In FinCEN final rule on beneficial ownership, quest to shuck shell companies, close longstanding fincrime loophole ‘misses the mark,’ say lawmakers

The Skinny:

• The U.S. Treasury has released its long-awaited final rule on capturing key beneficial ownership details on certain companies, a move to address one of the country’s largest and longstanding financial crime vulnerabilities and the vehicle of choice for the worst criminals on the planet to move their illicit hauls.
• Even so, there is likely little fanfare and backslapping at the Financial Crimes Enforcement (FinCEN) as its job in implementing the Corporate Transparency Act (CTA) is not over –– and already lawmakers are upset, voicing concern and leveling stinging criticism.
• The reason: Political powerbrokers tasked FinCEN with crafting a rule anticipating ways that a criminal, company formation agent or attorney could use even the slightest slip in language to evade reporting on the humans pulling the strings of elaborate illicit networks. But, at the same time, the bureau had to narrowly target small businesses – a mark it may have “missed.”

The U.S. Treasury Thursday released its long-awaited final rule on capturing key beneficial ownership details on certain companies, a move to address one of the country’s largest and longstanding financial crime vulnerabilities and the vehicle of choice for the worst criminals on the planet to move their illicit hauls.

Even so, there is likely little fanfare and backslapping at the Financial Crimes Enforcement (FinCEN) as its job in implementing the Corporate Transparency Act (CTA) is not over –– and already lawmakers are upset, voicing concern and leveling stinging criticism.

The rule describes who must file a beneficial ownership (BOI) report, what information must be reported and when a report is due.

In short, the rule requires reporting companies to file reports with FinCEN that identify two foundational categories of individuals:

• The beneficial owners of the entity itself
• The company applicants of the entity.

This ensures that key details on company formation agents, law firms and professional services firms are captured.

Beyond that, the just-released rulemaking, the first of three tied to the CTA, covers key details such as filing types: foreign and domestic and more detailed definitions of what beneficial owner means – for example, 25 percent ownership or someone who has “substantial control” of a firm.

The final rule also gives more depth and texture to detailing types of company applicants and information identifiers.

This includes a system where individuals can directly query FinCEN for unique “identifiers” in lieu of constantly sending the required four pieces of identify documents as well as finalizing nearly two dozen exemptions, such as those already covered by anti-money laundering (AML) compliance rules and other details.

• To read the FinCEN release, click here.
• To read a FinCEN Fact Sheet, click here.
• To read the full, roughly 300-page final rule, click here.
• To compare and contrast with the proposed rule, click here.

In all, the CTA – what many consider the centerpiece of the seminal Anti-Money Laundering Act (AMLA) passed in January 2021 to shift compliance from a focus on technical rules to effective results – is a weighty tome.

From its original relatively svelte incarnation, it has swelled from less than a dozen pages as a lithe, nimble bill into the hundreds of pages as a plodding, ponderous and rotund final rule.

The final rule is too complex, cumbersome, burdensome: Congress

For watchers and analysts of this historic initiative to shatter anonymous shell companies – a choice route for organized criminal groups, terror financiers, cyber-enabled fraudsters and odious, opulent oligarchs – it is no surprise that while some government investigators celebrate, economy hawks in Congress fume.

The reason: Political powerbrokers tasked FinCEN with crafting a rule that anticipated every way a criminal, company formation agent or attorney could use even the slightest slip in language and legalities to evade reporting on the flesh-and-blood humans pulling the strings of elaborate money laundering and corruption networks.

Hence why some representatives have chastised FinCEN for the reporting provisions of the CTA being too broad.

Their oft-repeated fear: FinCEN can take an expansive stance against criminals, but must narrowly target small businesses.

The bureau was under strict orders to treat them gingerly and not make it difficult for people to start businesses, keep them or grow them – cognizant that these treasured, pandemic-pummeled companies are the engine of the U.S. economy.

“FinCEN’s final rule regarding beneficial ownership remains fundamentally inconsistent with Congressional intent,” said the top Republican on the House Financial Services Committee, Patrick McHenry (NC-10), and the top Republican on the Subcommittee on Consumer Protection and Financial Institutions, Blaine Luetkemeyer (MO-03), in a statement.

“This rule is overly broad and injects unnecessary complexity by taking 10 pages of legislative text and turning it into a more than 300-page final rule,” they said, adding that while FinCEN took “small steps” to address concerns spelled out in prior letters and hearings, the changes were not enough.

“There is still a significant gap between the final rule and the framework outlined in the statute,” they said.

