Beneficial Ownership Information Reporting Requirements

Federal RegisterDec 8, 2021

Ask Donna

What actually matters in this document.

Text

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:

•

Federal E-rulemaking Portal: https://www.regulations.gov.

Follow the instructions for submitting comments. Refer to Docket Number FINCEN-2021-0005 and RIN 1506-AB49.

•

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

frc@fincen.gov.

SUPPLEMENTARY INFORMATION:

I. Executive Summary

These proposed regulations would implement the requirement in the CTA

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”).

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.

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.

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

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.

See

31 CFR 1010.230.

See also

U.S. Government Accountability Office,

Company Formations: Minimal Ownership Information Is Collected and Available

(April 2006), available at

https://www.gao.gov/assets/gao-06-376.pdf.

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

https://code.dccouncil.us/us/dc/council/code/sections/29-102.01.

See

U.S. Government Accountability Office,

Company Formations: Minimal Ownership Information Is Collected and Available

(April 2006), available at

https://www.gao.gov/assets/gao-06-376.pdf. See also, e.g.,

The National Association of Secretaries of State (NASS),

NASS Summary of Information Collected by States (June 2019),

available at

https://www.nass.org/sites/default/files/company%20formation/nass-business-entity-info-collected-june2019.pdf,

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.

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,

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.

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

https://home.treasury.gov/system/files/136/2018NMLRA_12-18.pdf.

FinCEN Advisory, FIN-2017-A003, “Advisory to Financial Institutions and Real Estate Firms and Professionals,” p. 3 (August 22, 2017), available at

https://www.fincen.gov/sites/default/files/advisory/2017-08-22/Risk%20in%20Real%20Estate%20Advisory_FINAL%20508%20Tuesday%20%28002%29.pdf.

“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

https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf.

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.”

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.”

The integration of BOI reported pursuant to the CTA with the current data collected under the Bank Secrecy Act (BSA),

and other

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.

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

https://financialservices.house.gov/uploadedfiles/11.04_waters_brown_maloney_letter_on_cta.pdf.

Id.

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)).

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).

https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-federal-identity-fedid.

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.

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.

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.

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.

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.

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.

https://www.fincen.gov/sites/default/files/shared/sar_tti_01.pdf.

FinCEN,

The Role of Domestic Shell Companies in Financial Crime and Money Laundering: Limited Liability Companies

(November 2006), available at

https://www.fincen.gov/sites/default/files/shared/LLCAssessment_FINAL.pdf.

FinCEN,

Potential Money Laundering Risks Associated with Shell Companies

(November 2006), available at

https://www.fincen.gov/resources/statutes-regulations/guidance/potential-money-laundering-risks-related-shell-companies.

FinCEN, FIN-2010-G001,

Guidance on Retaining and Obtaining Beneficial Ownership Information

(March 5, 2010), available at

https://www.fincen.gov/resources/statutes-regulations/guidance/guidance-obtaining-and-retaining-beneficial-ownership.

The CDD Rule and subsequent guidance and examination guidelines have superseded the 2010 beneficial ownership guidance.

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

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.

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.

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

https://www.fatf-gafi.org/publications/fatfrecommendations/documents/fatf-recommendations.html;

FATF Guidance, Transparency and Beneficial Ownership, Part III (October 2014), available at

https://www.fatf-gafi.org/media/fatf/documents/reports/Guidance-transparency-beneficial-ownership.pdf.

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

https://www.fatf-gafi.org/media/fatf/documents/reports/mer/MER%20US%20full.pdf.

Incorporation Transparency and Law Enforcement Assistance Act, S. 2956 110th Cong. (2008), available at

https://www.congress.gov/110/bills/s2956/BILLS-110s2956is.pdf;

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),

followed by a NPRM in August 2014.

FinCEN published the final CDD Rule in May 2016.

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.

77 FR 13046 (March 5, 2012).

79 FR 45151 (August 4, 2014).

81 FR 29397 (May 11, 2016).

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)

regime.

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.”

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.”

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

https://www.fatf-gafi.org/media/fatf/documents/reports/mer4/MER-United-States-2016.pdf.

Id.,

p. 153.

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

https://www.justice.gov/archives/opa/blog/financial-action-task-force-report-recognizes-us-anti-money-laundering-and-counter.

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

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)

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.

See supra

note 23.

Corporate Transparency Act of 2017, H.R. 3089 115th Cong. (2017); Corporate Transparency Act of 2017, S. 1717 115th Cong. (2017).

