On New Year’s Day, Congress officially overrode a Presidential veto to pass the 2021 National Defense Authorization Act (NDAA). The NDAA’s Division F – the Anti-Money Laundering Act of 2020 (AMLA) and, within the AMLA, the Corporate Transparency Act (CTA) – includes sweeping provisions updating the anti-money laundering regime. Crucially, it requires companies to report beneficial ownership information for inclusion in a national beneficial ownership registry.
Corporate Transparency Act – Reporting Requirements and Enforcement
The CTA requires the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) to create a national registry of beneficial ownership information. The database is designed to aid law enforcement in tackling money laundering, terrorism financing, and other illicit activities facilitated by shell companies. Currently, financial institutions must identify and verify the beneficial owners of their customers under the Bank Secrecy Act (BSA) customer due diligence and “know your customer” rules. The CTA now places a burden on reporting companies to report beneficial ownership information to FinCEN.
Reporting Dates. Companies formed/registered before the effective date of regulations prescribed under the CTA must report beneficial ownership information within two years of the effective date of those regulations. Companies formed/registered after that effective date must report the information at the time of their formation/registration. Companies must also update their beneficial ownership information within a year of any change of such information.
Covered Companies. The CTA targets anonymous shell companies that money launderers, terrorists, and criminals have traditionally used to conceal their identities. Many companies that are already under disclosure requirements are therefore exempt from the CTA provisions, including: publicly traded companies; entities owned by an otherwise exempt entity; and companies that are already highly regulated and may already disclose beneficial ownership, such as federally regulated banks, credit unions, registered investment advisers, registered investment companies, broker-dealers, state-regulated insurance companies, exchanges and clearing agencies, and bank holding companies. Also exempt are companies that: (i) employ over 20 full-time employees in the United States; (ii) annually report more than $5 million in gross receipts/sales to the IRS; and (iii) have an operating presence at a physical office in the United States.
Beneficial Owner Definition. Beneficial owners are individuals who control 25 percent of an entity’s ownership interests or who exercise substantial control over the entity. Individuals specifically not considered “beneficial owners” include:
- individuals acting as agents/custodians of others;
- employees whose control of or economic benefit from a company is derived solely from their employment status; and
- creditors of a reporting company (unless they are independently beneficial owners).
Required Information. Reporting companies must provide the name, date of birth, residential or business address, and unique identifier number from an acceptable identification document or a FinCEN identifier.
Availability of Information. Reported information will be confidential and maintained in a FinCEN database. The information will be available to law enforcement and national security agencies, as well as financial institutions performing customer due diligence (with the consent of the applicable entity).
The NDAA provides the federal government with various enforcement mechanisms, including subpoena power over records of foreign banks that maintain accounts in the United States, awards for whistleblowers of up to 30 percent of any fine over $1 million, and civil and criminal penalties for BSA violations and additional penalties for repeat violators. Egregious violators may be required to repay their bonuses and may be barred from serving on the board of a U.S. financial institution for 10 years.
Impact on CDD Requirements
The CTA requires FinCEN to bring the customer due diligence (CDD) rule into conformance with the CTA and to reduce burdens on financial institutions and legal entity customers that are now “unnecessary or duplicative.” FinCEN’s revisions should clarify how financial institutions may rely upon the beneficial ownership database in fulfilling their CDD obligations. But, to be clear, the CTA’s new reporting requirements are in addition to, and do not replace, a financial institution’s existing CDD obligations.
The AMLA provides additional requirements and authorizations, including provisions to:
- bring virtual currency within the remit of the BSA;
- establish a pilot program in which financial institutions may share information with their foreign branches, subsidiaries, and affiliates;
- create a BSA Advisory Group subcommittee on innovation and technology and “Innovation Officers” to improve BSA compliance alongside law enforcement and the private sector;
- require FinCEN to provide regular analysis to financial institutions on crime patterns, report to Congress on whether to create an AML No-Action Letter program, and appoint private sector domestic liaisons and foreign attachés to promote the work of the BSA;
- require Treasury to analyze the impact of financial technology on financial crimes compliance and to periodically convene a global anti-money laundering and financial crimes symposium; and
- establish a “FinCEN Exchange” to facilitate voluntary public-private information sharing among law enforcement, security agencies, financial institutions, and FinCEN.
The AMLA’s provisions create significant regulatory obligations for companies and impact the CDD obligations of financial institutions. New rules will flesh out these provisions – for example, by defining “substantial control” in the definition of a beneficial owner – and cause further changes in the CDD regulatory scheme. Domestic and foreign companies should know whether they are subject to the CTA and financial institutions should remain informed of FinCEN’s forthcoming regulations governing the use of the beneficial ownership registry in fulfilling CDD obligations. Until those regulations emerge, however, financial institutions are required to continue to comply with all applicable anti-money laundering laws.
The Banking & Financial Services and Securities and Capital Markets teams at Michael Best have attorneys who can assist institutions in understanding and complying with new and existing anti-money laundering laws. Please do not hesitate to contact a member of our teams for additional information.