Treasury Department Issues Final Rule on Beneficial Ownership Reporting Requirements Under the Corporate Transparency Act
Jurisdiction | United States,Federal |
Citation | Vol. 1 No. 2 |
Publication year | 2023 |
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Jeff C. Dodd, Kevin E. Gaunt, Carleton Goss, Eric R. Markus, and Elizabeth P. White *
In this article, the authors examine new regulations implementing beneficial ownership reporting requirements under a critical part of the Anti-Money Laundering Act of 2020.
The Financial Crimes Enforcement Network (FinCEN) issued final regulations (the Final Rule) 1 implementing the comprehensive beneficial ownership reporting requirements of the Corporate Transparency Act (CTA), 2 a critical part of the Anti-Money Laundering Act of 2020 (the AMLA).
The AMLA and CTA provisions are intended to prevent bad actors from using shell companies and complex corporate structures to facilitate and disguise their illicit activity. The Final Rule seeks to achieve the CTA's goal of addressing weaknesses in the existing patchwork of state laws regarding the collection and maintenance of beneficial ownership information by establishing a clear federal standard for the collection of this information, and by requiring FinCEN to create and maintain a nonpublic registry to store that information. The Biden administration has recently emphasized efforts to combat global corruption; that new focus goes hand-in-hand with the U.S. Treasury Department's acknowledgment for the need to limit the misuse of legal entities by building a beneficial ownership registry, consistent with efforts of the Financial Action Task Force 3 and G7 and G20 leaders to curb the ability of criminal enterprises to hide behind anonymous shell companies.
While the Final Rule tweaked some of the proposed rules outlined in FinCEN's December 7, 2021, Notice of Proposed Rule-making (NPRM) (such as by extending reporting deadlines and
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reducing the reporting requirements for "company applicants"), the Final Rule largely retains the overall framework and requirements proposed in the NPRM. Among other provisions, as discussed below in more detail, the Final Rule defines who qualifies as a beneficial owner—those exercising "substantial control" and those with a 25% "ownership interest"—and amends the existing Customer Due Diligence (CDD) Rule.
The Final Rule specifies a January 1, 2024, implementation date, but even it notes that it will need to perform substantial implementation work (including a secure database for collecting beneficial ownership information) and that the effective date will depend on that implementation and Congressional funding. Nonetheless, the Final Rule will have a major impact on businesses and their advisors, so planning for the Final Rule is advisable. FinCEN estimates that once the regulations go into effect on January 1, 2024, tens of millions of existing companies will have to make a report under the CTA 4 and approximately two million new entities created each year (and individuals and businesses that routinely facilitate the creation of these entities) will potentially be subject to the regulations. Failure to comply with the new reporting regime could result in civil and criminal penalties.
The Backstory
Enacted on January 1, 2021, as part of the AMLA, the CTA introduced sweeping reforms to U.S. anti-money laundering and counter-terrorist financing laws. The AMLA and CTA were intended to modernize the Bank Secrecy Act, thwart the use of shell companies by criminals, address emerging financial threats, reform whistle-blower incentives, and improve coordination and information sharing between regulators, law enforcement, and financial institutions. Before the CTA and the Final Rule, entities were not required to report beneficial ownership information (BOI) to federal and state governments. That said, financial institutions are required to collect certain BOI when accounts are opened under existing FinCEN regulations.
The CTA and the Final Rule impose reporting requirements 5 for BOI and describe who must file a BOI report, what information must be reported, and when such a report is due. FinCEN also notes in the comments to the Final Rule that it has been developing
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the Beneficial Ownership Secure System (BOSS) to receive, store, and maintain...
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