The US Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) on April 1 took the first step towards implementing the Corporate Transparency Act’s (CTA’s) beneficial ownership reporting requirements, issuing an Advanced Notice of Proposed Rulemaking (ANPRM). The ANPRM seeks comments from interested parties—including regulated entities; state, local, and tribal governments; law enforcement, and federal regulatory agencies—on specific questions relating to the implementation of the CTA’s requirements for reporting beneficial ownership information and the “maintenance and disclosure” of that information.
FinCEN intends to use the responses to the ANPRM to inform the Secretary of the Treasury’s promulgation of implementing regulations. In developing these regulations, the CTA requires FinCEN to, among other things, partner with state, local, and tribal governments and collect beneficial ownership information through their existing processes, when possible; ensure that the “form and manner” of collected information is “highly useful” to both law enforcement and financial institutions; and “[m]inimize burdens on reporting companies associated with the collection of the required information, in light of the private compliance costs placed on legitimate businesses.” Such regulations will take effect at a later date, and “FinCEN intends to provide a reasonable timeframe for stakeholders to implement the regulations.”
In issuing the ANPRM, FinCEN explained its understanding of the “procedures, methods, and standards,” that the CTA required FinCEN to develop by January 1, 2022. Specifically, FinCEN noted that it intends to promulgate regulations: (1) “prescribing procedures and standards governing reporting of beneficial ownership information;” (2) “specifying the information required to be reported and the reporting method;” (3) “specifying the method for reporting changes in beneficial ownership;” and (4) “specifying reporting requirements for exempt subsidiaries and exempt grandfathered entities that cease to be exempt.” The ANPR does not address modifications to the customer due diligence (CDD) requirements of financial institutions, which are expected to be covered in separate rulemaking.
Accordingly, in order to implement those aspects of the CTA, FinCEN solicited input on nearly 50 specific questions covering the following topics. Comments on the ANPRM are due on or before May 5, 2021, 30 days after the ANPRM was published in the Federal Register.
Background – As discussed in our prior LawFlash, Corporate Transparency Act: How Will It Affect Financial Institutions, the CTA, enacted by Congress on January 1, 2021, established a reporting regime for the beneficial owners of corporations and limited liability companies with the aim of making reliable information on beneficial ownership available to law enforcement and financial institutions for use in combatting money laundering. Subject to certain exceptions, these entities are required to report beneficial ownership information to FinCEN, which is authorized to disclose this information pursuant to proper requests from law enforcement or financial institutions (with customer consent) fulfilling their customer due diligence obligations. The CTA delegated to FinCEN substantial authority to implement the mechanics of the reporting and disclosure regime. In doing so, Congress gave FinCEN one year to promulgate implementing regulations (i.e., by January 1, 2022).
Definitions – FinCEN seeks comments on various defined terms in the CTA including: whether entities other than corporations or limited liability companies (i.e., “other similar entities”) should (or should not) be subject to reporting requirements; whether the definition of “beneficial owner” should match the definition under the CDD Rule; whether the terms “own,” “control,” or “substantial control” should be defined; whether “reporting company” is sufficiently clear, whether it should include additional categorial exemptions, how any exemptions should be initially determined, and whether exempt entities should be required to make a periodic filing in support of their ongoing eligibility for exempt status.
Reporting of Beneficial Ownership Information – FinCEN solicits input on the information that it should require from reporting companies, including whether information should be required as to the relationship between the company and its beneficial owners. FinCEN is also interested in whether it should require information “about the reporting company’s corporate affiliates, parents, and subsidiaries as a matter of course” or only when pertinent to the beneficial ownership, and what information it should require concerning these affiliated entities. The ANPRM seeks comments on how and when reporting companies or individuals should update FinCEN upon a change in previously-reported information (e.g., a change in substantial control), whether such requirements should differ depending on whether the company or individual holds a FinCEN identifier, and how the safe harbor for correcting previously-reported inaccurate information should be applied.