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

https://www.judiciary.senate.gov/imo/media/doc/Fowler%20Testimony.pdf.

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.”

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.”

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.”

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

https://www.judiciary.senate.gov/imo/media/doc/02-06-18%20Day%20Testimony.pdf.

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

https://www.fincen.gov/news/speeches/prepared-remarks-fincen-director-kenneth-blanco-delivered-american-bankers.

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.

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.

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.

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.

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

https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf.

U.S. Department of the Treasury,

National Money Laundering Risk Assessment

(2018), pp. 28-30, available at

https://home.treasury.gov/system/files/136/2018NMLRA_12-18.pdf.

U.S. Department of the Treasury,

National Strategy for Combating Terrorist and Other Illicit Financing

(2018), pp. 20, 47, available at

https://home.treasury.gov/system/files/136/nationalstrategyforcombatingterroristandotherillicitfinancing.pdf.

2020 Illicit Financing Strategy,

supra

note 35, p. 12, available at

https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf.

Most recently, Congress enacted the Anti-Money Laundering Act of 2020 (the “AML Act”), of which the CTA is a part.

Congress explained that among

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.”

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.

The Anti-Money Laundering Act of 2020 was enacted as Division F, §§ 6001-6511, of the William M. (Mac) Thornberry National Defense Authorization Act for Fiscal Year 2021, Public Law 116-283 (2021).

Id.,

Section 6002(5)(A)-(B).

FinCEN,

Anti-Money Laundering and Countering the Financing of Terrorism Priorities

(June 30, 2021), pp. 11-12, available at

https://www.fincen.gov/sites/default/files/shared/AML_CFT%20Priorities%20(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.

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.

“[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.”

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.

2020 Illicit Financing Strategy,

supra

note 35, pp. 13-14, available at

https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf.

Drug Enforcement Administration,

2020 Drug Enforcement Administration National Drug Threat Assessment

(“DEA 2020 NDTA”), pp. 87-88 (2020), available at

https://www.dea.gov/sites/default/files/2021-02/DIR-008-212020NationalDrugThreatAssessment_WEB.pdf.

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.

FBI,

Testimony of Steven M. D'Antuono, Section Chief, Criminal Investigative Division, “Combatting Illicit Financing by Anonymous Shell Companies”

(May 21, 2019), available at

https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies.

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,

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.

In a

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.

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.

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

https://www.treasury.gov/press-center/press-releases/Pages/jl23331.aspx.

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

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.

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

https://www.justice.gov/usao-cdca/pr/iranian-nationals-charged-conspiring-evade-us-sanctions-iran-disguising-300-million.

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.”

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.”

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.”

FinCEN,

Testimony for the Record, Kenneth A. Blanco, Director, U.S. Senate Committee on Banking, Housing and Urban Affairs

(May 21, 2019), available at

https://www.banking.senate.gov/imo/media/doc/Blanco%20Testimony%205-21-19.pdf.

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.”

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.

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.

FBI,

Testimony of Steven M. D'Antuono, Section Chief, Criminal Investigative Division, “Combatting Illicit Financing by Anonymous Shell Companies”

(May 21, 2019), available at

https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies.

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,

but the rule

provides only a partial solution.

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

and the so-called “311 measures” (

i.e.,

special measures imposed on jurisdictions, financial institutions, or international transactions of primary money laundering concern)

—offer temporary and targeted tools. Neither provides law enforcement the ability to quickly and efficiently follow the money.

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).

See

U.S. Money Laundering Threat Assessment Working Group,

U.S. Money Laundering Threat Assessment

(2005), pp. 48-49, available at

https://www.treasury.gov/resource-center/terrorist-illicit-finance/documents/mlta.pdf. 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

https://crsreports.congress.gov/product/pdf/R/R45798.

31 U.S.C. 5326(a); 31 CFR 1010.370.

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.”

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.”

2020 Illicit Financing Strategy,

supra

note 35, p. 14, available at

https://home.treasury.gov/system/files/136/National-Strategy-to-Counter-Illicit-Financev2.pdf.

FinCEN,

Testimony for the Record, Kenneth A. Blanco, Director, U.S. Senate Committee on Banking, Housing and Urban Affairs

(May 21, 2019), available at

https://www.banking.senate.gov/imo/media/doc/Blanco%20Testimony%205-21-19.pdf.

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.”

