For these
actions, we do not believe that the 12-month period prior to the
enactment of the CTA is more significant than any other subsequent 12-
month period. If a company experiences an ownership change or transfers
more than $1,000 at some later date after the CTA's enactment, we do
not see a reason why the company should be subject to the exemption
simply because it did not take those actions for the 12 months prior to
the CTA's enactment. FinCEN therefore proposes to interpret the first
prong of the dormant entity exemption as applying to the one-year
period before enactment, but FinCEN understands the fourth prong as
applying to any 12-month period.
In addition to the exemptions Congress specified in the CTA,
Congress also provided an exemption for ``any entity or class of
entities that the Secretary of the Treasury, with the written
concurrence of the Attorney General and the Secretary of Homeland
Security, has, by regulation, determined should be exempt.'' \144\ To
make such a determination, there must be a finding that requiring
beneficial ownership information ``would not serve the public
interest'' and ``would not be highly useful in national security,
intelligence, and law enforcement agency efforts to detect, prevent, or
prosecute money laundering, the financing of terrorism, proliferation
finance, serious tax fraud, or other crimes.'' \145\ Commenters to the
ANPRM suggested creating exemptions for state-licensed accounting
companies; federally regulated health care
[[Page 69941]]
institutions; limited liability companies owned by spouses solely to
hold real property; certain Tribal entities; certain commodity pools,
additional pooled investment vehicles, additional investment advisors,
and family offices; companies with less than a defined capitalization
or revenue threshold; well-established businesses; and entities owned
by U.S. persons with significant asset holdings held in custody at
regulated financial institutions. Many of these commenters, however,
did not explain why they believe their proposed additions would meet
the statutory standard. Other commenters from civil society
organizations recommended construing existing exemptions narrowly and
not introducing new exemptions at this time. While the proposed rule
would not create additional exemptions, FinCEN will continue to
consider whether any additional exemptions would be appropriate. FinCEN
welcomes comments on this approach and whether to adopt exemptions
beyond those specifically required by statute. FinCEN also welcomes
comments on how, when considering a new exemption, the agency should
make the statutorily required determinations that collecting beneficial
ownership information for a potentially exempt entity or class of
entities ``would not serve the public interest'' and also ``would not
be highly useful in national security, intelligence, and law
enforcement agency efforts to detect, prevent, or prosecute money
laundering, the financing of terrorism, proliferation finance, serious
tax fraud, or other crimes.''
---------------------------------------------------------------------------
\144\ 31 U.S.C. 5336(a)(11)(B)(xxiv).
\145\ Id.
---------------------------------------------------------------------------
Many commenters also encouraged FinCEN to require exempt entities
to file a report in order to claim an exemption. Such a requirement may
make FinCEN's BOI database significantly more useful by making it clear
which entities did not file BOI because they intentionally claimed
exemptions and which simply failed to satisfy the reporting obligation.
Many other commenters opposed such a requirement, arguing it was
inconsistent with both the statutory language of the CTA and the CTA's
legislative history, and likely to be highly burdensome. One commenter
suggested that a reasonable alternative to any affirmative exemption
filing requirement would be a requirement to provide an exemption
certification to FinCEN only upon request from the bureau or another
applicable governmental authority. However, the commenter did not
identify the statutory authority that would permit FinCEN to impose
such a requirement. FinCEN invites comment on any applicable statutory
authority. At least one commenter noted that FinCEN should permit
exempt entities to voluntarily file exemption certifications. FinCEN
invites comment on the appropriateness of inviting such voluntary
filings.
E. Timing of Reports; Update or Correction of Reports
i. Timing of Initial Reports
The CTA describes the filing deadlines for both reporting companies
in existence prior to the effective date of the regulations and for
reporting companies formed or registered after the effective date. The
provision at 31 U.S.C. 5336(b)(1)(B) provides that any reporting
company that has been formed or registered before the effective date of
the reporting regulations shall, in a timely manner, and not later than
two years after the effective date of the reporting regulations, submit
to FinCEN a report that contains the information described in 31 U.S.C.