Similarly, FinCEN asks for input on how reporting companies should document and/or certify the accuracy of their filings, whether and how they should affirm the ongoing accuracy of that information over time, and how FinCEN should confirm the accuracy of filings. Other reporting topics include: the type and number of methods for filing required information; the burdens to reporting companies and how FinCEN could reduce them while still providing useful information to law enforcement and financial institutions; and how federal, state, and tribal governments should fulfill their duties under the CTA to provide notice to entities of their reporting obligations.
FinCEN Identifier – FinCEN seeks comments on the format of the FinCEN identifier, its most likely uses, the process and requirements for an individual or entity to obtain a FinCEN identifier, and how FinCEN can ensure the uniqueness and security of identifiers and reduce the burden to financial institutions associated with complex ownership structures involving multiple FinCEN identifiers.
Security and Use of Beneficial Ownership and Applicant Information – The ANPRM solicits input on how FinCEN should evaluate requests for beneficial ownership information from federal regulatory agencies and state, local, or tribal law enforcement, as well as the timing, scope, and authorization of FinCEN’s response to such requests from financial institutions. FinCEN also seeks comments on whether and how it should update these requestors if a reporting company subsequently provides updated information, when it should disclose applicant information on similar terms as beneficial ownership information, and what privacy and security measures FinCEN should take with regard to beneficial ownership and applicant information.
Cost, Process, Outreach, and Partnership – The ANPRM requests comments on the potential costs that the CTA imposes on small businesses, the burdens it imposes on state, local, and tribal governments, and how FinCEN could minimize these costs and burdens. FinCEN also asks for input on its outreach to the small business community, financial institutions, “other business constituencies,” and “civil society stakeholders” concerning the CTA implementation, and opportunities for partnership with state, local, and tribal governments, including the identification of beneficial owners through these governments’ existing processes.
In many ways, the ANPRM covered topics FinCEN was expected to address in its forthcoming implementing regulations. In particular, there is no question that Congress granted FinCEN discretion to define the scope of the reporting requirement (through the definition of “reporting company” or through the enumeration of additional exemptions), and left FinCEN responsible for fleshing out the mechanics for the reporting regime. The ANPRM covers those expected topics.
In other ways, however, FinCEN, through the ANPRM, indicated that it was contemplating implementing aspects of the reporting program that may have been unexpected. In particular, FinCEN appears to be contemplating the possibility of an affirmative process to establish an exemption from registration (Question 9). This would effectively require all entities that satisfy the definition of a “reporting company” to register in some form with FinCEN, whether or not the entity is exempt. Non-exempt companies would be required to provide beneficial ownership information, and exempt companies would be required to provide the basis for their exempt status. Furthermore, FinCEN is contemplating requiring companies to periodically confirm their exempt status. Given the CTA’s (and the ANPRM’s) focus on the burdens associated with the reporting regime, requiring exempt companies affirmatively to register, establish, and regularly confirm their exemption seems surprising.
Furthermore, FinCEN also appears to be considering a requirement that non-exempt reporting companies must report more information than set out in the CTA. The CTA is specific as to what information must be reported. Under the heading “Required Information,” the CTA lists the following information to be reported for each beneficial owner and applicant of a reporting company: (1) name; (2) date of birth; (3) current residential or business address; and (4) a unique identifying number from an acceptable identification document or a FinCEN identifier. Nevertheless, FinCEN is contemplating requiring reporting entities to provide additional information about: (1) the reporting entity itself; (2) the reporting entity’s corporate affiliates, parents, and subsidiaries; and (3) the nature of the reporting entity’s relationship to its beneficial owners (Questions 10-13). Requiring the reporting of this information would not only increase the reporting burden on reporting entities, but it is arguably beyond the scope of FinCEN’s authority.
Although a final rule may be some time away, the ANPRM and ensuing rulemaking steps have implications for the entire financial ecosystem as a whole, as well as for the dynamics between law enforcement and financial institutions. In issuing the ANPRM, FinCEN encouraged all interested parties to comment on the specific questions posed in the ANPRM as well as any other aspects of the implementation of the CTA. Entities affected by the CTA – including exempted and non-exempted entities and financial institutions – should take FinCEN up on its invitation to participate in the development of this program. Financial institutions, reporting companies, and others should strongly consider submitting comments to FinCEN through external counsel, trade associations, or directly.