To get a sense of the intent of Congress and review the CTA as part of the AMLA in the bill signed into law, click here.

Reporting companies targeted by this legislation are those with 20 or fewer employees and less than $5 million in gross receipts or sales as reflected in the companies’ previous year’s federal tax returns.

“Congress crafted legislation to minimize the impact on legitimate small businesses, while balancing civil liberties and the needs of law enforcement. It’s clear this final rule misses the mark,” lawmakers said.

FinCEN noted, however, that the costs for companies to comply with the law should be minimal – or at least inline with fees to form an operation at the state level.  

The expected cost to prepare and submit an initial BOI report for reporting companies with simple management and ownership structures—which FinCEN expects to be the majority of reporting companies — would be approximately $85 apiece.

In comparison, the state formation fee for creating a limited liability company (LLC) can cost between $40 and $500, depending on the state, according to FinCEN.

Timeframes, timelines, deadlines: How soon are companies going to have to capture and report this information?

When does the final rule come into effect?

The rule is effective January 1, 2024.

What if I create a company right before the deadline? How quickly do I have to file my first beneficial ownership information (BOI) report?

Reporting companies created or registered before January 1, 2024, will have one year (until January 1, 2025) to file their initial reports.

What about if I create a company right after the effective date? Do I still have a year to capture and file the BOI?

No. The timeframe after the effective date shrinks considerably. Reporting companies created or registered after January 1, 2024, will have 30 days after creation or registration to file their initial reports.

What about if I send the information, but then a company changes ownership? How quickly do I have to update FinCEN with the BOI changes?

Once the initial report has been filed, both existing and new reporting companies will have to file updates within 30 days of a change in their beneficial ownership information.

The Tri-Force: Reporting prong of CTA is the first of three pieces – how will they all come together?

With a piece of legislation, and related rulemaking, with so many moving parts, FinCEN had to break the CTA into smaller, more manageable chunks.

The just-released reporting prong of the rule is the first of three rulemakings planned to implement the CTA.

In all, here is a quick snapshot of the prongs and their status.

The reporting prong:

Covers key details such as filing types: foreign and domestic, definition of beneficial owner – 25 percent or has “substantial control” of firm, company applicants and information identifiers and other details.

Status:

• Advanced Notice of Proposed Rulemaking (ANPR) in April 2021.
• Notice of proposed rulemaking (NPR) released in Dec. 2021.
• Final rule released in September 2022.

The access prong:

Establish rules for who may access the database of beneficial ownership information housed at FinCEN, for what purposes and what safeguards will be required to ensure that the information is secure and protected.

Banks are expected to get access to this data, but may have to get a customer’s permission first – an issue they are lobbying against behind the scenes before intermediate and final rules get set in stone.

Status: No ANPR or NPR issued.

The revisionist prong:

Revise FinCEN’s customer due diligence rule.

This rulemaking will work to harmonize the duties already being done by banks to grab much of this information under updated customer due diligence (CDD) final rules issued in May 2016.

The CDD Rule had four core requirements for covered financial institutions:

1. identify and verify the identity of customers
2. identify and verify the identity of the beneficial owners of companies opening accounts
3. understand the nature and purpose of customer relationships to develop customer risk profiles
4. conduct ongoing monitoring to identify and report suspicious transactions and, on a risk basis, to maintain and update customer information

Financial institutions will have to identify and verify the identity of any individual who owns 25 percent or more of a legal entity, and an individual who controls the legal entity.

Status: No ANPR or NPR issued.

A delicate balance: FinCEN didn’t waiver, stayed on track as rule progressed

While lawmakers are spitting mad, legal analysts have taken a more measured, even sanguine approach to grading the bureau’s efforts.

“The final rule ultimately strives to balance the need for increased transparency of shell company ownership while not overburdening small companies,” according to an analysis by law firm, Arnold & Porter.

To read their full report, click here.

“For the most part, the changes from the earlier, proposed rule are minor and technical, and focused on minimizing that burden,” attorneys noted, adding that one new wrinkle in the final rule, for example, extends the timing for newly created entities to file initial beneficial ownership information (BOI) reports from 14 days to 30 days.

Even so, the final beneficial ownership rule is a watershed moment in the country’s fight against a wide array of threat actors, said Treasury Secretary Janet Yellen. 

The final rule marks a “major step forward in giving law enforcement, national security agencies, and other partners the information they need to crack down on criminals, corrupt individuals, and other bad actors who seek to take advantage of America’s financial system for illicit purposes,” she said.