5336(b)(2). Separately, 31 U.S.C. 5336(b)(1)(C) provides that in
accordance with regulations prescribed by the Secretary, any reporting
company that has been formed or registered after the effective date of
the regulations shall, at the time of formation or registration, submit
to FinCEN a report that contains the information described in 31 U.S.C.
5336(b)(2).
Thus, the CTA requires FinCEN to prescribe regulations for exactly
when reporting companies must file. The proposed regulations elaborate
and clarify these filing deadlines in a manner that seeks to both
minimize burdens on filers and to advance the objective of providing a
timely and accurate database of highly useful information for
authorized users. For newly formed or registered companies, proposed 31
CFR 1010.380(a)(1)(i) specifies that a domestic reporting company
formed on or after the effective date of the regulation shall file a
report within 14 calendar days of the date it was formed as specified
by a secretary of state or similar office. Proposed 31 CFR
1010.380(a)(1)(ii) specifies that any entity that becomes a foreign
reporting company on or after the effective date of the regulation
shall file a report within 14 calendar days of the date it first became
a foreign reporting company. Both proposed rules are intended to
minimize the compliance burden by providing a bright-line rule as well
as a reasonable period of time for newly formed or registered reporting
companies to collect and report information from their beneficial
owners and company applicants. At the same time, FinCEN seeks to
compile a timely and highly useful database of beneficial ownership
information available to law enforcement and other authorized users.
FinCEN believes that allowing 14 days for such initial reporting to
FinCEN will provide newly formed or registered reporting companies
reasonable time to collect the information specified in proposed 31 CFR
1010.380(b)(1) from their beneficial owners and company applicants and
to enter the required information about the company, its beneficial
owners, and its company applicants into a form provided by FinCEN.
Because the entity will be newly formed or registered, FinCEN
anticipates that much of the required information will be readily
available to the reporting company, and that the burden on the
reporting company to collect and provide this information within 14
calendar days will be minimal. FinCEN also believes that requiring
initial reports to be filed relatively quickly will help make the BOI
reporting process a natural part of the formation or registration
process, furthering the CTA's objective to ``set a clear, Federal
standard for incorporation practices.'' \146\ However, based on
comments received in response to the ANPRM, FinCEN is aware there may
be special circumstances in which a 14-calendar-day deadline to file an
initial report is insufficient or impractical.\147\ FinCEN welcomes
additional comments on whether the 14-day deadline for newly formed or
registered reporting companies to file an initial report is reasonable,
and on whether there are situations in which this time is likely to be
insufficient and proposals to address such situations.
---------------------------------------------------------------------------
\146\ CTA, Section 6406(5)(A).
\147\ For example, one commenter noted that it may take longer
than 14 days for an entity to complete necessary registrations or
approvals that would exclude the entity from the definition of a
``reporting company.''
---------------------------------------------------------------------------
For entities formed or registered before the effective date of the
regulations, the CTA requires filing of beneficial owner and company
applicant information ``in a timely manner,'' but no later than two
years after the effective date of the final regulations. Proposed 31
CFR 1010.380(a)(1)(iii) would require any domestic reporting company
created before the effective date of the regulation and any entity that
became a foreign reporting company before the effective date of the
regulation to file a report not later than one year after the effective
date of the regulation. This approach balances the need for effective
outreach and notice to preexisting companies with the need to collect
[[Page 69942]]
beneficial information in a timely manner and ensure a level playing
field between all legal entities that constitute reporting companies.
A one-year reporting deadline is designed to provide reporting
companies sufficient time to receive notice of the reporting
requirement, conduct appropriate due diligence to determine the company
applicant and beneficial owners, collect the required information from
the beneficial owners and company applicants, and provide the required
information about the company, its beneficial owners, and its company
applicants to FinCEN. FinCEN intends to work with secretaries of state
or similar offices and to leverage other communication channels to
ensure that reporting companies in existence prior to the effective
date of the regulations receive timely notice of and guidance on their
BOI reporting obligations. In proposing a one-year deadline, FinCEN has
sought to ensure that the database is highly useful to law enforcement
by obtaining BOI for existing entities as soon as possible while also
minimizing burdens on reporting companies and secretaries of state and
similar offices that will need adequate time to comply with the new
rules. FinCEN invites comments on whether the one-year period for
preexisting reporting companies to file their initial report is
reasonable.
