Compliance and anti-money laundering professionals should be partnering with financial institutions to complete preparations to move toward a new era in corporate transparency that will begin next year
The Corporate Transparency Act (CTA) — enacted as part of the Anti-Money Laundering Act of 2020 (AMLA 2020) — establishes beneficial ownership information (BOI) reporting requirements for a broad range of entities beginning January 1, 2024. And those that will have to comply with these new requirements should be spending the last half of 2023 putting the finishing touches on the processes and policies that will make this era come to pass.
However, January 1, 2024, is not a statutory deadline or regulation — it’s a target date that FinCEN established September 30, 2022, in its final beneficial ownership reporting rule. This means that, if necessary, FinCEN can move the target date to something that is more attainable.
If we take a step back from the CTA and AMLA 2020 target date, you can clearly see what needs to be done before implementation is ready. The U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) has several major requirements for completion, and each has its own milestones. Unless each requirement is completed, the programs under the CTA and AMLA 2020 are destined to fail and lead to more confusion for registered companies and financial institutions. What is clearer, in terms of regulation, is that we are far away from the finish line.
Hitting the milestones
The first, and most notable requirement is the completion of a database for reporting BOI to FinCEN. The preliminary requirements for what the database would do were provided in the final reporting rule on September 30, 2022 — but that was the first milestone, not a mark of completion. The database needs to be designed, built, tested, and deployed on a large scale; and there has been no action to indicate that FinCEN is ready to deploy this database.
Another milestone is the finalization of the beneficial ownership access rule. And while there has been discussion around what entities should have access to the database and under what circumstances, this access rule is still under review. In its Spring 2023 regulatory review, FinCEN indicated that it would publish the final rule in September 2023.
And there is a third rule that FinCEN is required to publish: a rule to reconcile the 2016 beneficial ownership rule with these new reporting and access rules. “We don’t know whether legal-entity customers are still going to have to provide their beneficial ownership information to the banks under the current 2016 rule, as well as into FinCEN under the new Corporate Transparency Act rules,” explains James Richards, Founder and Principal at RegTech Consulting. “Banks will need to continue collecting beneficial ownership information at account opening. It’s very possible that customers will be confused at what they will see as a dual reporting requirement.”
“I don’t think anything will end the progress on the database quicker than a data breach. If someone hacks into it and steals 10 million American small business ownership records that would shut the database down in two days.”
Richards also noted that there is no guidance on what financial institutions are to do when there are discrepancies between what has been reported under the 2016 rule and what will be reported under the CTA: “Failure to clarify this portion of the rulemaking likely will lead to more even more Suspicious Activity Reports (SARs) than the already record-breaking number that are filed every year. If not clearly enacted, the new rules can lead to inconsistency and a huge volume of defensive SARs filings.
In addition to building the database and promulgating the three rules, the Beneficial Ownership Reporting Form needs to be completed. The original proposed version gave reporting companies the option of reporting “unknown” or “unavailable” for their beneficial owners. After a maelstrom of criticism that these options were not allowed under the statute, FinCEN relented and pulled the proposed form. As of late July 2023, FinCEN has not released a new form.
With all of this, FinCEN needs to hire the staff to keep the database functional; and the agency will also need thousands of professionals on staff to field calls, maintain the database, and provide education to the millions of businesses that will need to submit their beneficial ownership information, as well as to all of their attorneys, financial advisors, and company formation agents that will interact with the database on a regular basis.
From a realistic perspective, even if all the requirements were met today, it is highly unlikely that the milestones related to the dissemination of information and regulations will be able to be completed in any meaningful way before the target date in less than five months. The most concerning part of this is the lack of transparency around the status of completing these requirements.
Changes within FinCEN
The concerns are also compounded by the proverbial changing of the guard at FinCEN. As of July 13, FinCEN’s former Acting Director, Himamauli Das, transitioned out of his role, which is now to be held by Andrea Gacki, current Director of the Office of Foreign Assets Control (OFAC).
Further, it is important not to rush through the completion of these milestones. Failure to properly go through this process leaves individuals, institutions, and corporations vulnerable. “The one thing that FinCEN shouldn’t get wrong is the information security aspect of the database,” Richards explains. “I don’t think anything will end the progress on the database quicker than a data breach. If someone hacks into it and steals 10 million American small business ownership records that would shut the database down in two days.”
Despite the time it will take to launch the database and the pressure to make a target date, protecting personal identifying information is paramount. Indeed, considering where we are with the database for reporting BOI to FinCEN, it would be prudent — advisable even — to push back the target date and reassess the milestones that are in place.
Clearly, a coordinated and transparent effort could make great strides toward fulfilling the intentions of the CTA under the AMLA 2020.
You can read some more of Jim Richards’ thoughts on beneficial ownership information here.