The Demise of Anonymous U.S. Shell Companies—Beneficial Ownership and the Financial System
The Corporate Transparency Act (CTA), included as part of the 2021 NDAA, establishes a long-sought federal beneficial ownership registry that effectively would eliminate anonymously owned and controlled companies in the United States. Despite generally strong AML laws and regulations, until now the United States and territories have had sole responsibility for the establishment and administration of legal entities, and a lack of transparency has enabled bad actors to launder money, finance terrorism, and profit off tax fraud, human and drug trafficking, and other financial fraud.
Until the 2021 NDAA, the only affirmative beneficial ownership obligations had fallen primarily on certain banking institutions that are required to identify and diligence each 25 percent or more beneficial owner and control persons as part of customer due diligence. Under the CTA, legal entities (including all legal structures) will be required to submit to the U.S. Department of Treasury’s Financial Crimes Enforcement Network (FinCEN) beneficial ownership information regarding any person who owns 25 percent or more of, or who has “substantial control” over, the entity.
Filing beneficial ownership information with FinCEN will be required when a legal entity is formed or registered to do business in the United States. Existing entities also will be required to report this information within the next two years. The CTA includes periodic updating requirements and legal entities will be required to update any changes to the beneficial ownership information on the registry within one year of such a change. Required beneficial ownership information is similar to that currently collected by covered financial institutions under FinCEN regulations as part of customer due diligence and includes the name, date of birth, residential or business addresses, and a unique identifying number such as a driver’s license or passport for any such beneficial owners.
That information will be held in a non-public beneficial ownership registry, and subject to disclosure through certain legal channels that include receipt of a request from law enforcement, a federal agency on behalf of law enforcement, or a financial institution for compliance with due diligence requirements. Accordingly, private financial institutions will have access and will be able to use this information to satisfy at least some KYC obligations. Regulations to be issued by FinCEN will clarify how such information will be gathered, distributed, accessed, used, and relied upon by financial institutions.
This new beneficial ownership registry will bring the United States largely in line with the European Union, United Kingdom and other developed countries as well as internationally recognized standards. However, the CTA does not go as far as many European jurisdictions that, under the 4th and 5th Anti-Money Laundering Directives, publicly disclose at least some of the collected beneficial ownership information through a centralized registry.
Impacts for Financial Institutions
The beneficial ownership registry will significantly impact financial institutions’ AML programs. Financial institutions have customer identification and due diligence obligations and, since 2016, certain financial institutions have been required to identify and verify beneficial owners of legal entities as part of their AML compliance. The non-public registry will reflect a new source of information to supplement and potentially replace some existing AML compliance processes.
The pending rulemaking processes to implement the 2021 NDAA should offer opportunities for industry comment as well as insights into how compliance obligations will change. From standard customer due diligence, to transaction due diligence, to risk assessment, the federal database and coming regulations will have profound impacts. These changes also will come at a time when the financial industry is working to incorporate new automated systems and artificial intelligence, and regulators have indicated an openness to innovation. Thus, the next three years should present a number of challenges and opportunities to in-house counsel and compliance professionals at U.S. financial institutions.
Stepping Up the Fight Against Money Laundering
While the beneficial ownership registry is a key development, the 2021 NDAA also contained significant additional reforms that will impact both law enforcement and financial institutions in the fight against money laundering and terrorist financing. The broad series of reforms included as part of the Anti-Money Laundering Act of 2020 (AML Act) are outlined below, and each will be developed by further regulatory initiatives that bear watching over the course of 2021:
- Information Sharing: The 2021 NDAA aims to enhance information sharing, and the AML Act would create the FinCEN Exchange, a voluntary public-private information sharing partnership designed to expand communications between the federal government and financial institutions. The AML Act further directs the formation of a pilot program on sharing of information related to SARs with foreign branches, subsidiaries, and affiliates of a financial group.
- S. AML Policy Planning: Under the AML Act, the Secretary of the Treasury, in consultation with the Attorney General, federal and state regulators, and national security agencies, is directed to publish new priorities for AML policies within 180 days of enactment of the 2021 NDAA. Treasury is further directed to update these priorities every four years.
- Innovation Challenge: The AML Act directs a study of the implementation of new technologies to modernize AML laws, including artificial intelligence, blockchain and other emerging technologies. The AML Act aims to encourage new technological innovations and reinforce risk-based policies and procedures within financial institutions. It also directs the hiring of a FinCEN Bank Secrecy Act Innovation Officer, tasked with providing outreach to law enforcement and financial intuitions on technological innovations, and implementation of new methods and technologies for Bank Secrecy Act compliance.
- Re-examining Reporting Obligations: The AML Act authorizes the Secretary of the Treasury to undertake a formal review of financial institution reporting requirements related to currency transaction reports and suspicious activity reports (SARs), and to reduce any unnecessarily burdensome requirements, as well as to determine whether existing dollar thresholds for reporting should be adjusted.
- Added Support for FinCEN: The AML Act provides for expanded FinCEN staffing, including domestic and international liaisons responsible for increasing coordination with federal regulators, financial institutions, foreign law enforcement agencies, and foreign governments, as part of the overarching plan to increase information exchanges and communication between AML authorities, foreign jurisdictions and financial institutions.
- Expanding AML in the Virtual Currency and Art Markets: The AML Act identifies both the virtual currency and art markets as Congressional priorities, directing FinCEN to study and expand efforts to counter money laundering issues through the sale of antiquities and works of art, and through the use of virtual currencies.
- AML Regulatory Guidance: The AML Act authorizes the Director of FinCEN to conduct an assessment on the feasibility and appropriateness of issuing no-action letters in response to AML inquiries.
- Whistleblower Program: The AML Act also would create new whistleblower incentives and protections to encourage reporting of illicit behavior. Whistleblowers voluntarily providing information leading to successful enforcement of AML laws could receive up to 30 percent of monetary sanctions, subject to certain restrictions, and are protected from retaliation for cooperation with law enforcement.
- Increased Penalties: Repeat violators of AML rules could face the greater of three times the profit gain or loss avoided as a result of the violation, or two times the existing maximum penalty under the law. “Egregious” violators of the Bank Secrecy Act, including those convicted of criminal acts and willful civil violations facilitating money laundering or terrorism financing also can be barred from serving on the board of directors of a financial institution for 10 years after the conviction or judgment.
Overall, the 2021 NDAA provisions constitute a significant advance in AML laws in the United States. Financial institutions are expected to be closely watching, and in many cases participating in, the regulatory steps to implement this new law amidst a rapidly changing AML regulatory landscape.