Proposed 31 CFR 1010.380(a)(1)(iv) would require entities that are
not reporting companies by virtue of one or more exemptions to file a
report within 30 calendar days after the date on which the entity no
longer meets any exemption criteria.\148\ Whenever an entity does not
meet the criteria for an exemption and otherwise qualifies as a
reporting company, it becomes subject to the CTA's requirement that
``each reporting company shall submit to FinCEN a report'' of its
BOI.\149\ Although the CTA specifies when newly formed and existing
reporting companies must file their reports,\150\ it does not in most
cases specify when a report must be filed by a previously exempt
entity.\151\ FinCEN believes that 30 days from the date an exemption
ceases to apply is a reasonable time for once-exempt entities to file
an initial report with FinCEN. Specifically, FinCEN believes that
keeping the database updated and accurate is essential to ensuring it
is highly useful and that 30 days provides sufficient time for entities
that previously evaluated their eligibility for an exemption from the
reporting requirements and claimed such an exemption to collect and
file the required BOI with FinCEN. Again, FinCEN invites comments on
whether this proposed timeframe is reasonable.
---------------------------------------------------------------------------
\148\ The trigger date is delayed by statute 180 days for legal
entities described in section 501(c) of the Internal Revenue Code
that lose their tax exemption. 31 U.S.C. 5336(a)(11)(xix)(I),
proposed 31 CFR 1010.380(d)(2)(xix)(A).
\149\ 31 U.S.C. 5336(b)(1)(A).
\150\ 31 U.S.C. 5336(b)(1)(B); 5336(b)(1)(C).
\151\ The CTA specifies that a report must be filed at the time
an entity no longer meets the criteria for the subsidiary exemption
and the grandfathered inactive business exemption. See 31 U.S.C.
5336(b)(2)(D), (E). However, in light of the express obligation in
section 5336(b)(1)(A) for all reporting companies to file reports,
FinCEN does not interpret the provisions focused on those two
exemptions as relieving reporting companies of a filing obligation
when they no longer meet the criteria for other exemptions. While
the provisions focused on those two exemptions are arguably
unnecessary in light of the general filing obligation, Congress may
have included those provisions to make itself clear, as it may have
had particular concern about those two exemptions. See, e.g., Loving
v. IRS, 742 F.3d 1013, 1019 (D.C. Cir. 2014) (recognizing that,
despite the general desire to avoid surplusage, ``lawmakers, like
Shakespeare characters, sometimes employ overlap or redundancy so as
to remove any doubt and make doubly sure'').
---------------------------------------------------------------------------
ii. Update or Correction of Reports
The provision at 31 U.S.C. 5336(b)(1)(D) requires reporting
companies to update information submitted in prior reports to FinCEN in
a timely manner, and not later than one year after the date on which
there is a change with respect to any of the information described in
31 U.S.C. 5336(b)(2). The CTA also provides a safe harbor for persons
who inadvertently submit inaccurate information in a report to FinCEN
if they, among other things, voluntarily and promptly file a corrected
report no later than 90 days after the submission of the inaccurate
report.
FinCEN proposes to provide reporting companies with 14 calendar
days to correct any inaccurate information filed with FinCEN from the
date on which the inaccuracy is discovered and 30 calendar days to
update with FinCEN information that has changed after filing.
Specifically, proposed 31 CFR 1010.380(a)(3) would require reporting
companies to file a report to correct inaccurately filed information
within 14 calendar days after the date on which the reporting company
becomes aware or has reason to know that any required information
contained in any report that the reporting company filed with FinCEN
was inaccurate when filed and remains inaccurate. This would include
information about any beneficial owner and the reporting company.
FinCEN believes 14 calendar days provides adequate time for a reporting
company, after it knows or has reason to know that it has made an
inaccurate filing,
[…truncated; see source link]Indexed from Federal Register on December 8, 2021.
This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.