FBI,

Testimony of Steven M. D'Antuono, Section Chief, Criminal Investigative Division, “Combatting Illicit Financing by Anonymous Shell Companies”

(May 21, 2019), available at

https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies.

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.”

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

us all at risk.”

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.”

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

https://www.finance.senate.gov/imo/media/doc/45146.pdf.

Senator Sherrod Brown, “National Defense Authorization Act,” Congressional Record 166:208 (December 9, 2020), p. S7311, available at

https://www.govinfo.gov/content/pkg/CREC-2020-12-09/pdf/CREC-2020-12-09.pdf.

Senators Sheldon Whitehouse, Chuck Grassley, Ron Wyden, and Marco Rubio, Letter to the Financial Crimes Enforcement Network, (May 5, 2021), available at

https://www.rubio.senate.gov/public/_cache/files/ceb65708-7973-4b66-8bd4-c8254509a6f3/13D55FBEE293CAAF52B7317C5CA7E44C.senators-cta-comment-letter-05.04.2021.pdf.

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),

FATF, and the Egmont Group,

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.

See, e.g.,

United States G-8 Action Plan for Transparency of Company Ownership and Control

(June 2013),

https://obamawhitehouse.archives.gov/the-press-office/2013/06/18/united-states-g-8-action-plan-transparency-company-ownership-and-control; G8 Lough Erne Declaration

(July 2013),

https://www.gov.uk/government/publications/g8-lough-erne-declaration; G20 High Level Principles on Beneficial Ownership

(2014),

https://www.g20.utoronto.ca/2014/g20_high-level_principles_beneficial_ownership_transparency.pdf

;

United States Action Plan to Implement the G-20 High Level Principles on Beneficial Ownership

(Oct. 2015),

https://obamawhitehouse.archives.gov/blog/2015/10/16/us-action-plan-implement-g-20-high-level-principles-beneficial-ownership.

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),

https://egmontgroup.org/sites/default/files/filedepot/Concealment_of_BO/FATF-Egmont-Concealment-beneficial-ownership.pdf.

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.

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.

FBI,

Testimony of Steven M. D'Antuono, Section Chief, Criminal Investigative Division, “Combatting Illicit Financing by Anonymous Shell Companies”

(May 21, 2019), available at

https://www.fbi.gov/news/testimony/combating-illicit-financing-by-anonymous-shell-companies.

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.”

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.

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.

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].”

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.

See generally

31 U.S.C. 5336(b), (c).

31 U.S.C. 5336(b)(5).

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.

A FinCEN identifier is a unique identifying number that FinCEN will

issue to individuals or entities upon request.

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.

See

31 U.S.C. 5336(b)(2).

See

31 U.S.C. 5336(b)(3)(A)(i).

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.

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.

Foreign government access is limited to foreign law enforcement agencies, prosecutors, and judges in specified circumstances.

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.

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.

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.

See

31 U.S.C. 5336(c)(2)(B)(i)(I).

See

31 U.S.C. 5336(c)(2)(B)(i)(II).

See

31 U.S.C. 5336(c)(2)(B)(ii).

See

31 U.S.C. 5336(c)(2)(B)(iii).

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.

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).

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.

CTA, Section 6403(d)(1).

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)[.]”).

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.

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.

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.

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.

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 § 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

information has already been provided to FinCEN, by a FinCEN identifier.

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.

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.

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.

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.”

Also for clarity, the proposed rule consolidates discussion of the FinCEN identifier in proposed 31 CFR 1010.380(b)(5).

“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).

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.

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.

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.”

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.

This provision therefore

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.

31 U.S.C. 5336(b)(4), (b)(2)(A)(iv).

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

(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.

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

https://www.irs.gov/individuals/international-taxpayers/taxpayer-identification-numbers-tin.

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.

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.”

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

31 U.S.C. 5336(b)(2)(A).

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

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.

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

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

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

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

https://www.dnb.com/duns-number.html.

102

See

LEI Worldwide,

What is a Legal Entity Identifier?,

available at

https://www.lei-worldwide.com/what-is-a-legal-entity-identifier.html.

103

See

Global LEI Foundation,

LEI Statistics—Global LEI Index—LEI Data—GLEIF,

available at

https://www.gleif.org/en/lei-data/global-lei-index/lei-statistics.

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.

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

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

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

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 £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

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/822823/review-implementation-psc-register.pdf.

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

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

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

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

Kellong Brown & Root, Inc.,

848 F.3d 366, 374 (5th Cir. 2017);