As published on complianceweek.com, Wednesday 9 February, 2022.
Industry groups and nonprofit watchdogs have markedly different takes on the rule creating a beneficial ownership registry under the administration of the Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
Not surprisingly, advocates for small businesses and banks while supporting the registry’s goals and purpose criticized the burdens complying with its requirements would place on companies. Watchdog groups and nonprofits generally advocated for fewer exemptions that would force more entities to be required to file information with the registry.
FinCEN did not release the more than 230 comment letters the agency said it received regarding the rule, which was proposed in December. The registry is a key pillar of the Biden administration’s anti-corruption efforts, part of the U.S. government’s attempt to pull back the veil on anonymous shell companies used to launder illicit profits from corruption, money laundering, terrorist financing, tax fraud, and other financial crime activities.
Congress ordered FinCEN to develop the beneficial ownership registry in a defense spending bill signed into law in January 2021. The comment period on the proposed rule is now closed.
The next step is for FinCEN to publish two additional rules, one laying out what entities can access beneficial ownership information and another updating the customer due diligence (CDD) rule that currently requires banks to collect beneficial ownership information on their legal entity customers.
The beneficial ownership information would be kept in a confidential database administered by FinCEN and unavailable to the public. It could be accessed by federal law enforcement agencies using “appropriate protocols”; by federal agencies fulfilling requests of “certain foreign requestors” like foreign law enforcement agencies; by the U.S. Treasury and its agents; and by state, local, and tribal law enforcement agencies with a court order. Financial institutions could also access the database, using appropriate protocols, in the process of complying with FinCEN’s CDD rule, enacted in 2016.
The beneficial ownership registry would require corporations, limited liability companies, and similar entities to report certain information about their beneficial owners, defined as “the individual natural persons who ultimately own or control the companies.”
Such owners would be required to provide their full legal name, residential or business address, and a unique number available from an identity document. In lieu of that unique number, beneficial owners could request FinCEN create an identification number for them, called a “FinCEN identifier.”
The American Bankers Association (ABA) said in a comment letter to FinCEN that while it has always supported a beneficial ownership registry, “several banks have pointed out that until the access regulation has been implemented and the CDD rule has been updated, it will be difficult to assess how these reporting requirements fit with bank responsibilities.”
“Banks will need to take extensive steps to update systems and procedures—and training—to reflect the new requirements. This will be a major undertaking that will divert resources from other efforts, undermining FinCEN’s goal to encourage effectiveness and efficiency,” the ABA said.
The ABA expressed other concerns in its letter, including that FinCEN do more to clarify which entities must turn over information to the registry and to address “several unresolved issues regarding trusts.”
The American College of Trust and Estate Counsel, a nonprofit group representing more than 2,400 lawyers, pointed out trusts are often established to benefit family members over several generations and that property can be divided within a trust between individuals and corporate entities.
As written, the beneficial ownership rule lacks clarity regarding certain types of trusts, causing a reporting company to “assume a very significant burden to ‘over comply’ with the proposed regulations by gathering more information than is necessary or useful with regard to trusts which have an ownership interest in a reporting company,” the group said in its letter.
The Office of Advocacy of the U.S. Small Business Administration commented the proposed rule “will be economically burdensome for small businesses.” In an analysis compiled by FinCEN, the agency estimated the total cost of the rule will be $1.26 billion in the first year and $364 million thereafter. Small businesses often must navigate these regulations on their own, the office noted.
FinCEN should be offering maximum flexibility to mitigate the costs of the rule, the office said, like providing two years from the implementation of the rule to comply, which is what Congress ordered. FinCEN’s rule proposes only one year.
“Advocacy encourages FinCEN to allow for the maximum flexibility allowed in the statute and extend the compliance requirements accordingly,” the letter said.
The Project On Government Oversight (POGO), a nonpartisan independent watchdog, praised requirements of the rule in its letter to FinCEN, particularly the “strong definition of a beneficial owner” and its “timely reporting requirements,” although it recommended tightening up the definition of senior officers, who often do not “exercise any authority over the operations of the entity.”