On Thursday, April 1, 2021, the Financial Crimes Enforcement Network (“FinCEN”) released an advance notice of proposed rulemaking (“ANPR”), presenting the public with its first opportunity to comment on the beneficial ownership disclosure requirements in the Corporate Transparency Act (“CTA”), a key component of the Anti-Money Laundering Act of 2020 (“AMLA”). The ANPR focuses on procedures and standards for beneficial ownership reporting by covered companies, and on the design and use of FinCEN’s planned beneficial ownership database. The ANPR does not address expected modifications to the customer due diligence (“CDD”) requirements of financial institutions, which will be the subject of a separate rulemaking process. Comments on the ANPR are expected to be due on May 5, 2021 — i.e., 30 days after the ANPR is slated for publication in the Federal Register.
This alert summarizes key issues in the ANPR, as relevant both to financial institutions and to reporting companies.
As discussed in our prior client alert, here, the CTA, enacted by Congress on January 1, 2021, establishes a new federal framework for the reporting and disclosure of beneficial ownership information, with the aim of making reliable information on beneficial ownership available to law enforcement and financial institutions for use in combatting money laundering.
In the ANPR, FinCEN reiterates the following key objectives in implementing this framework: (1) to ensure the information is collected in a form and manner that is highly useful for national security, law enforcement, and financial institution anti-money laundering (“AML”) compliance; (2) to minimize burdens on reporting companies; and (3) to guarantee that the collected information remains secure and confidential. To that end, the ANPR requests responses to 48 questions across several topic areas, including those set out below.
Questions on Coverage of Reporting Companies and Beneficial Owners
Several of the questions in the ANPR relate to the appropriate definition of “reporting company” and “beneficial owner.”
For instance, the CTA indicates that “reporting companies” subject to reporting obligations under the CTA should include not only corporations and LLCs, but also “other similar entities.” We expect that FinCEN will be especially focused on the reporting obligations of entities (including investment vehicles) that operate through partnership or trust structures. Investment funds and advisors may wish to comment on this point, and on other questions on this topic, such as those relating to certain certifications to be filed by foreign pooled investment vehicles.
The ANPR also asks for input on whether FinCEN should, by regulation, exclude from reporting requirements any group of entities that is not expressly exempted under the text of the CTA. In addition to the private funds industry, this question will be of interest to foreign public companies, particularly those traded on major foreign exchanges. Requiring beneficial ownership filings from such public companies may not carry significant benefits for the U.S. government and U.S. financial institutions.
With respect to the definition of “beneficial owner,” FinCEN has asked when the existing statutory tests for when a person qualifies as a beneficial owner (i.e., the ownership and substantial control tests) are sufficiently clear. The ANPR thus provides an opportunity for comment on whether the “substantial control” test in the CTA should be interpreted to align with the “control” prong of FinCEN’s current CDD rule or other existing laws, such as the definition of beneficial owner under the Exchange Act and its implementing regulations. More generally, the ANPR may be a good opportunity for organizations to identify aspects of FinCEN’s current CDD regulations and guidance that may be ambiguous or difficult to administer in practice, or otherwise should not be incorporated into the new regime.
Questions on Scope and Mechanics of Reporting
The ANPR asks about the appropriateness of requiring reporting companies to disclose chains of ownership and other interrelationships, particularly in organizations with complex structures. Such reporting may be valuable to government agencies and financial institutions, but also raises important confidentiality concerns, which FinCEN will need to thoroughly consider.
In addition, FinCEN has posed a number of questions on the specific mechanics of reporting information to, and receiving information from, the agency. These questions provide an opportunity for firms to address how reporting can be most efficiently integrated into their existing entity management, tax, or other corporate processes, and for financial institutions to address how they might most efficiently receive beneficial ownership information from FinCEN. In this connection, FinCEN has specifically asked for input on how it can “reach out to financial institutions to ensure the efficiency and effectiveness of the process by which financial institutions could potentially access the beneficial ownership information held by FinCEN.”
Questions on Verification Requirements for Public Companies and Other Exempt Companies
As summarized in our prior blog post, here, the CTA exempts a large number of entities from reporting requirements, including public companies and certain companies with substantial onshore operations in the U.S. FinCEN has asked for comments on how it can verify that entities claiming an exemption are in fact exempt. Entities that expect to take advantage of exemptions should pay close attention to this issue, and may wish to propose to FinCEN that verification should, to the extent possible, be conducted via other government agencies and databases. For example, FinCEN could verify exemptions for publicly traded companies with the SEC or based on public securities filings rather than imposing a filing requirement on the firms themselves, and it could verify exemptions for financial institutions against registration information maintained by state and federal regulators. Such approaches may be consistent with FinCEN’s statutory mandate, which is in part to “minimize burdens on reporting companies . . . in light of the private compliance costs placed on legitimate businesses.”
Questions on Security and Disclosure of Beneficial Ownership Information
The creation of a large, federal database on beneficial ownership raises questions as to the security and appropriate use of information submitted by reporting companies. FinCEN has therefore asked what criteria it should employ before deciding to disclose beneficial ownership information pursuant to a law enforcement request, what additional security and privacy measures it should implement to protect beneficial ownership information, how it can make its collected information most useful for financial institutions, and whether beneficial ownership information should be disclosed on the same terms to all authorized recipients. It will be important for FinCEN to hear both from reporting companies and financial institutions on these issues, to ensure an appropriate balance is struck between confidentiality and privacy on the one hand, and the AML needs of financial services firms on the other. Among other things, financial institutions may want to comment on how to align any obligation placed on them to hold confidentially any beneficial ownership information received from FinCEN with expectations under existing client contracts, statutes, or regulations.
Reporting companies, financial institutions, and others interested in the topics addressed in the ANPR should strongly consider submitting comments to FinCEN, either directly or through counsel or their trade associations. While these topics will be the subject of a future Notice of Proposed Rulemaking, there is likely greater flexibility in the rulemaking process at this early stage than there will be after FinCEN publishes a draft rule.
In addition, the ANPR explains that FinCEN will undertake a separate rulemaking process, subsequent to the issuance of a final rule on legal entity beneficial ownership reporting, to revise CDD requirements for financial institutions. While this process may entail a further ANPR, the regulatory policies adopted as a result of this ANPR will likely influence any subsequent rulemaking processes. For example, if there are gaps in reporting requirements or information, financial institutions may be expected to fill those gaps as part of their own CDD processes. This early opportunity to comment will therefore be of broad relevance to those interested in the CTA’s overall regulatory framework.
For further information on the ANPR or the CTA more generally, please contact the following members of Covington’s Financial Institutions and Tax practices:
Financial Institutions and AML
Nikhil Gore +1 202 662 5918 email@example.com