January was not a quiet month in D.C. An outgoing president refused to concede the election, a mob stormed the Capitol, and a new President eventually was inaugurated. Amidst the chaos, one might be forgiven for overlooking what is likely to be the most consequential change in federal anti-money laundering laws in a generation: the Corporate Transparency Act.
This little noticed law, which was passed on January 1 as part of the National Defense Authorization Act, requires millions of new and existing companies operating in the United States to disclose their beneficial owners to the U.S. Treasury, and is likely to lead to a dramatic uptick in anti-money laundering enforcement actions. Recently sworn-in Treasury Secretary Janet Yellen has pledged to make the implementation of the bill — which has been kicking around Congress for nearly a decade and a half — one of her highest priorities. If she makes good on this promise, she will play a critical role in shaping a powerful new tool to combat illicit financial flows.
The Corporate Transparency Act’s Long and Winding Road
The roots of the Corporate Transparency Act trace back over two decades to the aftermath of the attacks of 9/11, which brought public scrutiny to Al-Qaeda’s use of money laundering to fund its terrorist activities. Roughly six weeks after these attacks, Congress passed the USA PATRIOT Act, which amended the Bank Secrecy Act to require U.S. financial institutions to perform due diligence and, in some cases, enhanced due diligence, with regard to correspondent accounts established or maintained for foreign financial institutions and private banking accounts established or maintained for non-U.S. persons. For private banking accounts, financial institutions must take reasonable steps to identify the nominal and beneficial owners of such accounts.
Gaps in the law, however, gave rise to problems that began to garner attention after passage of the PATRIOT Act. For example, a 2008 Senate investigation revealed that billions of dollars linked to illicit activity, including corruption and market manipulation, was coursing through U.S.-based shell companies. In response, a then little-known senator from Illinois, Barack Obama, introduced the first version of what would later become the Corporate Transparency Act. Senator Obama’s bill ultimately languished, however, and, as President, he was never able to convince Congress to put the bill on his desk.
The 2016 leak of the Panama Papers—a cache of 11.5 million documents that revealed the financial inner working of money laundering operations around the globe —stoked public concern about the abuse of U.S. shell companies and brought renewed attention to the lack of transparency in financial transactions.
In May 2016, the FinCEN released a final rule codifying new and existing customer due diligence requirements under the Bank Secrecy Act, including a requirement that financial institutions must identify and verify the natural persons, if any, who directly or indirectly own 25% or more of a legal entity customer, and who "controls" the entity.
Financial institutions, however, were hindered in their efforts to determine beneficial ownership because public information on companies is limited. In response, in 2020, Congress finally agreed to tuck the Corporate Transparency Act into the annual National Defense Authorization Act for 2021, a piece of so-called must-pass legislation that funds the military. Even then, the road to passage was not exactly smooth. President Trump vetoed the National Defense Authorization Act when it was first passed by Congress. Finally, on January 1, 2021, Congress overrode President Trump’s veto and passed into law the National Defense Authorization Act, along with its Corporate Transparency Act provisions.
Disclosing Beneficial Owners
The Corporate Transparency Act requires certain “corporation[s], limited liability compan[ies], or other similar entit[ies]” operating in the United States to provide FinCEN with the full name, date of birth, address, and unique identifying number of the entity’s “beneficial owner.” A “beneficial owner” is defined to include anyone who “exercises substantial control over the entity” or has at least a 25% “ownership interest” in the entity. Any individual who fails to comply with these registration requirements is subject to strict civil fines and can be sentenced to two years imprisonment.
The new law also requires FinCEN to maintain strict data privacy protocols to protect the beneficial ownership information it will collect under the Act. Critically, however, the Act also authorizes FinCEN to share beneficial ownership information with U.S. and, under certain conditions, foreign law enforcement authorities.
The law is one of the most sweeping federal efforts to monitor the private sector in years. According to the preamble of the Corporate Transparency Act, “more than 2,000,000 corporations and limited liabilities companies are being formed” in the United States each year. As such, this new law will impose disclosure obligations on millions of new and existing entities. That is why it consistently has been described as the biggest update to federal anti-money laundering laws in a generation.
Secretary Yellen’s Opportunity to Shape the Bill
Secretary Yellen has said that implementing the Corporate Transparency Act is “one of [her] highest priorities,” and that the U.S. Treasury is actively hiring to manage the implementation of the new law. Secretary Yellen will also have the opportunity to fill in key definitional details and address potential loopholes in the Act by promulgating relevant regulations.
For example, one important issue will be whether partnerships and trusts are required to disclose beneficial ownership information to FinCEN. Although the Corporate Transparency Act does not explicitly mention partnerships and trusts, it does apply to any entity “similar” to a corporation or limited liability company. Some legal analysts have suggested that the Act therefore does not cover partnerships and trusts because, unlike corporations and limited liability companies, general partnerships typically are not required to register with the secretary of state and most trusts are currently excluded from the scope of customer due diligence rules. Others, however, have raised concerns that excluding partnerships and trusts from the scope of the Act might weaken the new law’s effectiveness. Secretary Yellen will have to determine whether she has the authority to include them within the scope of the Act and, if so, whether to impose disclosure requirements on these types of entities.
Another important issue is that “pooled investment vehicles,” such as hedge funds and private equity funds, are not required to disclose beneficial ownership information. This has raised concerns that the new Act will encourage money launderers to use these pools of assets for nefarious purposes. Secretary Yellen will have to determine what, if anything, she might do to address this issue. For example, she might require pooled investment vehicles to certify to FinCEN that they are excluded from the scope of the Act. Although this would not have the same effect as collecting beneficial ownership information, it might allow for some degree of oversight.
On April 5, 2021, FinCEN issued an advance notice of proposed rulemaking to solicit public comment on questions pertaining to the implementation of the Corporate Transparency Act. Written comments are due by May 5, 2021.
Anticipating Increased Enforcement
Although it will be a while before the Corporate Transparency Act becomes fully effective, the new legislation is likely to lead to increased enforcement even in the short to medium term.
For starters, it has spurred a renewed focus on ways that the Treasury Secretary can use existing federal authorities to combat money laundering. For example, after the Corporate Transparency Act passed, Manhattan District Attorney Cyrus Vance publicly urged Secretary Yellen to promulgate regulations to apply the PATRIOT Act’s customer due diligence rules to private equity and real estate firms. If adopted, this suggestion would dramatically expand the reach of the PATRIOT Act into two sectors that are sometimes perceived as being sites of money laundering activity.
Moreover, the passage of the Corporate Transparency Act sends a strong signal to the incoming administration that money laundering is a bipartisan concern. This show of political consensus may encourage U.S. law enforcement agencies to step up investigations into money laundering and related activity. In addition, the beneficial ownership information collected under the Act should allow for the U.S. Treasury to more easily conduct anti-money laundering investigations. In short, the political and legal shifts brought on by the Corporate Transparency Act suggest more anti-money laundering enforcement actions is coming.
Every new Treasury Secretary begins their tenure as the new sheriff in town. By signaling the importance she places on the Corporate Transparency Act, Secretary Yellen has sent a clear warning that she has a new tool in her arsenal, and she’s not afraid to use it. Those entities covered by the new law would do well to pay attention to its implementation, lest they get caught in Secretary Yellen’s crosshairs.